Investors have a fiduciary duty to “push for action” from policymakers on tackling deforestation, experts say.
As well as challenging corporates on their exposure and contribution to nature-related impacts, investors must engage with governments to encourage policies that protect the natural world and generate publicly available nature data.
“Why talk to government? Because they set the regulatory environment, they set the investment framework, and they set the budgets for agencies that enforce measures that counter deforestation,” said Graham Stock, Senior Emerging Markets Sovereign Strategist at asset manager RBC BlueBay, speaking at ESG Investor’s Nature Data for Institutional Investors event on 2 November.
Stock is Co-chair of the Investor Policy Dialogue on Deforestation (IPDD), which focuses on deforestation-related engagement with governments, and has more than 70 institutional investor members across 20 countries.
Two of its workstreams cover two of the most heavily forested countries in the world – Indonesia and Brazil.
IPDD began engagement efforts with Brazil’s government in 2020, which operated under then-President Jair Bolsonaro. Investor members were prompted to act following ongoing forest fires in the Amazon and public criticism of the government’s failure to act.
“We made the case to the Brazilian government that we had a fiduciary duty as investors to raise this topic with them, because [deforestation] is a risk to Brazil itself, with 40% of the country’s greenhouse gas (GHG) emissions coming from land use change and deforestation,” said Stock.
The stance of a government towards climate or nature-related issues such as deforestation has a huge impact on investor and corporate progress halting and reversing man-made negative environmental impacts, he noted.
In the case of Brazil, the Bolsonaro administration was attempting to reduce the availability of deforestation-related data which investors and corporates need, Stock said.
“The Bolsonaro administration had policies that were dramatically opposed to what we wanted to see,” he noted.
“While we were engaging with this previous government, there were efforts to reduce the ability of the Brazilian institutions to produce good data.
“Brazil’s space agency tracks deforestation through crucial satellite data, producing monthly reports. They are a very reliable source of information. But they [the government] tried to cut the budget for that agency, trying to scale back the amount of data available to investors and other entities.”
Following two and a half years of “frustrating” dialogue for the IPDD, Luiz Inácio Lula da Silva – who has publicly committed to ending deforestation of the Amazon – won the Brazilian Presidency from Bolsonaro last year.
Deforestation in the Amazon declined by 33.6% during the first six months of Lula’s administration.
“The new government is much more in line with our asks on the environment, with nature at the centre of their agenda,” said Stock.
He added that it is nonetheless crucial for investors to keep focused and “push for action” when engaging with policymakers, noting that saying the right things doesn’t necessarily lead to change in and of itself.
A third IPDD workstream is focused on the demand side of the equation, with investors engaging with the US, EU and UK, as they are some of the biggest importers of goods secured through deforestation.
Seeing the wood from the trees
Peter van der Werf, Head of Engagement at asset manager Robeco, highlighted the importance of collective action by investors to effectively identify and mitigate deforestation-related risks in their portfolios.
“Over time, we have conducted individual engagements on topics such as palm oil, soy supply and other specific impacts of deforestation, but always with a very small group of companies identified through fundamental research which make up a small part of our investment exposure,” he told onlookers.
A more comprehensive approach to tackling deforestation impacts in portfolios has become possible through Robeco’s involvement in a variety of “collective action” initiatives, such as Nature Action 100 (NA100).
In September, the global investor initiative NA100 (US$23.6 trillion in AUM) entered its engagement phase, sending letters to its 100 focus list companies – which span eight key sectors, including food and forestry. It also outlined its expectations on corporate approaches to nature-related risks and impacts.
Focus companies include Glencore, Amazon and Danone.
NA100 expects these companies to assess and report on their nature-related dependencies and risks, set and disclose science-based targets, engage with Indigenous Peoples and local communities, and establish board oversight on nature.
It is working closely with Spring, another nature-focused engagement initiative led by the UN-convened Principles for Responsible Investment (PRI), to limit the duplication of initiatives.
New tools are also being launched to ensure investors have enough data to hand when conducting assessments on their portfolio exposure to deforestation and to inform engagement.
This month, Global Canopy, the Stockholm Environment Institute and Zoological Society of London launched Forest IQ, a data tool which aims to identify and highlight the financial sector’s involvement in deforestation. It will expand its coverage over time.
“Forest IQ aims to help financial institutions screen their portfolios, engage with the most relevant [and worst-offending] companies, and manage deforestation risks to achieve their climate and nature targets,” said Fiona Pedeboy, Research at Global Canopy.
It has three core indicators, covering exposure, materiality, and reported performance. It is aligned with the Accountability Framework initiative (AFi) guidelines on deforestation and aims to support financial institutions meeting the reporting requirements outlined under the Taskforce on Nature-related Financial Disclosures (TNFD).
Forest IQ was developed in consultation with ten global financial institutions, including BlackRock, BNP Paribas, and Lombard Odier.
It further integrates data from existing datasets, like Global Canopy’s Forest 500, which tracks the policies and performance of the 350 most influential companies and 150 financial institutions linked to deforestation on their progress.
In February, research by Forest 500 found that 40% of companies and financial institutions most at risk of driving deforestation have no formal deforestation policy.
In May 2022, environmental disclosure platform CDP and the AFi identified major gaps in investors and companies’ forest-related reporting, warning that almost US$80 billion of enterprise value was therefore at risk.
They noted that just 36% of companies have company-wide no-deforestation and no-conversion policies in place, while 13% have policies and commitments aligned with best practice. Additionally, just 26% of companies said they were monitoring compliance with zero-deforestation policies.
“There’s no way to reach net zero without tackling deforestation,” said Pedeboy.
With increasing access to data and engagement initiatives, investors now need to start developing deforestation policies, agreed van der Werf from Robeco.
“This will ultimately lead to much better insights for investment teams to then start making the right choices as to which actors to finance and which represent unacceptable levels of risk,” he said.
“We’re now just a few years into our biodiversity journey as an industry, and we don’t have long before it’s 2030 and we need to be reversing nature loss, not just stopping it.”