New Guidance on Deforestation Due Diligence Aims to Help Banks and Investors Identify, Prevent and Mitigate Risks

Introduction

As concerns about deforestation continue to mount, a new guidance has been released by Global Canopy, Neural Alpha, and SEI to help banks and investors identify, prevent, and mitigate the risks of deforestation, conversion, and associated human rights abuse in their financial portfolios.

The Need for Guidance

The guidance comes at a critical time as incoming EU deforestation regulations and existing corporate sustainability due diligence requirements are driving interest in nature-related disclosures and voluntary commitments by financial institutions to eliminate commodity-driven deforestation from their portfolios. However, despite this increased focus on deforestation, many financial institutions still lack adequate policies and processes in place to manage the risks associated with deforestation.

The State of Deforestation Policies

According to Global Canopy’s latest Forest 500 report, around 60% of the 150 financial institutions assessed have no deforestation policies for any commodities. This highlights the need for a step-by-step process for financial institutions to identify and manage their exposure to deforestation risk.

The Due Diligence Process

The new guidance provides a decision tree approach that uses increasingly granular information where it is needed and available. For example, in cases where a client or holding operates in an industry that does not produce or source forest-risk commodities, a low deforestation risk flag can be assigned, allowing financial institutions to focus their efforts on higher risk clients or holdings.

Key Features of the Due Diligence Process

• Decision tree approach using increasingly granular information
• Ability to assign a low deforestation risk flag for clients or holdings with no forest-risk commodities
• Access to existing datasets that provide information on exposure and policy risks posed by significant supply chain actors

Existing Datasets and Resources

The guidance points users to existing datasets that provide information on exposure and policy risks posed by the most significant supply chain actors. These datasets include:

Trase Finance’s Due Diligence Dataset

• Drills down into traders’ sourcing patterns at subnational levels for selected high-risk commodities and biomes

Forest 500’s Assessment of Companies and Financial Institutions

• Assesses companies and financial institutions with the greatest exposure to tropical deforestation risk

Best Practice Recommendations

The guidance provides best practice recommendations on specific actions that financial institutions can take as equity and debt holders, including:

Engaging with Clients and Holdings

• Propose mitigating actions to reduce deforestation risk

Escalating Stewardship Activities

• Exercise ownership rights or contractual requirements to address deforestation risk

Conclusion

The new guidance provides common ground for the finance sector and its stakeholders to work individually and collectively towards deforestation-free portfolios. Prospective users are invited to contact Global Canopy at [email protected] for support and collaboration.