SIX WAYS TO FIX SUSTAINABLE FINANCE
|Introduction: Sustainable finance's biggest problems|
|1. Join the PRB|
|2. Mandate TCFD|
|3. Standardize climate risk measurements|
|4. Develop transition finance|
|5. Target deforestation reduction|
|6. Incentivize green finance|
While many metrics and proposed disclosures are focused on carbon emissions, onlookers say that the financial industry is missing one large part of the sustainability pie: deforestation.
Many sustainable finance heads and risk officers mention the need for greater transparency in their own supply chain financing with regards to soft commodities. More typically it is oil and gas, as well as mining and transport, to which they direct most of their attention.
But improved policies and greater disclosure regarding deforestation and other physical risks need to be given higher priority by banks. Boston Common Asset Management expanded its study this year to ask banks how they are supporting zero deforestation in addition to fossil fuel financing reduction, and the results were bleak.
Only 16% of the 58 banks in the study require clients to commit to no-deforestation policies and only 14% require soft commodities clients to adopt time-bound certification plans.
“Even in the relatively advanced markets in Australia and Europe, only about a third have required no-deforestation policies and even fewer have expanded these policies to all soft commodities. Strikingly, none of the US or Canadian banks – and few in emerging markets – require clients to adopt no-deforestation policies,” says the report.
“We are already off-track and heading into a three degree world,” says Lauren Compere, director of shareholder engagement at Boston Common Asset Management. “What worries me as an investor is the sleeping giants of the earth system.
Lauren Compere, Boston Common Asset Management
"The Amazon is one of those that if it wakes up – in terms of emitting carbon rather than being a sink – we will have reached a point of no return; yet deforestation is continuing at a rate at which we have lost 20% of our world’s forests. If we lose 40% then there will be earth shattering implications.”
Chris Hart is the senior sustainable finance associate working on natural capital at not-for-profit, Global Canopy. The organization has developed the Forest 500 platform, which identifies and ranks the most influential companies and financial institutions in forest risk commodity supply chains.
Its research shows that no bank scores higher than three out of five for its policies and expectations of clients from the key industries of palm oil, soy, beef, timber and pulp and paper production (industries that are the main drivers of agriculture-related deforestation), and 134 out of 150 financial institutions score two or below.
Hart says banks that claim the data is insufficient to support the level of disclosure that would lead to improved policies are misunderstanding their role. “Imperfect data should not be a barrier to action. The financial sector has evolved to manage risk using incomplete data and a lack of transparency and so this should be a core skill set for them. When it comes to environmental risk management this is no different.”
Furthermore, Hart adds that the ecosystem of data and tools to support risk management is developing fast. He points to platforms such as Trase.earth, which provides greater transparency on soft commodity supply chains linked to areas of deforestation, and Global Canopy’s policy benchmarking tools.
Hart says he expects greater focus on deforestation from banks as the dialogue around expanding climate-related financial disclosures to broader nature-related financial disclosures increases in 2020 (dubbed as a ‘super year’ for nature).
Boston Common Asset Management’s study also points to the Soft Commodities Compact, coordinated by the Banking Environment Initiative (BEI), as an initiative that could help banks take action regarding their financing activities and deforestation.
Pavan Sukhdev, WWF International
Its aim is to look at ways in which banks can assist their clients to achieve net zero deforestation in the key soft commodities by 2020. Barclays, BNP Paribas, Deutsche Bank, JPMorgan, Lloyds, RBS, Santander, Société Générale, Standard Chartered, UBS and Westpac are among its members.
Pavan Sukhdev, president of WWF International and a former banker, says unless banks start to factor in broader environmental risk they cannot claim to be working towards sustainability. “Most bankers are working under the assumption that they understand the risks of the underlying asset or company – but they don’t.
"They may understand profitability and some drivers of default risk, but they have not yet factored in ecological value-at-risk. And as we are missing an important driver of risk, then by definition most finance is unsustainable.” He adds: “It’s time bank chief executives exercised wisdom – a much underrated quality in finance.”