Growing regulatory pressure is forcing banks to tackle deforestation risk, though experts believe they are not taking it seriously enough. 

The EU’s Deforestation Regulation and the UK’s Environment Act, which came into force in 2023 and 2021 respectively, do not apply directly to banks. However, they pose significant financial risk to banks’ clients which are exposed to deforestation in their supply chains.

Companies that fail to comply with the EUDR face a penalty of up to 4% of their annual turnover. Last December, EU-based banks controversially escaped inclusion in the present regulation, although it is scheduled for review in 2025, when it could be extended to the finance sector.

In the UK, the Environment Act makes it illegal for larger businesses operating to use “forest-risk” commodities such as soy and palm oil that have been grown on land which is used illegally. However, the rollout of the law has been beset with delays while the government finalises the list of commodities covered by the regime.

The UK Treasury also rejected recent calls for banks to carry out due diligence requirements on deforestation. For now, it is reviewing how well the current system tackles illegal deforestation financing. 

Forward-thinking banks tackle deforestation risk

“Even without their direct inclusion in the EUDR or Environment Act, banks still need to engage with deforestation risks and impacts in their operations,” says Julia Grothaus of Linklaters. “The wider focus on nature, biodiversity, human rights and due diligence means that banks are increasingly looking to address this topic.”

Both the EU’s Corporate Sustainability Due Diligence Directive and the Task Force on Nature-related Financial Disclosures target deforestation. The Worldwide Wildlife Fund says that when forests are cut, burned or otherwise removed they emit carbon, contributing around 15% of all greenhouse gas emissions. 

Banks that finance companies behind this destruction incur reputation risk, says non-governmental organisation Global Canopy. BNP Paribas is currently being sued by a group of NGOs for financing companies that allegedly contribute to the deforestation of the Amazon rainforest. Forests soak up a third of global carbon emissions.

Some proactive banks are taking steps, such as making policy commitments to eradicate their exposure. The Forest 500 ranking system, which rates the deforestation policies of financial institutions, finds that most banks highly exposed to deforestation still have a long way to go, though a small number do take these issues seriously.

What does a best-practice-appropriate policy look like?

It should set specific and strong commitments that prohibit all deforestation and protection of internationally recognised human rights, according to Pei Chi Wong of Global Canopy.  

Deutsche Bank prohibits financing of the clearing of primary tropical forests, illegal logging or conversion of land of high conservation value, high-carbon-stocks forests or peat lands.

Rabobank, which tops Forest 500’s ranking, uses a range of different measuring tools but admits that the process involves “trial and error”. “We cannot offer a 100% guarantee against deforestation,” a spokesperson says.

Despite its ongoing lawsuit, BNP Paribas’s policy also scores highly on the Forest 500. Its policy includes deforestation-related criteria in its financing and investment policies for certain high-risk sectors. 

European banks dominate the Forest 500’s top 20 rankings. The first US bank is Citigroup, which comes in at number 26 with a policy score of 23%.

How banks can build a deforestation policy

• Understand the scope of commitments, both in terms of business activities covered and deforestation risk definitions
• Set up governance procedures. Identify who is responsible for overseeing the policy, and establish reporting and escalation processes
• Maintain due diligence and ongoing monitoring processes
• Ensure strong engagement and mitigation/remediation measures, with the severest step being dropping the client

Source: Linklaters

Banks should take action by 2025

Banks that have signed up to the Paris agreement to limit global warming to 1.5°C should avoid financing or facilitating commodity-driven deforestation by no later than 2025, advises the Institutional Investors Group on Climate Change.

Global pacts to halt deforestation by 2030, such as the Glasgow Declaration on Forests at Cop26, suggest that regulatory pressure will increase in the coming years. However, the world is currently off track to meet this target, according to the civil society-led Forest Declaration Assessment. 

Collaboration is key, says Sebastien Soleille, global head of energy transition and environment at BNP Paribas. “Our efforts will be much more efficient if more stakeholders fight deforestation,” he says.

“This is why we work in several coalitions to define robust and relevant frameworks like TNFD, gather and manage nature-related data through collaboration with experts such as CDP and IUCN, and promote specific tools like biodiversity credits.”