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Bank and Investor Policies

Study Says Banks Are Still Financing Deforestation. Here Is How They Can Stop

Steve Zwick

Companies around the world are tripping over each other to make “zero deforestation” pledges, but that won’t mean a thing if the banks that finance them ignore deforestation liability. A new study says that’s exactly what’s happening, but there’s a simple solution. Will the banks bite?

29 July 2015 | The UN Environment Programme (UNEP) and the Natural Capital Declaration (NCD) today unveiled the “Soft Commodity Forest-Risk Assessment” (SCFA), which is a set of simple guidelines that banks and other financial institutions can use to measure and reduce the impact that their agricultural clients have on deforestation. It builds on the work of WWF and other green NGOs, but it adds in financial feedback developed by NCD, which promotes the use of natural capital accounting in financial products and services.

When NCD and UNEP began applying the SCFA to financial institutions, however, it found that only 13 of the 30 banks surveyed had developed financial products and services specifically aimed at promoting the production and trade of sustainable commodities. The important “soft” commodities include palm oil soy and beef – the major drivers of tropical deforestation. Most financial institutions have no systematic way of measuring their clients’ exposure to deforestation liability risk, or even whether they are in compliance with local laws. This is despite the attention focused on deforestation commitments in the New York Declaration on Forests, the Consumer Goods Forum, and the Tropical Forest Alliance, as well as country commitments to reduce greenhouse gas emissions.

The findings and recommendations are published in a report entitled “Bank and Investor Risk Policies for Soft Commodities”, which also serves as a how-to for the SCFA. Accompanying it is a free Excel-based tool meant for financial institutions to assess their own lending and investment policies against those of the 30 others.

“Financial institutions can use the SCFA tool to evaluate how their policies compare to sector peers in addressing deforestation or forest degradation risks linked to these commodities,” the report states. “Meeting these criteria would strengthen the individual financial institution’s performance in relation to the benchmark included in the SCFA tool.”

The guidelines provide both minimum and best-practice recommendations, with the minimums focusing on disclosure and the best practices focusing more on formal policies that address environmental and social impacts. For example, a best practice might require companies receiving loans from banks to achieve certification under the Roundtable on Sustainable Palm Oil or the Roundtable on Responsible Soy within a certain timeframe.

The report highlighted some institutions for managing their environmental risk, and singled out the African Development Bank, FMO Development Bank, the International Finance Corporation, Standard Chartered Bank, and Sumitomo Mitsui Trust Bank.

Almost all financial institutions disclose general sustainability policies or policies focused to some extent on the production of agricultural commodities, but many do not disclose evidence of specific activities to monitor companies’ compliance with these policies on an ongoing basis.

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