Blog | Jan. 21, 2021

Why climate risk reporting will not stop the finance industry bankrolling deforestation

The financial sector is heavily complicit in driving global deforestation and the climate crisis. With mounting evidence that self-regulation by financial institutions is failing to curb forest destruction, it is clear that government intervention is needed.

In March 2020, a UK government-appointed taskforce came to this conclusion. The Global Resource Initiative (GRI), which included key players from the world of finance, concluded that the financial sector should be subject to mandatory rules requiring them to undertake checks on deforestation risks. Following this, the European Parliament made a similar recommendation in October, and now even agribusiness companies are calling for consideration of a due diligence obligation on loans and investment. 

Disappointingly, the UK government has opted not to follow its own taskforce’s advice. When it introduced a provision on deforestation in the Environment Bill currently before parliament, this was restricted purely to supply chain companies, excluding finance entirely. To justify this, the government pointed to other reporting initiatives that it said would fill this gap, particularly the Taskforce on Climate-related Financial Disclosures (TCFD).

However, current tools on climate risk reporting such as the TCFD do not work for deforestation. Mandatory rules on deforestation must therefore apply to the finance sector to effectively safeguard our forests and climate.

Why the TCFD falls short for deforestation

The cornerstone of TCFD is businesses tallying and reporting on their annual carbon dioxide emissions, as well as qualitative reporting on other climate risks relevant to the sectors they work in. The core argument of TCFD is that annual standardised and comparable reporting of climate change risks allows investors and banks to make better decisions about where they put their money. TCFD began as an ‘opt-in’ voluntary initiative for companies, although some governments – such as the UK – are proposing to make TCFD mandatory.

However, there are several reasons why TCFD falls short when it comes to compelling financial institutions to act on deforestation:

Problem 1: Deforestation won’t actually appear in annual reporting on emissions

The TCFD approach focuses on measurable emissions or risks. Yet, many of the companies found to have deforestation in their global supply chains or finance already have some form of ‘no deforestation’ commitment. Their role in deforestation often isn’t explicitly planned – it is just the highly predictable outcome of sourcing from high-risk geographies with few checks and balances.

That includes hundreds of the world’s largest agribusiness companies, which are the powerful linchpins of global supply chains and continue to buy commodities from areas known to be high-risk for deforestation and human rights abuses, despite their public pledges. Given that banks and their clients are already reporting that they have no exposure to deforestation in current and future years, we can expect their TCFD reporting of emissions from deforestation in supply chains would similarly be zero.

Problem 2: TCFD does not address the fundamental market incentives for deforestation

The TCFD focus is on counting annual emissions - so it only covers deforestation that has taken place in the reporting year. However, for over a decade, measures focused on tackling deforestation in high-risk industries like agribusiness have moved away from this single year approach. Industry policies, or even laws, have focused on ending sourcing from any forest that has been cleared since a given cut-off date. If the cut-off date is 2006, for example, this means that an area of forest standing in 2006 could never be a source of palm oil. Even if the forest is later destroyed, a company can only buy products grown on land cleared before 2006.

Without cut-off dates, there is nothing to stop a company (or its financier) from simply deciding that it is willing to bear the cost of a bad annual TCFD report or a one-off fine for deforestation, if it means that it can now produce on, and profit off, the deforested land for decades to come. Cut-off dates make sure that there is no market today, or in the future, for commodities produced off the back of forest destruction.

Our recent report Beef, Banks and the Brazilian Amazon uncovered that between 2017-2019 Brazilian beef traders JBS, Marfrig and Minerva bought cattle from ranches that contained 20,000 football fields worth of illegal deforestation. As this was only uncovered in 2020, it would not be included in the current annual TCFD report because the deforestation occurred in previous years, highlighting the fundamental flaw in the TCFD’s single-year system.

Problem 3: Banks and investors are already aware of their links to deforestation. The problem isn’t information, but incentive

Our Money to Burn report shows that despite public commitments, reported risks and exposés, the finance sector continues to pump money into companies implicated in the destruction of climate-critical forests and related human rights abuses. In fact, in our recent report we found that the three biggest buyers of cattle in the Amazon have had their credit ratings upgraded despite the region’s rapid escalation of forest destruction, fires and global outcry. A higher credit rating usually results in a company getting cheaper finance and makes them more attractive to investors.

TCFD is a mechanism purely based on reporting and the problem isn’t a lack of reporting. It is that even when presented with comprehensive evidence of concerning practices, banks and investors stop short of shifting their money unless deforestation or other issues are ‘material’, i.e. unless deforestation is going to cost them money or run the risk of regulatory action. That is why governments need to act to binding laws that incentivise financers to stop bankrolling deforestation.

Other current finance measures that fall short on deforestation

Green finance

One common argument is that rather than raising the bar on all finance, what is needed is more incentives for ‘green finance’. There is some nuance to the debate, but in simple terms the premise is that we shouldn’t require banks to be deforestation-free, but that we should reward them when they offer special ‘green’ financial products that have forest-friendly requirements. However, we found key cheerleaders of green finance, such as Barclays or ING bank, are in their mainstream operations financing beef traders complicit in tens of thousands of hectares of Amazon rainforest destruction.

NGOs in Brazil have been quick to point out that the country has millions of hectares of degraded land that could be adapted for sustainable beef or soy production. However, there is no incentive for companies to shift to more sustainable production models so long as sourcing from the heartland of the Amazon rainforest or the Cerrado tropical ecosystem is supported by, and legitimised, by their financiers.

A taskforce on nature-related financial disclosures

Increasingly, the shortfalls of TCFD for forests are being recognised. The response to this has been for discussions to converge around work for a new mechanism focused on ‘nature’ or biodiversity, rather than carbon emissions: a Taskforce on Nature-related Financial Disclosures (TNFD). French President Macron and UK Prime Minister Johnson are among those who have championed a TCFD-style mechanism for biodiversity – most recently at the One Planet Summit.

But many of the problems we encounter with annual reporting from TCFD similarly apply to TNFD. The premise is also hypothetical, relying on a standardised unit of measurement for ‘nature’ which does not currently exist. This signals years of delay before the merit of the idea can even be assessed.

Finance must not be left out of laws to tackle deforestation in supply chains

In 2020, we have seen the UK introduce laws to address their complicity in global deforestation by seeking to clean up their supply chains, with EU laws in the pipeline. While laws aiming to end the importation and use of commodities linked to deforestation will undoubtedly shape finance, a key lesson from Brazil and Indonesia is that company violations of local laws have not deterred global banks and investors if they themselves are exempt.

In 2020, efforts by the GRI, the European Parliament and others show growing support for a quite common-sense idea: requiring banks and investors to follow the same rules as their clients is key to influencing financial sector behaviour, cleaning up supply chains and making sure these laws succeed. It is time to recognise TCFD’s blind spot when it comes to deforestation, and ensure the financial sector is required by law to address their complicity in forest destruction.

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