Fiona Smith, Investment Proposition Manager at Smart Pension, explains tactics and tools that can enable substantial strides toward sustainability and resilience.
The growing challenges of climate change and biodiversity loss have made confronting deforestation a critical issue. Recent findings from the Forest Declaration Assessment show a concerning trend: global efforts to reduce deforestation are falling significantly short of 2030 targets, trailing by 21% last year. Deforestation poses a major threat to our natural world and contributes significantly to climate change. It is also linked to serious human rights abuses, including forced labour and the displacement of indigenous peoples.
With pension investments serving as key drivers of the wider economy, they have a pivotal role in addressing deforestation. For pension schemes, this responsibility involves not only safeguarding the world for their members, but also ensuring the sustainability and health of their investments and the broader economic system.
Where to start
Given the intense focus on climate change and the extensive, sometimes bewildering array of data available, it can be difficult to know where to start on biodiversity loss and other nature-related risks. Organisations now have the Taskforce on Nature-related Financial Disclosures (TNFD) to consider, a global initiative aimed at providing financial institutions and companies with a framework to disclose and manage how they affect and rely on the natural world as well as the corresponding risks and opportunities. The TNFD itself acknowledges that there is no single way for organisations to get started on doing so, as each organisation is different.
For pension schemes, deforestation can be a tangible place to start addressing nature risks. Financing companies across various regions and sectors make pension schemes particularly susceptible to the risks of commodity-driven deforestation. Companies involved in the production and procurement of commodities such as palm oil, soybeans, beef, timber, and many more, will be at high risk.
Nature-related challenges like depletion of resources and woodland loss, along with transition risks from evolving policies and international standards, can adversely affect a company’s operations and lead to financial losses. Forests also play a crucial role in regulating rainfall patterns, maintaining water and soil quality, and preventing floods, all while performing the critical function of absorbing and storing carbon dioxide, which is subsequently released when forests are cleared. This underscores how intrinsically linked nature and climate are, highlighting the need to end deforestation in order to achieve net zero commitments. Moreover, in exposing companies to the risk of human rights abuses, deforestation may lead to violations of international human rights legislation and standards, as well as corporate policies and commitments.
To set about tackling deforestation, pension schemes need to develop a focused internal strategy to map and understand deforestation risks. In response to this need, Global Canopy and Make My Money Matter have crafted an interactive guide, providing a ready-made framework for pension schemes. While the prospect of additional guidelines might seem daunting, this offers a gentle but impactful lead-in to addressing nature-related risks.
Understand the risks
This guidance begins with understanding key risks, and analysing investment portfolios to identify risk exposure. Key factors such as investment locations, involved sectors, the materiality of the impacts, dependencies, and the current policies of investee companies can all feed into this assessment, which will show where more focussed engagement is needed. The guidance can be used with the TNFD’s LEAP approach: Locate, Evaluate, Assess and Prepare. Aligning metrics with the TNFD framework ensures that pension schemes are not only measuring relevant and meaningful aspects of their investments but also contributing to a standardised approach to risk assessment across the financial sector. When pension schemes are ready to expand their nature focus, they can ‘LEAP’ into TNFD reporting by making use of their existing work on deforestation.
Within the interactive guide, a particularly helpful tool is Global Canopy’s Forest 500, which evaluates and ranks the most influential companies and financial institutions in forest risk commodity supply chains. Insights from Forest 500 enable pension schemes to identify high-risk investments, guiding strategies for engagement and risk monitoring.
Not having access to data or agreed metrics shouldn’t prevent action now. Addressing deforestation involves working closely with investment managers and consultants to leverage their expertise and resources. Collaboration across the industry is also key. The pensions deforestation-free working group spearheaded by Global Canopy and Make My Money Matter provides a synergistic and productive opportunity for pension schemes to develop and problem-solve.
Understanding and measuring risks is just one aspect of a comprehensive approach to addressing deforestation. Pension schemes must also actively influence corporate behaviour. This requires pushing investment managers, and where possible, the companies themselves, to take these issues into account. Utilising shareholder influence and collaborative initiatives to engage on deforestation issues is a powerful tool. Nature Action 100 is an example of an effective collaborative engagement initiative focussed on reversing nature and biodiversity loss, and has identified 100 companies in eight key sectors to engage with. As a number of these companies overlap with those in the Forest 500, this is a chance for schemes to start engaging productively.
Divestment, while a contentious strategy, should be considered a last resort. Timelines can be tailored to each pension scheme’s capabilities and resources. A proactive and transparent approach in influencing corporate behaviour towards deforestation is crucial, aiming to foster a balance between stewardship and managing the risks.
Use your influence
The role of pension schemes in combating deforestation is to address the risks to members’ investments and use their influence to make a real difference, creating a world that we all want to retire into. The stark reality that two pounds in every ten of the average UK pension are linked to deforestation stresses the need for action. Pension schemes are uniquely positioned to drive significant change.
By developing comprehensive risk assessments, policies, aligning with initiatives like the TNFD, engaging in corporate behaviour change, and participating in collaborative industry efforts, they can make substantial strides in addressing deforestation. This approach is vital not only for protecting nature and our climate but also for ensuring the sustainability and resilience of pension investments for members, steering us towards a more sustainable global economy.