How financial institutions can manage deforestation risks in Southeast Asia
13 July 2023
As deforestation trends shift in Southeast Asia, financial institutions can use the Accountability Framework to guide engagement with companies in the region.
Southeast Asia is one of the world’s largest producing regions of agricultural and forestry commodities, and Indonesia and Malaysia alone supply 83 percent of global palm oil. Commodity production has contributed to deforestation in the region, with palm oil being the biggest driver. Between 2017-2021, Indonesia and Malaysia lost over two million hectares of forest, according to Global Forest Watch. That’s nearly 30 times the size of Singapore.
But palm oil production is not the only source of agricultural-driven deforestation in Southeast Asia. Other soft commodities also cause a large amount of forest loss. In Indonesia, for example, a 2019 study found that when combined, these other commodities cause more deforestation than palm oil. While deforestation linked to commodities like cattle, cocoa, coffee, and natural rubber is declining, according to a 2020 WRI study, it is not being curbed fast enough to meet global climate targets.
The financial sector is well-positioned to play a strategic role in accelerating the transition to ethical commodity supply chains in Southeast Asia. However, only 17% of the 557 financial institutions assessed by Global Canopy publicly recognised the risks posed to their business by deforestation.
To safeguard forests and other natural ecosystems in Southeast Asia, the financial sector should take a cross-commodity approach that considers not just palm oil, but all forest-risk agricultural production. The financial sector should apply this approach when establishing lending and investment policies, as well as when assessing portfolio risk.
The Accountability Framework initiative offers financial institutions guidance on how to manage deforestation, conversion, and human rights risks related to soft commodities. Financial institutions can also multiply the impacts of their investment or lending policies by adopting the Accountability Framework´s definition of a ‘company’ as being the full corporate group. Finally, financial institutions should encourage companies in their portfolio to set Science Based Target initiative Forest, Land, and Agriculture (SBTi FLAG) climate targets and Science Based Targets Network (SBTN) Land Targets, which are aligned with the Accountability Framework on definitions and goal setting.
By using the Accountability Framework and Framework-aligned tools and approaches to assess companies in their portfolios, financial institution can integrate best practice on the topics of deforestation and human rights into their decision-making on lending and investment. To learn more about the Accountability Framework, visit our page for financial institutions.