Announcements by governments, corporates and investors follow direction change on deforestation under Brazil’s Lula.
Public and private sector commitments to tackling deforestation have been strengthened at COP27, adding to optimism for meaningful change following the recent election victory of President Lula in Brazil.
The Forests and Climate Leaders’ Partnership (FCLP) was launched by more than 25 major governments – including the UK, US and France – aiming to “halt and reverse” forest loss and land degradation. Additionally, the Finance Sector Deforestation Action (FSDA) initiative and the Lowering Emissions by Accelerating Forest finance (LEAF) Coalition reported increased support and commitments.
The announcements follow the election in Brazil of President Luiz Inácio Lula da Silva, who has committed to ending deforestation.
Brazil, which contains over 12% of the world’s forests, has seen 420 million hectares of forest destroyed since 1990 and ten million hectares a year cleared between 2015-2020 alone. As well as destroying trees which had previously sequestrated significant quantities of CO2, the rapid deforestation has increased Brazil’s reliance on soy bean and beef exports, which could have major implications on the nation’s economy, as well as for investors.
Peter Elwin, financial think tank Planet Tracker’s Director of Fixed Income and Head of Food and Land Use Programme, told ESG Investor that countries including Brazil need to “strengthen the commitments they have already made to ensure deforestation will cease by 2030 at the latest” at COP27.
“A greater focus on due diligence legislation among importer countries would put pressure on supply chains to eliminate deforestation. And importer countries should also look for ways to invest in the countries producing the deforestation-linked commodities to incentivise deforestation and conversion-free production,” he said.
Increasing commitments
The FCLP looks to bring together financial firms, companies, policymakers and Indigenous communities, aiming to “halt and reverse” forest loss and land degradation this decade in “an inclusive manner”. The initiative, members of which collectively account for 35% of forests and around 60% of global GDP, is a voluntary partnership which aims to deliver sustainable development and supporting an inclusive rural transformation.
At last year’s COP26 in Glasgow, US$12 billion of public forest-related finance was committed over five years, with US$2.67 billion spent in the first year and a further €1 billion additional public money to be committed at COP27. In addition to the US$7.2 billion of private funds committed in Glasgow, at least US$3.6 billion of additional private capital will be committed at COP27, bringing the total funds mobilised to halt and reverse forest loss and land degradation by 2030 to US$23.8 billion.
Indonesia, one of the countries with the highest levels of deforestation is said to be “considering joining the FCLP”. Brazil, Indonesia and the Democratic Republic of the Congo, the three largest rainforest nations, are currently in negotiations to form a strategic alliance to coordinate on their forest conservation efforts, nicknamed an “Opec for rainforests”.
The FCLP encourages international collaboration on the sustainable land use economy and supply chains, mobilises public and donor finance to support implementation, supports Indigenous Peoples’ and local communities’ initiatives and works toward strengthening and scaling carbon markets for forests.
The FSDA initiative said it was expanding its membership, implementing its investor expectations to investee firms and moving forward with commitments made last year at COP26 by member firms including LGIM, Aviva, AXA, Schroders, Storebrand, JGP (Brazil), Impax, Generation Investment Management and Bancolombia. The newly added members include pan-African investment company SouthBridge Group, Banco Estado de Chile, GAM Investments and London CIV. Through the initiative, members look to act to “eliminate commodity-driven deforestation from portfolios and drive progress towards a net zero, nature-positive economy”.
Michelle Scrimgeour, LGIM’s CEO, said: “Deforestation is a priority: forests are both a vital carbon sink and an important home for nature and we believe the interdependencies between nature and climate are of critical importance. Over the past year, as a member of the Finance Sector Deforestation Action group, we have made significant progress – set investor expectations and initiated targeted corporate engagements to drive action.”
The LEAF coalition, which seeks to protect forests by promoting only use of high-quality carbon credits and offsets, announced that it had passed US$1.5 billion in corporate spending now committed to the project, a 100% increase in corporate support. Auto manufacturer Volkswagen Group and fashion retailer H&M Group have become the latest global companies to join the LEAF Coalition. The firms join more than 25 global corporations including Amazon, Salesforce, Bayer, PwC, Unilever, Blackrock, E.ON, McKinsey and Company and GSK in signing up to LEAF.
Ecuador has become the first country to sign a memorandum of agreement with Emergent, the coordinator of The LEAF Coalition, with the Republic Korea joining the governments of the UK, US and Norway in backing LEAF, becoming the first Asian government to provide the coalition with financial support.
Brazil at “tipping point”
While the election of President Lula has been seen as paving the way for a much-needed change in policy direction, it also comes at a “tipping point” for managing deforestation-related risks in Brazil. A recent report by financial think tank Planet Tracker found that regional climate change driven by deforestation puts more than 39% of Brazil’s exports at risk, causing “significant harm” to the Brazilian economy and its soft commodity supply chains.
These exports include soy beans, with the majority of soy used in Europe being imported from South America. According to Planet Tracker’s data, soy beans could experience yield declines of up 66% in a “moderate climate warming scenario”.
Planet Tracker’s Peter Elwin said: “This is a global issue. Stopping deforestation in Brazil and elsewhere is essential if we are to have any chance of meeting our climate goals, which is why we’re calling on investors to help drive us away from the tipping point of no return.”
In the run-up to the election, Lula pledged to establish representation for local Indigenous groups in government, strengthen Brazil’s environmental protection agency, and crack down on illegal deforestation. Analysis by Carbon Brief also found that the new President could cut deforesting of the Amazon by 89%, avoiding 75,960km2 of rainforest loss by 2030 – an area roughly the size of Panama.
Elwin noted that investors have a key role to play in supporting efforts to curb deforestation rates by ensuring investee companies are not exposed to or complicit in deforestation and pushing policymakers and food suppliers to increase transparency and improve due diligence practices.
Investors should expect changes to Brazilian deforestation policy under Lula, according to Elwin. Brazil’s nationally determined contribution (NDC) has already committed the country to halting deforestation by 2030, but with Lula now in power “there is the potential to bring this deadline forward”, said Elwin. Planet Tracker has recommended that Brazil should bring its NDC deadline forward to 2025.
Brazilian organisations have been working to limit the impact of deforestation. BVRio Institute and Imaflora make government timber traceability information available to international buyers through online platforms, assisting buyers in assessing the legal origin of the timber they purchase. “This is valuable for basic investment analysis, as well as assessing risks such as deforestation,” he said, adding that it is an area the Brazilian government under Lula will have to address.
“Actions are more important than words,” Elwin added. “The new Brazilian government needs to rapidly step-up investment in enforcement mechanisms to ensure illegal deforestation is prevented, and to invest in better land registration processes to clarify Indigenous Peoples rights to land and prevent land theft. Action to address this will reduce these investment risks, improving potential returns for investors and attracting inward investment into Brazil.”
