First-ever investor expectations on deforestation for commercial and investment banks published by FSDA and IIGCC

• New paper sets out investor expectations for banks on eliminating commodity-driven deforestation, conversion and associated human rights abuses in their lending and investment practices.
• Banks that fail to address deforestation are exposed to financial risk through various channels, including physical risk, transition risk and systemic risk.
• Banks are uniquely positioned to tackle deforestation through engagement across value chains, their financing decisions and encouraging best practice and transparency among clients.

The Finance Sector Deforestation Action initiative (FSDA) and IIGCC have today published a set of investor expectations for commercial and investment banks on eliminating commodity-driven deforestation, conversion and associated human rights abuses in their lending and investment practices.

The investor-led expectations – Finance Sector Deforestation Action (FSDA) Expectations For Commercial And Investment Banks – were developed by FSDA participants, members of IIGCC’s Banks Working Group and led by Kiran Sehra, Aviva Investors, and Lauren Compere, Boston Common along with Lucia Graham-Wood and Norah Berk at IIGCC, and with important contributions from Puninda Thind, Climate Champions Team and Sue Reid, Global Optimism.

The expectations are based on the principles that deforestation is a climate issue accounting for approximately 11% of carbon emissions, and poses a financial risk to investors and banks at both top-down systemic and bottom-up individual company levels.

As shareholders in banks, investors have a fiduciary duty to ensure banks consider and manage the financial risks associated with deforestation. The expectations were developed to support investor engagement with banks on deforestation.

Investor Expectations for Banks

Building on the FSDA’s investor expectations of companies, the paper outlines five key engagement expectations (see below), underpinned by 19 criteria for best practice:

1. Risk assessment: Conduct a deforestation risk assessment of exposure to commodity-driven deforestation through its financing activities to determine highest risk related to commodities, sectors and regions.
2. Commitment and governance: Set a public commitment to deforestation- and conversion-free banking across all material non-consumer financing activities, including all forest-risk agricultural commodities and all operations and geographies to which the bank has material risk exposure, while ensuring human rights are respected. The target date should be aligned with the 2030 Global Stocktake goal, with best efforts to eliminate deforestation caused by high-risk commodities no later than the end of 2025.
3. Expectations for clients: Set expectations of clients that encourage them to: establish traceability, manage non-compliance, support the economic inclusion of value chain actors in deforestation-free production models, and provide financial products to support clients in investing in innovative solutions.
4. Monitoring and compliance: Perform ongoing due diligence on clients for deforestation commitments, integrate monitoring systems into existing bank processes, set expectations on non-compliance engagement and escalations, and require annual client reporting on deforestation risk. Reporting requirements are suggested across two categories (1) for financing clients directly involved in upstream forest-risk commodities (2) for financing clients sourcing or trading commodities.
5. Disclosure: Disclose the bank’s deforestation policies and publicly report progress on an annual basis including across the following categories: risk assessment; commitment and governance; monitoring, engagement and compliance.

Stephanie Pfeifer, CEO, IIGCC: “Deforestation is a critical issue at the centre of the nature and climate nexus. Banks have an outsized role to play in the global economy, and have the potential to effect real change in addressing deforestation risk. IIGCC is happy to be launching these investor expectations on deforestation for banks alongside the FSDA, and will continue engaging on deforestation as part of our ongoing work on nature and climate. We look forward to seeing the new expectations being put into practice.”

Investor support

Lauren Compere, co-author and Head of Stewardship and Engagement at Boston Common Asset Management: “Without stable forests, net zero and the 1.5C scenario are out of reach. These expectations push for more ambitious engagement with the issue of commodity-driven deforestation among banks and investors in banks. As investors and FSDA signatories Boston Common Asset Management are pleased to have co-led on this work to bring greater engagement with deforestation to the financial sector.”

Kiran Sehra, co-author and Nature and Biodiversity Lead at Aviva Investors: “As allocators of capital, banks play a key role in tackling commodity driven deforestation. These expectations present an opportunity for banks to begin implementing best practice on how to approach commodity-driven deforestation in a comprehensive way. They also recognise that banks will be an important part of the solution. Aviva Investors is pleased to have co-led this work to support investor engagement with banks.”

Peter van der Werf, Head of Active Ownership, Robeco: “Robeco engages with global diversified banks on their approach to climate and nature transition in their lending practices. We expect banks to address their exposure to deforestation risks, as they play a vital role in mitigating commodity-driven deforestation, conversion and associated human rights abuses through engaging with their clients. As an FSDA member we support these expectations and their intention of raising the standard of commitments and actions in this systemically important sector. Directing financial flows in a manner that prevents deforestation is key for us achieving the goals of the Paris Agreement and Global Biodiversity Framework, as well as mitigating portfolio risks on behalf of our clients.”

Charlotte Apps CFA, Sustainable Investing Analyst, Fidelity International: “As allocators of capital, financial institutions have an important role to play in addressing commodity-driven deforestation and its associated risks. Fidelity International welcomes The Finance Sector Deforestation Action (FSDA) expectations for commercial and investment banks which provide a consistent and coherent roadmap to guide investors in engaging banks on this important topic.”

About FSDA

The FSDA brings together 33 financial institutions who are using best efforts to eliminate agricultural commodity-driven deforestation risks in their investment and lending portfolios by 2025. IIGCC has managed the FSDA’s Secretariat since September 2024. 

ENDS

About IIGCC

IIGCC brings the investment community together to work towards a net zero and climate resilient future. We create change the world needs by unlocking investor action on climate change.

We work with our members to address climate risk and ensure they are well positioned to make the most of investment opportunities offered by climate mitigation and adaptation efforts, ensuring that their investments contribute towards a better world for us all to live in.

Our team supports investors to create practical solutions that can make a real difference in tackling climate change – providing guidance and support on investment practices, policies and corporate behaviours that have real impact and deliver change that the world needs. For more information visit www.iigcc.org and @iigccnews

Media contact

Sara Trett, Communications Officer, IIGCC

E: [email protected]

T: +44 (0)7436 16122