Investors have a powerful new tool to identify hotspots of deforestation risk in their portfolios, improve how they measure ESG performance and create innovative green products.
by James Richens
On 28 October, a group of responsible investment experts gathered to launch Trase Finance, an open-source data platform that maps the financing of agricultural commodity traders linked to deforestation risk.
Trase Finance was created by an independent, not-for-profit partnership including Global Canopy, Stockholm Environment Institute and fintech startup Neural Alpha. More than 30 financial institutions supported its development and testing. It is based on the wider Trase initiative’s comprehensive supply chain mapping of the international trade in commodities.
Introducing the webinar, Sarah Maslin, Brazil correspondent at The Economist, said deforestation is an increasingly important issue for investors. In July, Nordea Asset Management divested its $45m shareholding in JBS, a Brazilian meat company, over its links to deforestation risk. In June, a coalition of 29 global investment firms that manage $3.7trn called on the Brazilian government to stop soaring deforestation in the Amazon.
Toby Gardner, Trase director and senior research fellow at Stockholm Environment Institute, agreed: “I think what we’re witnessing is a stepchange in recognition of the role that the finance sector has to play, galvanised in particular by the viral coverage of the unprecedented fires in the Amazon in the last two years.”
Filling the data gap
Banks and Investors face a challenge in obtaining the data needed to identify the companies driving deforestation.
“A lack of reliable and consistent data has been limiting actions around sustainable finance,” said Emine Isciel, head of climate and environment at Storebrand Asset Management. “The right data is crucial to guide investment decisions and steer capital away from unsustainable business practices including companies involved in deforestation.”
Trase Finance enables financial institutions to systematically identify their direct and indirect exposure to deforestation risk via their financing of commodity traders, allowing them to improve the sustainability of their portfolios.
Trase Finance contains data on 5,000 companies exporting Brazilian soy and beef, and Indonesian palm oil, as well as 12,000 financial institutions with equity or debt in these companies. From 2021, Trase Finance will be expanded to cover more than half of the volume of globally traded agricultural commodities.
Helen Bellfield, Trase lead and policy director at Global Canopy, outlined how the platform can be used by banks and investors to improve due diligence and screen their investments and loans for deforestation risk exposure. For example, Norway’s global pension fund invests in Bunge, Glencore and Marfrig – commodity traders with significant deforestation risk in their supply chains. The fund also has indirect exposure through its investments in banks such as BTG Pactual which has holdings in JBS, and Maybank, which finances palm oil companies in Indonesia including Sinar Mas.
Hilde Jevan, chief advisor at the Council on Ethics for the Norwegian Government Pension Fund, said Trase Finance was a very powerful tool for investors: “It enables an organisation like ours to see where the risks are highest – where the hotspots are for us.” Many investors are focused on policies, commitments, disclosure and reporting rather than what is happening on the ground, she added.
Once investors have identified deforestation risks, they can engage with companies on improving their performance.
“To have a really good conversation with a company, it really needs to be based on the facts,” said Jevan. Companies that fail to respond risk being divested, she warned.
Shona Hawkes, senior global policy adviser at Global Witness, said the only way banks and investors can do due diligence on companies operating in high-risk areas like the Amazon is if they have supply chain data. But companies are not providing that data because investors are not insisting on it. Trase shows that getting supply chain data is possible, she added.
Opportunities for green finance
Trase Finance highlights deforestation risks associated with funds intended to support companies with strong environmental, social and governance (ESG) credentials. For example, an ESG fund managed by BlackRock has equity holdings in deforestation-risk commodity traders ADM and Bunge.
This is because existing ESG data is often crude and does not correlate well with actual performance.
“There is nothing worse than having indicators that give a veneer of sustainability,” said Gardner.
Trase Finance data can be used to strengthen ESG funds and other green financial products such as green bonds and sustainability linked loans. For example, in July, Norwegian salmon producer Grieg Seafood excluded commodity trader Cargill from the use of proceeds of its green bond due to the high deforestation risk associated with their soy supply chain. Trase data can be used to systematically identify traders with deforestation risk within the bond, rather than acting only on those in the public eye.
“Risk management is first and foremost about identifying priorities for action,” said Gardner, acknowledging the challenge confronting investors managing portfolios containing thousands of companies. Trase Finance provides a filter that highlights where problems are and informs targeted engagement strategies to correct those problems and reduce deforestation, he concluded.