Introduction

Australia has been identified as the only developed nation named a global deforestation front, primarily due to significant land clearing for agriculture, forestry, and urban development. Forest loss contributes to biodiversity decline, carbon emissions, and ecosystem disruption, posing material risks to businesses and financiers. Deforestation within Australia has largely been overlooked compared to tropical deforestation hotspots like the Amazon, despite its substantial impact​.

The report highlights the increasing regulatory pressure, particularly from Europe, where the EU Deforestation Regulation mandates that products entering EU markets must be deforestation-free. Australian businesses in deforestation-risk sectors and their financial backers must address these risks to comply with evolving regulations and avoid reputational damage​.

Deforestation in Australia

Australia’s forests cover 134 million hectares and are critical for biodiversity, carbon sequestration, and ecosystem stability. However, between 1990 and 2020, more than 6 million hectares of primary forest were deforested, primarily in Queensland​. Key drivers include agriculture, particularly beef grazing, cropping, and land development.

The beef and sheep sector is the most significant contributor to deforestation, accounting for 75% of primary deforestation between 2016 and 2020​. In contrast, the cropping sector cleared land to expand arable areas, with notable growth in cotton production in northern Australia. Urban development also contributes to forest loss, with infrastructure expansion fragmenting ecosystems and displacing species​.

Forest degradation, primarily caused by logging, further threatens ecosystems, although it is not classified as deforestation under current Australian definitions. Climate change exacerbates the issue, with bushfires during the 2019-2020 fire season destroying over 8.19 million hectares of native forest​. The report emphasises the need to improve national data accuracy and monitoring frameworks, such as the SLATS and National Greenhouse Gas Inventory datasets​.

Financing deforestation and forest degradation risk sectors in Australia

The report identifies $137.6 billion USD in financing from approximately 1,900 financial institutions into Australia’s deforestation-risk sectors, including beef, forestry, cropping, and land development​. North American financiers account for 51% ($69 billion USD), while European financiers contribute 21% ($29 billion USD)​. The majority of funds come through equity holdings (49%) and bond issuances (25%).

European financiers are disproportionately exposed to the beef sector and rely heavily on bond issuances and shareholdings. The flow of capital into these sectors signals a clear exposure to deforestation risks, which could intensify as regulatory frameworks, like the EU Deforestation Regulation, expand to include financial institutions​.

The forestry sector, while not officially classified as causing deforestation, contributes to forest degradation by reducing biodiversity and carbon stocks. Mining, particularly bauxite operations in Western Australia, has also driven clearing in sensitive forest ecosystems​. Financial institutions face physical, transition, and systemic risks if these issues remain unaddressed.

Recommendations

The report outlines an action plan for financial institutions to mitigate exposure to deforestation risks in Australia:

• Establish a position and plan:
  • Adopt clear zero-deforestation policies with defined baselines and target dates.
  • Update definitions of deforestation to include biodiversity and carbon impacts.
  • Develop internal guidance and provide staff training on Australian deforestation risks​.
• Identify and map risks:
  • Conduct annual risk assessments using the NGGI and state-level datasets such as SLATS.
  • Prioritise engagement with clients in high-risk sectors (beef, cropping, forestry, and land development).
• Engage clients and regulators:
  • Communicate clear expectations on vegetation management to Australian clients.
  • Advocate for stronger federal and state regulations, including reforms to the EPBC Act and improved monitoring systems​.
• Monitor and disclose progress:
  • Enhance due diligence processes to include high-risk sectors and regions.
  • Disclose progress on deforestation commitments transparently, ensuring alignment with global reporting standards​.

For Australian companies in deforestation-risk sectors, the report recommends:

• Quantifying deforestation impacts and setting science-based targets.
• Adopting advanced technologies like geospatial mapping to monitor deforestation and forest degradation.
• Enhancing transparency and traceability across supply chains​.

Conclusion

The financial sector plays a pivotal role in mitigating deforestation risks. Taking proactive steps to address exposure will safeguard long-term financial stability, support regulatory compliance, and contribute to halting biodiversity and ecosystem loss.