Bouvet Island Finance Sector Urged to Step Up Due Diligence on Deforestation Risks
Introduction
A groundbreaking report has been released, highlighting the importance of due diligence in finance when it comes to deforestation-related risks and impacts. The report, compiled by Climate & Company (C&Company) in collaboration with Andra AP-fonden (AP2), showcases a real-life example of how a pension fund carried out comprehensive due diligence on its deforestation-related risks.
Deforestation Poses Significant Systemic Risk
According to the report, deforestation poses a significant systemic risk to ecosystems, people, and the global economy. The finance sector plays a crucial role in the production and trade of commodities that drive nature loss, making it essential for financial institutions to engage with companies they finance or provide services to, shifting businesses towards becoming deforestation-free.
Risks and Impacts
- Deforestation poses significant risks to ecosystems, people, and the global economy
- Financial institutions play a crucial role in the production and trade of commodities that drive nature loss
- Engaging with companies can help shift businesses towards becoming deforestation-free
Regulatory Developments
Although financial institutions are currently exempt from due diligence laws in the UK and EU, this could change soon. The EUDR has mandated a review within two years (likely by mid-2025) to assess whether financial institutions should be included, while the Financial Services and Markets Act in the UK has tasked the Treasury with reviewing the extent to which regulation is adequate for eliminating the financing of prohibited forest-risk commodities.
Regulatory Developments
- EUDR mandated a review within two years to assess whether financial institutions should be included
- Financial Services and Markets Act in the UK tasked the Treasury with reviewing the extent to which regulation is adequate
Urgent Action Required
In light of this, financial institutions are being urged to take action now. Fortunately, advanced guidance and data are available to support their efforts.
Advanced Guidance and Data
- Report “Due Diligence towards Deforestation-Free Finance” provides a step-by-step methodology for financial institutions to conduct due diligence
- Report includes combining existing data sources, systematising assessments, and addressing technical challenges
Case Study: AP2’s Due Diligence Approach
AP2 partnered with C&Company, supported by Global Canopy, to conduct due diligence across their entire equity portfolio, aiming to meet their commitment to a portfolio free from commodity-driven deforestation by 2025. The report details the assessment process, which included:
Case Study: AP2’s Due Diligence Approach
- Identifying high-risk companies
- Evaluating policy strength and implementation
- Pledging active engagement with companies that continue to poorly manage risks
Replicability and Scalability
The approach outlined in the report is designed to be replicated by other financial institutions and analysts conducting due diligence. The methodology includes combining existing data sources, systematising assessments, and addressing technical challenges.
Replicability and Scalability
- Code repository created to provide a prioritisation and management tool for practitioners
- Report provides practical guidance to support nature-related assessments and engagement process
Conclusion
Financial institutions have the power to shift the flow of finance towards more sustainable business practices, and this report provides practical guidance to support their nature-related assessments and engagement process. The approaches detailed can be applied to global equity and corporate bond portfolios, making it an essential resource for financial institutions looking to make a positive impact on the environment.
Get Started Today
- Read the report “Making deforestation due diligence work in practice”
- Watch the recording of the Due Diligence guidance launch