As a series of anti-deforestation regulations faces investors in coming years, experts look to the steps needed to match world leaders’ commitments with reality
At the COP26 climate conference in Glasgow last year, 141 nations, covering more than 90 per cent of the world’s forests, signed a pledge to end deforestation by 2030. With the final decisions on a global strategy for the coming decade to be taken at the COP15 biodiversity summit in China in May, the evidence suggests further steps are needed.
Deforestation is an issue that has been on the radar for many years, and enjoys metrics and standards lacking in other areas of sustainability. Yet the Food and Agriculture Organization of the United Nations found that net deforestation still hit 4.7m hectares a year in the 10 years to 2020. In 2018, it was estimated that only 11.3 per cent of global roundwood production was certified by the Forest Stewardship Council.
With the reversal of this trend key to both meeting climate commitments as well as mitigating other biodiversity risks, governments are beginning to take action.
The European Commission in November 2021 proposed a regulation on the importing and exporting of products and commodities linked to deforestation. France has previously pledged to eradicate such imports, which can include soy, palm oil and beef, by 2030.
The UK is mulling similar legislation, and US President Joe Biden’s announcement of a plan to halt deforestation cited the financial mechanisms necessary: “We’re going to work to ensure markets recognize the true economic value of natural carbon sinks and motivate governments, land owners, and stakeholders to prioritize conservation.”
Some investors already see this value. Douglas Crawshaw, global head of real estate manager research at WTW, says: “Clients of Willis Towers Watson have been backing reforestation strategies for a number of years as we consider such investment opportunities compelling both in terms of return generation and as a climate solution.”
He notes the importance of planting trees to lock up carbon dioxide while at the same time giving off oxygen. “The amount of trees needed to be planted is huge but the benefits are considerable, especially if the wood, when felled, is used, for example, for building construction [or for] furniture making and so on, thereby locking away the carbon for the long-term,” he says.
But while anecdotal positive investment opportunities are widely available, net deforestation suggests the entire system is not yet aligned with the 2030 target.
Gautier Queru, investment director and Land Degradation Neutrality Fund project manager at Mirova, says the necessary regulation will be two-pronged: “In order to support the fight against deforestation, more regulation including restrictions on negative activities and incentives for positive activities are needed.”
He praises the work done by France and the EU, saying this regulation creates investment opportunities in the funding of certified projects, such as the Rainforest Alliance, FSC, and others.
Initiatives are beginning to take effect and move markets, says Gabriel Webber Ziero, head of regulatory advisory at Ecofact.
He points to new requirements from the Brazilian central bank, requiring financial institutions to account for potential losses linked to environmental factors like deforestation.
“We’re starting to see a lot of heat as two types of regulations are coming together. On the one hand, we have financial regulations requiring financial institutions to identify and manage environmental risks, including deforestation, related to their financing activities, as is the case of Brazil. On the other hand, we have laws mandating large companies to conduct due diligence on their supply chains, such as in France. In addition, we start to see litigation addressing potential failures in supply chain due diligence processes, like the one initiated in France against a chain of super markets for allegedly selling beef coming from deforested areas in the Amazon,” he says.
Webber Ziero says he expects the finalisation of the EU taxonomy technical screening criteria to further steer investors away from deforestation products in value chains, and points to innovative financial instruments such as green letters of credit, trialled by CaixaBank in 2019.
Financial institutions elsewhere in the world could come under similar pressure, with the introduction of recommendations by the Taskforce for Nature-Related Financial Disclosures, scheduled for 2023.
“We see it as an excellent starting point to provide a clear nature-related financial risk framework to encourage better disclosure and help redirect financial flows towards nature-positive outcomes. Our letter to the chancellor called on the UK to actively encourage a broader group of countries, such as the G20, to engage with the TNFD and endorse its critical work,” says Oscar Warwick Thompson, head of policy and communications at the UK Sustainable Investment and Finance Association.
“We think a critical ambition for policymakers to pursue at COP15 in China is the objective of making all financial flows consistent with a nature-positive future and reversing biodiversity loss by 2030. We would like to see this embedded in the Post 2020 Global Biodiversity Framework, which will be adopted at COP15, and this would effectively mirror the Paris Agreement’s long-term goal on finance flows,” he adds.
But others worry that for all the positive noises made by regulators, investors and corporates, the financial sector is still ill-equipped to deal with these issues.
Yan Swiderski is a trustee of the Global Returns Project, a charity that runs a ‘fund’ portfolio of climate not-for-profit organisations, designed for private investors to allocate a small portion to, alongside their sustainable investment portfolio. The goal is for these carefully selected donations to achieve global good that is beyond the reach of financial instruments, and in the process mitigate the investment risk posed by factors such as deforestation.
Swiderski, who left a long career in the City of London in 2019, is less optimistic about the chances of effective regulation, pointing to the low penetration of sustainability certification in timber markets and relatively small sums promised by governments, in relation to the size of industries involved.
Global Canopy, one of the non-profits in the Global Returns Fund’s portfolio, found in its January Forest 500 report that one third of the 350 companies with the greatest exposure to deforestation through palm oil, soy, beef, leather, timber, pulp and paper do not have a commitment to remove deforestation from their supply chains.
“In an ideal world, governments would regulate these activities and all these problems get solved,” says Swiderski. “But clearly we are not in an ideal world.”
Swiderski is a strong supporter of a global carbon price mechanism in the form of a tax on polluters that would be redistributed to the poorest in society. But he remains sceptical about the power of environmental, social and governance investing.
“There are certain things that markets just can’t price properly,” he says. “Markets don’t price those externalities. They allow the rest of society to bear those costs.”