Deforestation is firmly at the centre of the climate-nature nexus. Stephanie Pfeifer, IIGCC CEO, outlines the issue, its relevance to investors, and IIGCC’s priorities for the Finance Sector Deforestation Action (FSDA) as its new Secretariat.
The importance of forests cannot be underestimated. Forests are home to 80% of all land-based species of animals, plants and insects, and three quarters of the world’s accessible freshwater. They also support the livelihoods of 25% of the world's total population and are crucial for food security.
Left unchecked, deforestation poses a major economic systemic risk with the capacity to destabilise global systems. Current levels of deforestation could push ecosystems past crucial tipping points leading to catastrophic impacts for the climate, biodiversity, economic stability and humanity.
Deforestation is a climate issue
Deforestation is intricately tied to climate change. According to the Intergovernmental Panel on Climate Change (IPCC), around 11% of annual global greenhouse gas emissions (GHG) are attributed to deforestation driven by land-use change and agriculture (the majority of deforestation is caused by agricultural commodities production, in particular palm oil, soy, beef, and pulp and paper). Just as deforestation contributes significantly to GHG emissions, climate change is exacerbating deforestation and land degradation.
Halting deforestation is therefore vital to mitigating economic systemic risk, reaching net zero and the goals of the Paris Agreement. In recognition of the significant contribution of deforestation to annual global GHG emissions and to keep 1.5°C (with low overshoot) within reach, the United Nations has called for eliminating commodity-driven deforestation and peatland loss by 2025 at the latest. At COP28, the first Global Stocktake emphasised the need to halt and reverse all deforestation and land degradation by 2030.
The conservation of forests, alongside other forms of sustainable land management, also stands out as one of the most cost-effective and immediate measures for mitigating climate risk and keeping us on the path to net zero by 2050.
Deforestation is an investor issue
But what about investors – how is tackling deforestation materially relevant to them?
At a systemic level, left unchecked, deforestation will further contribute to global warming, more extreme weather events and the erosion of natural ecosystems – all of which present major economic and financial ramifications, including to financial markets as a whole.
Investors can be exposed at an underlying asset level too. This includes transition risk, such as investee companies getting caught on the wrong side of a rapidly evolving regulatory landscape. For example, the EU Deforestation Regulation (EUDR) may include fines up to 4% of a company’s annual turnover or temporary exclusion from commercial activities within the EU for non-compliance. Litigation and reputational impacts of deforestation, often due to violations of human rights, are both on the rise as well. Investors can further be exposed to physical risks from deforestation that can harm underlying assets through an increased likelihood of events such as fires and floods.
Overall, eliminating agricultural commodity-driven deforestation from investment portfolios presents a key opportunity for investors to advance their net zero strategies, reduce risk and boost resilience in their investment portfolios.
When considering the risks associated with deforestation and their exposure to these, investors are fulfilling their fiduciary duties to consider and manage financially material risks and opportunities in the long-term economic interests of their clients and beneficiaries.
IIGCC and the climate-nature nexus
As recently communicated in a strategy update to members, IIGCC has a growing focus on the intersection between nature and climate and the inextricable links between the two – with deforestation sitting at the heart of this.
From a wider nature perspective, we have several IIGCC-led workstreams and projects either completed or ongoing – and more in the pipeline. For example, we have sought to scale company engagements on nature via Nature Action 100, integrate nature into investment strategies (reclassifying the Agriculture, Forestry and Fisheries (AFF) sector to a high-impact sector under NZIF), and undertaken policy and stakeholder advocacy for an enabling regulatory landscape via the Investor Agenda’s Global Investor Statement 2024.
Most recently and specifically in relation to deforestation, we are delighted to formally announce that IIGCC is now managing the Secretariat for the Finance Sector Deforestation Action (FSDA) initiative as of September 2024.
IIGCC and FSDA
Launched at COP26 and co-founded by the United Nations High-Level Champions, FSDA brings together 30+ financial institutions who have committed to use best efforts to end commodity-driven deforestation in their portfolios.
In our role as Secretariat, IIGCC manages the core operations and administration of FSDA, including hosting the new FSDA webpage. More broadly, IIGCC also supports participants to fulfil their FSDA commitments by developing and/or promoting relevant guidance and by supporting company engagements. For example, members of IIGCC’s Banks Working Group and FSDA participants recently developed investor expectations for commercial and investment banks. The expectations are intended to support investors in their engagement with banks on the topic of deforestation.
Our objectives for the FSDA over the next 12 months are threefold.
Firstly, to support deeper company engagements on deforestation. We will leverage our experience from other engagement initiatives here, including Climate Action 100+, Nature Action 100 and the Net Zero Engagement Initiative.
Secondly, to provide and/or promote more guidance and research to FSDA participants to further support them in fulfilling their commitments – for example, via expert-led technical webinars.
Lastly and more broadly, while each investor acts independently and based on their own circumstances, we hope to use FSDA to help promote investor action on deforestation and to encourage more investors towards eliminating deforestation from their investment portfolios.
We look forward to sharing more details about all our work on deforestation, as well as the latest updates for the FSDA.
If you would like to know more about this topic, FSDA and how you can get involved, then please contact Norah Berk nberk@iigcc.org. We will have an IIGCC delegation at COP16 where we would be delighted to meet with all interested parties.