On World Environment Day we ask what steps companies, financial institutions and governments should take to ensure we build back better in the wake of the COVID-19 pandemic
By Sarah Rogerson
As many countries start to recover from the worst effects of coronavirus, attention is turning to how to rebuild jobs and livelihoods. But the pandemic has also highlighted the importance of our relationship with nature, and as societies look to rebuild, it is crucial that they do so in a way that better protects the natural world we depend upon.
This must include a renewed commitment to ending tropical deforestation. Home to more than half of life on earth and huge absorbers of carbon, tropical forests offer up to a third of the solution to climate change. Yet they receive just 3% of the funding. And, as last year’s Amazon fires so painfully reminded the world, these forests are still being destroyed by agricultural expansion for a handful of ubiquitous commodities, like soy, palm oil, beef and timber.
On World Environment Day, we ask what steps companies, financial institutions and governments should take to address this.
The role of companies
Companies in forest-risk supply chains can act immediately. Despite many companies having set commitments throughout the last decade to tackle deforestation in commodity supply chains, global deforestation rates have increased, and analysis by Forest 500 shows that 40% of the most influential companies are yet to set any commitments.
It is in companies’ own self-interest to clean up their supply chains. As consumers choose to support more sustainable products, and governments look at setting requirements for goods being imported into their markets, companies are increasingly exposed to market and reputational risks by buying commodities linked to deforestation.
There is also a risk that unsustainable practices may impact the ability of producers to continue to grow commodities - for instance by increasing the likelihood of drought, or reducing the habitat for pollinators.
Sustainable supply chains are more resilient to pressures from markets and climate change. Indeed, the global index provider, MSCI, recently found that companies with stronger ESG ratings were performing better throughout the current crisis.
In order to achieve sustainable and resilient supply chains, companies buying forest-risk commodities need to:
1. Understand where they are sourcing from, and how to mitigate the risk of being associated with deforestation or other environmental and social issues.
2. Set themselves clear standards which should be applied to all of the companies in their supply chain, and support their suppliers to meet their expectations.
3. Be transparent and report openly on their implementation and progress towards deforestation-free products.
How the finance sector can help
Financial institutions are exposed to deforestation risks through the companies that they finance. The direct and indirect financing of the trade in deforestation-risk commodities is worth hundreds of billions of dollars each year. And yet, our analysis shows that 102 of the 150 most exposed financial institutions still have not set clear requirements for the companies that they finance.
Investors and lenders can play a crucial role because they have leverage to drive change in the companies they finance. They can help companies move to more sustainable sourcing approaches by engaging and setting requirements for their financing.
To play this role effectively, financial institutions need to understand their exposure, set clear requirements of their portfolio companies, with timelines and monitoring to ensure that they are met.
A new tool, Trase Finance, which is being developed by Global Canopy, the Stockholm Environment Institute and Neural Alpha, will allow financial institutions to identify their own exposure to deforestation risks by screening their portfolios for direct and indirect exposure. This enhanced transparency could be transformational.
Opportunities for collaboration
It is critical that policymakers support companies and financial institutions to move to more sustainable practices - and some, including the UK government and the EU, are considering legislative steps to reduce their exposure to deforestation.
Some companies have declared support for due diligence in consumer markets (particularly in the EU and the UK) and some are even threatening to boycott products from Brazil, where legislation to protect the country’s tropical rainforests is being weakened.
Building back better will require action from governments, companies, the finance sector and consumers alike. Companies and financial institutions have an opportunity to show real leadership by taking action to address the risks in their own supply chains and working together to drive change. And by acting now, they can help minimise the risks of future crises.