Investors have a fiduciary duty to ‘urge policymakers to action’ in tackling deforestation, experts say.
In addition to challenging companies about their exposure and contribution to nature-related impacts, investors should work with governments to encourage policies that protect the natural world and generate publicly available nature data.
“Why talk to the government? Because they determine the regulatory environment, they set the investment framework and budgets for agencies that enforce measures to combat deforestation,” said Graham Stock, Senior Emerging Markets Sovereign Strategist at asset manager RBC BlueBay. ESG‘S Nature data for institutional investors event on November 2.
Stock co-chairs the Investor Policy Dialogue on Deforestation (IPDD), which focuses on deforestation-related engagement with governments, and has more than 70 institutional investors in 20 countries.
Two of the work streams cover two of the most heavily forested countries in the world: Indonesia and Brazil.
IPDD began collaborative efforts in 2020 with the Brazilian government, which operated under then-President Jair Bolsonaro. Investor members were spurred into action following ongoing wildfires in the Amazon and public criticism of the government’s failure to act.
“We have made it clear to the Brazilian government that we as investors have a fiduciary duty to raise this issue with them, because [deforestation] is a risk for Brazil itself, as 40% of the country’s greenhouse gas (GHG) emissions come from land use change and deforestation,” said Stock.
A government’s stance on climate or nature-related issues such as deforestation has a huge impact on the progress of investors and businesses, halting and reversing man-made negative environmental impacts, he noted.
In the case of Brazil, the Bolsonaro administration tried to reduce the availability of deforestation-related data that investors and companies need, Stock said.
“The Bolsonaro administration had policies that were dramatically at odds with what we wanted to see,” he noted.
“While we were talking to this previous government, there were attempts to reduce the ability of Brazilian institutions to produce good data.
“The Brazilian Space Agency monitors deforestation through crucial satellite data and produces monthly reports. They are a very reliable source of information. But she [the government] I have tried to reduce the budget for that agency in an effort to reduce the amount of data available to investors and other entities.”
After two and a half years of ‘frustrating’ dialogue for the IPDD, Luiz Inácio Lula da Silva – who committed publicly to end Amazon deforestation – won the Brazilian presidency from Bolsonaro last year.
Deforestation in the Amazon turned down by 33.6% during the first six months of Lula’s government.
“The new government fits much better with our questions about the environment, with nature central to their agenda,” says Stock.
He added that it is nevertheless crucial that investors remain focused and “push for action” when engaging with policymakers, noting that saying the right things in itself will not necessarily lead to change.
A third IPDD workstream focuses on the demand side of the story, with investors working with the US, EU and UK as they are some of the largest importers of goods secured by deforestation.
Seeing the forest through the trees
Peter van der Werf, Head of Engagement at asset manager Robeco, emphasized the importance of collective action from investors to effectively identify and mitigate deforestation-related risks in their portfolios.
“Over time we have had individual engagements on issues such as palm oil, soy supply and other specific impacts of deforestation, but always with a very small group of companies identified through fundamental research that capture a small portion of our investment exposure.” he said to the spectators.
A broader approach to tackling the impacts of deforestation across portfolios has become possible thanks to Robeco’s involvement in a variety of ‘collective action’ initiatives, such as Nature Action 100 (NA100).
In Septemberthe global investor initiative NA100 (US$23.6 trillion in assets under management) entered its engagement phase and sent letters to its 100 focus list companies – covering eight key sectors, including food and forestry. It also outlined his expectations on business approaches to nature-related risks and consequences.
Focus companies include Glencore, Amazon and Danone.
NA100 expects these companies to assess and report their nature-related dependencies and risks, set and publicly disclose science-based targets, collaborate with indigenous peoples and local communities, and establish governance oversight of nature.
It is to work together closely with Spring, another nature-focused engagement initiative led by the UN-convened Principles for Responsible Investment (PRI), to limit the duplication of initiatives.
New tools are also being launched to ensure investors have sufficient data at hand when assessing their portfolio exposure to deforestation, and to inform engagement.
This month, Global Canopy, the Stockholm Environment Institute and the Zoological Society of London launched Forest IQ, a data tool that aims to identify and highlight the financial sector’s involvement in deforestation. It will expand its coverage over time.
“Forest IQ aims to help financial institutions screen their portfolios and focus on the most relevant ones [and worst-offending] companies, and managing deforestation risks to achieve their climate and nature goals,” says Fiona Pedeboy, Research at Global Canopy.
It has three core indicators, covering exposure, materiality and reported performance. It is aligned with the Accountability Framework initiative (AFi) guidelines on deforestation and aims to support financial institutions that comply with the reporting requirements set out in the Taskforce on Nature-related Financial Disclosures (TNFD).
Forest IQ was developed in consultation with ten global financial institutions, including BlackRock, BNP Paribas and Lombard Odier.
It further integrates data from existing datasets, such as Global Canopy’s Forest 500, which tracks the policies and performance of the 350 most influential companies and 150 financial institutions linked to deforestation and their progress.
In February, research Forest 500 shows that 40% of companies and financial institutions most at risk of causing deforestation do not have a formal deforestation policy.
In May 2022, CDP, environmental information platform and the AFi published identified there are major gaps in investors’ and companies’ forest-related reporting, with warnings that this puts nearly $80 billion in corporate value at risk.
They noted that only 36% of companies have implemented company-wide policies against deforestation and conversion, while 13% have policies and commitments aligned with best practices. Furthermore, only 26% of companies said they monitored compliance with anti-deforestation policies.
“There is no way to reach net zero without tackling deforestation,” says Pedeboy.
With access to data and engagement initiatives increasing, investors must start developing deforestation policies now, says Robeco’s Van der Werf.
“This will ultimately lead to much better insights for investment teams to then start making the right choices about which actors to fund and which represent unacceptable levels of risk,” he said.
“We are now only a few years into our biodiversity journey as an industry, and it won’t be long before 2030 is here and we need to reverse, not just stop, nature loss.”