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Deforestation: Have asset managers twigged link to net zero?

Capital Monitor assesses whether investors see the connection between climate change and deforestation. Sadly, it seems not. And here’s why.

By Polly Bindman

Stumped: Are investors failing to understand the impact of deforestation on our chances of reaching net zero by 2050? (photo by Geralda via iStock)
  • Almost two-thirds of asset managers most exposed to companies linked to deforestation have no associated investment policies in place, despite pledges to become net zero.
  • Reforestation carbon credits are popular with investors hoping to offset their own operational emissions, but the impact of planting new trees compared with forest preservation is minimal.
  • Forests that have been planted in the past 19 years represent less than 5% of the current global forest carbon sink, according to the World Resources Institute.

In 2018, the world’s largest fund manager by assets, BlackRock, purchased 21,500 carbon credits for the sustainable management of the Working Woodlands, according to the company’s 2018 annual climate change report.  

The project, run by the Nature Conservancy, an environmental non-profit body, sold those credits for the ‘avoided deforestation’ of areas including the Hawk Mountain forest. However, as a Bloomberg investigation revealed two years later, parts of the land ‘preserved’ under the project were already well-protected, casting doubt over the efficacy of the programme. Disney and JP Morgan were also implicated in this story.

Regardless of intent, Bloomberg’s report elevated the problem of whether carbon credits alone can, or should, solve some of our most pressing climate-related challenges. Can you ignore your investment exposure to logging if you are, at the same time, planting lots of trees?

Many would argue the answer is no. Deforestation is a significant source of carbon emissions. According to the World Resources Institute (WRI), the systematic loss of woodland was responsible for approximately 8.3 gigatonnnes of carbon emissions between 2001 and 2020.

The UN believes forests act as a net carbon sink capturing about 20% of the estimated global annual carbon emissions, yet, according to a January report by Forest 500, a project run by environmental non-governmental organisation (NGO) Global Canopy, 93 of the 150 asset managers and banks with the largest exposure to forest commodities have very little to say about deforestation. This is despite many committing to net zero.

In fact, 22 financial institutions with a net-zero climate goal provided $66.9bn of financing to companies with commodity-specific deforestation commitments in 2021, according to the report.

Capital Monitor analysis of the policies of investors most exposed to forest-risk commodities, according to separate data from campaign coalition network Forests and Finance, reveals that those with the most financial influence over these companies are doing the least to regulate deforestation in their supply chains.

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Forests and Finance’s data assesses institutions’ exposure to 300 company groups active in ‘tropical forest-risk sectors’ – those involved in beef, palm oil, pulp and paper, rubber, soy and timber supply chains in Southeast Asia, Central and West Africa, and Brazil.

The Forest 500 project assesses an overlapping group of investors’ policies on over a 100 different indicators for each forest-risk commodity group, such as whether they have any overarching policy monitoring deforestation in the supply chains of the same commodities.

The data also shows that each of the top eight investors by exposure to these companies – none of which have an overarching deforestation policy according to Forest 500 – have increased their investment to them (see chart below). While exposure to beef, soy, palm oil and timber companies is not inherently damaging, it is more likely to contribute to deforestation risk if companies are not required to monitor their supply chains, for example.

Slow to recognise deforestation risks

While there has been a “significant focus from the finance sector on fossil fuels for several years now – as it is seen as a critical way for institutions to meet their net-zero targets – very few institutions have made significant progress in terms of their approach to deforestation”, says Emma Thompson, a researcher at Global Canopy and co-author of the report.

As the UN Principles for Responsible Investment (PRI) noted last year, investors’ net-zero promises "often do not address the destruction of our forests and the systemic and reputational risks that come with it". Just one in five recognise that deforestation poses any sort of risk to their business activities or reputation, according to the Forest 500 report.

BlackRock and Vanguard, the two asset managers with the highest exposure to tropical forest-risk sectors, and which also have some of the weakest policies according to the two separate NGOs, voted against all but one out of the 16 deforestation-linked shareholder resolutions between 2012 and 2020, a Friends of the Earth analysis found.

Commitment to tackle this issue has gained some momentum. In December, the European Commission proposed a new law to halt deforestation, while at Cop26, more than 30 financial institutions with nearly $9trn in assets pledged to use "best efforts" to eliminate commodity-driven deforestation from their portfolios by 2025.

However, only four of these signatories – Fidelity International, Legal & General Investment Management, Schroders, and Sumitomo Mitsui Trust Asset Management – are among the 150 institutions with the biggest influence on the sector.

Cognitive dissonance?

How investors presently connect the dots between climate change and deforestation can be seen through the booming voluntary carbon offsets market, which hit $1bn in revenue last year. Almost one-third (32%) of existing carbon offsets purchased were for ‘avoided deforestation’, while 4% were for afforestation (planting new forests) or reforestation projects.

But, even when working effectively, carbon offsetting cannot yet mitigate the effect of deforestation.  

Investors play a vital role facilitating the success of properly regulated carbon markets, which help companies offset their emissions from hard-to-abate sectors. Yet company approaches to purchasing forest-linked offsets are often oddly detached from their methods of monitoring deforestation.

“Companies are coming to us from a climate [angle]," says Theresa Hartmann, climate and nature lead at the World Economic Forum. "The CEO wants to make a net-zero target, but not necessarily saying they want to stop deforestation. Though obviously, the two are connected.”

The result can be a company facilitating deforestation in one part of the world while spending money on planting new trees in another. For example, while retail giant Amazon has no overarching deforestation policy, including no commitment to monitor supply chain deforestation, according to the Forest 500 report, it has spent $100m on reforestation projects and climate mitigation solutions since 2019.

New trees just don’t cut it

While reforestation projects and tree planting schemes are popular with large corporations like Amazon and Microsoft, as well as nations such as India and China, the benefits of planting new trees compared with maintaining old ones take time to yield.

Forests that have been planted in the past 19 years represent less than 5% of the current global forest carbon sink, according to the WRI. While countries like China are now technically net re-foresters due to large-scale tree-planting initiatives, just 5.6% of the Asian nation's forest is classified as ‘primary’, which is the most biodiverse type and holds the most carbon.  

There also just is not enough land mass to offset existing emissions through tree planting. Analysis from Carbon Brief finds that Shell’s net-zero strategy, for example, would require trees planted over an area of Brazil.

Any successful strategy in mitigating against deforestation requires careful, localised supply chain monitoring, and an investor's first step should be setting a net-zero target and deforestation policy – only then followed by offset purchases, Hartmann argues.

Though this may be more arduous than throwing money at the problem, it might be the only way to ensure the protection of at-risk forests and a reasonable chance of hitting net zero.

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