SUSTAINABLE INSIGHT

Financial Sector Confronts Deforestation as a Key ESG Risk

Tue 15 Sep, 2020 - 9:38 AM ET

Loss of natural forests as a result of clearing for agricultural and forestry use is growing across the world. This has a number of environmental effects and contributes to increased carbon emissions, biodiversity loss, and climate change. Fitch Ratings expects environmental, social, and governance (ESG) factors to have increasing influence on the financing activities of corporates and financial institutions with links to forest-risk sectors in the coming years, as deforestation comes under growing scrutiny. Governments and the private sector have become more aware of the economic costs of the environmental issues stemming from forest loss, such as increased greenhouse gas emissions and biodiversity loss. Investors and banks are paying increasing attention to deforestation risks as climate change and other ESG issues rise higher on their agendas. Some of the most widely consumed agricultural commodities are linked to forest loss – beef and leather, palm oil, soy, rubber, and timber and wood products. Government responses to address the issue have been varied, with different approaches applied in producer countries and consumer countries. Some groups of institutional investors, often in partnership with non-government organisations (NGOs), have actively engaged with companies on excessive or illegal deforestation.

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