Nairobi, Oxford -- A new lending and investment policy tool for financial institutions, unveiled today, aims to reduce the deforestation risk caused by the unsustainable production, trade, processing and retail of soft commodities, especially soy, palm oil and beef.
New research by the UN Environment Programme (UNEP) and the Natural Capital Declaration highlights the critical need to fundamentally strengthen how financial institutions view, address and manage deforestation and degradations risks.
Of the 30 financial institutions assessed, the majority did not have policies that explicitly require clients to comply with applicable local, national and ratified international laws and regulations related to forest conservation.
The study, entitled 'Bank and Investor Risk Policies for Soft Commodities' highlights policies that banks and investors can adopt to help reduce deforestation and forest degradation risks resulting from unsustainable practices across agricultural supply chains that are major drivers of tropical deforestation.
An accompanying Soft Commodities Forest-risk Assessment Tool provides a framework to evaluate policies adopted by banks and investors to address deforestation and forest degradation risk in the agricultural value chain.
UN Under-Secretary-General and UNEP Executive Director Achim Steiner, said, 'Addressing deforestation is high on the twenty-first century policy agenda. The continuing loss of the world's tropical rainforests represents a significant threat to the security of water, food, energy, health and climate for millions worldwide.'
'Banks and investors who engage in the destruction of forests through their lending and investment practices expose themselves to potentially significant regulatory, reputational, legal, operational and market risks, which could affect the credit risks and market value of underlying assets,' he said.
'Financial institutions can and should be part of the solution should they decide to adopt the tools and mechanisms designed to curb deforestation and produce sustainable value chains for commodities,' Mr. Steiner concluded.
The study and the tool help financial institutions gain insight into criteria to address risks and opportunities linked to soft commodity producers, such as the potential to support sustainable production through financial products and services.
Banks and investors are encouraged to adopt internal policies and procedures to strengthen monitoring and management of risks linked to the financing of companies whose activities contribute to deforestation and forest degradation through their operations or supply chains.
Andrew Mitchell, Co-Director, Natural Capital Declaration and CEO, Global Canopy Programme says 'Financial institutions have a major role to play in curbing deforestation and in helping to accelerate the transition to new more sustainable practices. The NCD's new Soft Commodity Forest Risk Assessment Tool now gives them the means to update or develop soft commodity policies using the minimum and best-practice suggestions provided in the report.'
The study, commissioned by the UN-REDD Programme, was produced by the Natural Capital Declaration (NCD). The Natural Capital Declaration is a unique global finance-led and CEO endorsed initiative co-convened by UNEP's Finance Initiative and the Global Canopy Programme that seeks to accelerate the integration of natural capital considerations into financial products and services such as loans, bonds and equities.
The report and the new tool are freely available to download.
More Findings from the report:
- The financial sector is exposed to risks from deforestation and degradation linked to the production and processing of soft commodities
- The best performing financial institutions in terms of managing this risk are the African Development Bank, FMO Development Bank, the International Finance Corporation, Standard Chartered Bank and Sumitomo Mitsui Trust Bank.
- Almost half of the 30 financial institutions evaluated have policies in place to identify, manage and control or mitigate risks linked to loans or investments in companies involved in soft commodities.
- Despite the recent deforestation commitments in the New York Declaration on Forests, Country commitments under the UNFCCC, and other leading initiatives such as the Consumer Goods Forum and Tropical Forest Alliance, few financial institutions were systematically quantifying their exposure to risks or creating opportunities related to the production of soft commodities at a portfolio level
- Only 13 per cent of the financial institutions assessed have developed financial products and services specifically aimed at promoting the production and trade of sustainable commodities.
- Almost all financial institutions disclose general sustainability policies or policies focused to some extent on the production of soft commodities. However, many financial institutions do not disclose evidence of specific activities to monitor companies' compliance with these policies on an ongoing basis.
- Recommendations for financial institutions identify areas for improvement that are tailored to how advanced their existing policies and practices are compared with sector peers. Leaders are expected to have specific environmental criteria in policies for soft commodities, covering the entire value chains of companies they lend to or invest in. They are also expected to require or encourage certification under relevant commodities roundtables, and to disclose implementation and monitoring of policies.