Investment firms commit to tackle deforestation

Chief executives from more than 30 financial institutions made the announcement ahead of the world leaders’ summit on forest and land use at the COP26 climate change conference in Glasgow. Participating firms, which together manage almost $9 trillion in assets, include Aviva, Fidelity, Legal and General Investment Management (LGIM) and Axa.

Participating organisations have committed to creating internal plans, milestones and incentives to meet the 2025 deadline, aligned with the Paris Agreement objective of limiting global warming to 1.5˚C above pre-industrial levels. They will also publicly disclose any deforestation risk and mitigation activities in their portfolios, and report on their progress.

The announcement coincided with a commitment by over 100 countries to stop and reverse deforestation and land degradation by 2030, in the first major announcement of COP26. Participating countries account for 85% of the world’s forests and include Brazil, Indonesia, Russia, Canada and the Democratic Republic of the Congo.

The world’s forests absorb one third of the carbon dioxide released from burning fossil fuels every year, as well as playing an important role in global biodiversity protection and food security, according to a signed commitment letter issued by participating financial firms (4-page / 426KB PDF). However, deforestation associated with the production of ‘forest risk’ agricultural commodities including beef, soil, palm oil, paper and pulp now itself accounts for 8% of global CO2 emissions, more than the entire EU.

Participating firms will assess their individual exposures to these ‘forest risk’ commodities by the end of 2022, engaging with relevant clients and developing investment and lending policies addressing this type of risk, according to the letter. By 2023, they will disclose deforestation risk and mitigation activities in their portfolios, along with due diligence and engagement. Public reporting on “credible progress” towards eliminating exposure to these risks will follow by 2025, by which time participating firms intend to only provide finance to clients that have met risk reduction criteria.

At the same time, participating firms intend to increase investment in “nature based” deforestation solutions and support the transition to a sustainable agricultural sector. An announcement by the UK government referred to newly-mobilised private sector funding of “at least £5.3 billion” to support efforts to reverse deforestation and land degradation in developing countries alongside £8.75bn of public finance from 12 countries, which includes £1.5bn from the UK over the next five years.

The UK finance includes a £200 million commitment to a new £1.1bn fund to protect the world’s second largest tropical rainforest, in the Congo Basin, as well as £200m for the Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition. LEAF, which provides funding to tropical and subtropical countries that have successfully reduced emissions from deforestation and degradation, has already raised $1bn in public and private sector funders.

Aviva group chief executive Amanda Blanc said that financial firms had a “pivotal role” to play in efforts to tackle climate change, “using our influence on the companies we invest in to encourage and ensure best practice”.

Environmental law expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law, welcomed the commitment.

“We have already been seeing increasing levels of activity in the area of forest conservation and restoration funded by large multinationals, and it has been particularly interesting to see and advise on some novel and innovative structures in this area,” she said.

“The work being done by, for example, the Taskforce on Nature-Related Financial Disclosures (TNFD) will increasingly drive the inclusion of nature-based disclosures in company reporting, which in turn should lead to a greater recognition of the impacts a company has in this regard, enabling appropriate commitments and targets to be identified to address these impacts. We expect to continue to see growth in this area,” she said.

Launched in June, the TNFD is a global market-led initiative which is working on a framework for organisations to report and act on evolving nature-based risks. It is intended to build on the work of the Taskforce on Climate-Related Financial Disclosures, which has developed risk-based metrics and targets to which some governments, including that of the UK, are now seeking to give legal force.