Introduction

The report reviews actions by 557 financial institutions regarding deforestation, a significant driver of climate change, biodiversity loss, and human rights abuses. Commodity-driven deforestation contributes 10% of global carbon emissions, and financial institutions play a crucial role in its elimination. Despite climate commitments made at COP26, only a small proportion of these institutions are taking concrete action, highlighting the need for rapid progress to meet 2025 deforestation targets.

Findings

The report highlights a low baseline of action on deforestation within the financial sector. Only 20% of institutions have a policy targeting a specific commodity linked to deforestation, and just 6% cover all four high-risk commodities (palm oil, soy, timber, and cattle products). Further, only 17% of financial institutions recognise deforestation as a business risk, with 53% acknowledging financial risks, 49% reputational risks, and 40% material risks. These figures underscore the sector’s slow response to deforestation-related risks, despite the clear financial, reputational, and regulatory consequences.

Collaborating across the sector

Collaboration within the financial sector is essential for driving change. The report finds that 42% of institutions are involved in initiatives aimed at addressing deforestation, such as the Finance Sector Deforestation Action initiative. However, only 4% of institutions actively advocate for deforestation-related legislation. The need for broader collaboration and legislative advocacy is evident, especially as regulations targeting deforestation are advancing in regions like the UK, EU, and the US.

Do the financial institutions have deforestation policies?

Just 12% of institutions have published an overarching deforestation policy, and a mere 6% have commodity-specific policies for all four high-risk commodities. Financial institutions are most likely to address palm oil (17%), with fewer addressing soy (11%) and cattle products (7%). To meet their net-zero climate commitments, financial institutions must establish comprehensive deforestation policies across all commodities.

Cross-commodity action on deforestation

Leading institutions, such as Storebrand and AXA, have deforestation policies covering all four commodities. These policies require companies to eliminate deforestation from their operations and supply chains. For financial institutions to drive meaningful change, these comprehensive policies should be implemented across the sector, with clear targets and timeframes.

Do the financial institutions have policies on associated human rights?

Human rights abuses often accompany deforestation. The report finds that only 12% of financial institutions have a policy requiring clients to respect the Free, Prior and Informed Consent (FPIC) of Indigenous peoples and local communities. Furthermore, only 3% encourage or require respect for customary rights to land, resources, and territory. Addressing these rights is essential for reducing deforestation and protecting vulnerable communities.

Are the financial institutions exposed to deforestation risk?

Nearly two-thirds (62%) of financial institutions reviewed provide finance to companies with a high exposure to deforestation risks. Despite this significant exposure, only 16% have published an overarching deforestation policy, and 29% have a policy for at least one commodity. Institutions must urgently address their deforestation risks to meet their climate commitments.

Recommendations

The report recommends that financial institutions recognise the risks posed by deforestation and associated human rights abuses, set strong policies, and engage clients to implement these policies. Collaboration across the sector and legislative advocacy are also essential. Financial institutions must monitor progress and report transparently on their actions to eliminate deforestation and meet their net-zero targets by 2025.