New Framework-aligned guidance for financial institutions supports due diligence on deforestation, conversion, and human rights

Companies that produce or source agricultural and forestry commodities can expect greater scrutiny of their exposure to deforestation, conversion, and associated human rights abuses as regulatory and reputational risks put increasing pressure on the institutions that finance them.

These financial institutions will be looking to companies in their portfolios to set and implement commitments to protection of ecosystems and human rights, as laid out in new due diligence guidance from Global Canopy, Neural Alpha, and the Stockholm Environmental Institute.

The new guidance will help financial institutions implement due diligence processes to identify, prevent, and mitigate the risks of deforestation, conversion, and associated human rights abuses in their lending and investment portfolios. It is aligned with the Finance & Deforestation Advisory Group’s Finance Sector Roadmap, which is endorsed by the Accountability Framework initiative and aligns with its Core Principles and definitions.

From voluntary commitments to regulatory compliance

Recognising that tackling deforestation is necessary to meet greenhouse gas emissions targets and biodiversity goals, leading financial institutions have already made voluntary commitments to eliminate commodity-driven deforestation from their portfolios.

Incoming EU deforestation legislation – which imposes potential financial penalties and further aligns deforestation risk and financial materiality – will drive financial institutions to assess their clients and holdings’ readiness for compliance. In addition, corporate sustainability due diligence requirements in the EU are set to require large corporations, including large investors, to conduct due diligence on adverse environmental and social impacts of their investee companies.

Companies following the Accountability Framework will be positioned to meet finance sector expectations

The new due diligence guidance provides financial institutions with a systematic, risk-based approach to assessing companies’ deforestation exposure risk and the policies they have in place to mitigate that risk. Exposure risk is the probability that a commodity produced or sourced is linked to deforestation, conversion, and associated human rights abuses.

For example, financial institutions are guided to flag higher exposure risk where companies produce or source in countries and subnational regions with deforestation, conversion, and associated human rights abuses, as well as where companies lack sufficient supply chain traceability. The guidance also outlines a range of actions financial institutions can take to engage, support, incentivise, or penalise companies in the transition towards deforestation-free supply chains.

Therefore, supply chain companies that are making progress towards achieving traceability and implementing supply chain management practices that support responsible supply chains in line with the Accountability Framework will be better equipped to respond constructively to stewardship engagements from financial institutions.

Transparent disclosures set supply chain actors apart from peers

The guidance directs financial institutions to information sources that they can use to drive decision-making. These include companies’ public and private disclosures as well as open source, third-party datasets where financial institutions can obtain company-specific information and independent assessments of their policy commitments and implementation.

Companies that enact and disclose ambitious timebound targets and robust implementation mechanisms, and that report regularly on progress towards those goals, are more readily recognised by tracking and accountability platforms and assessments that provide information to financial institutions and other stakeholders.

Companies operating in soft commodity supply chains can therefore set themselves apart from peers through transparent disclosures demonstrating robust risk management and progress when seeking or renewing financing relationships with lenders and investors.

The bottom line

Financial institutions increasingly need to assess their portfolios for compliance with voluntary and regulatory expectations related to the protection of ecosystems and human rights. Companies that follow the guidance of the Accountability Framework in setting commitments, taking action within their supply chains and sourcing regions, and clearly disclosing progress, will be well positioned to meet the expectations of their lenders and investors.    

Download guidance (free registration required): Due Diligence towards deforestation-free finance: Guidance for financial institutions

About Global Canopy

Global Canopy is a data-driven not for profit that targets the market forces destroying nature. We do this by improving transparency and accountability. We provide innovative open-access data, clear metrics, and actionable insights to leading companies, financial institutions, governments and campaigning organisations worldwide to help them make better decisions about nature, forests and people.