How can the financial sector cut its ties to deforestation?

Attention to the harm caused by deforestation has grown in recent years, and with this has come a push for actors at all stages of global supply chains to examine their own ties to, and complicity in, the practice. Among them, financial institutions have come under scrutiny for the ways in which their money weaves through these chains, from the companies managing agricultural production at one end, to the retailers selling their end-products at the other.

Tropical deforestation carries grave consequences. Not only is it responsible for the destruction of wildlife habitats and the livelihoods of local communities, it is ranked as the second largest source of greenhouse gases. With more than 70% occurring in service of agricultural production, its connection to the manufacturing of what are everyday items for many people around the world, including beef, coffee, soy and paper, is strong and the inescapably global effects on the climate are severe.

Considering the dire warnings recently issued about the state of global biodiversity, the present and potential ramifications of unchecked deforestation are profound. What’s more, without intervention, the problem is likely only to grow.

Financial institutions are becoming increasingly aware both of the numerous and complex ways in which their activities may be increasing their deforestation risk exposure and of the material losses which might come with ignoring these exposures. As a result, a growing number of financial institutions have begun exploring how to alter their own policies on identifying and eradicating them.

The involvement of financial institutions in these systems is far from simple, however. Beyond the most overtly linked actors to deforestation, exist many whose connection to the harmful generation of agricultural commodities is less than clear. As a result, when investigating their own relationship to environmentally destructive, financial institutions must consider their indirect, as well as direct, involvement.

While institutions may directly finance actors engaging in deforestation, indirect links are more difficult to unpick. Financial institutions might, for instance, invest in banks which then go on to lend to companies involved in deforestation, or in other funds which themselves have indirect links to environmentally harmful businesses. The further away from the direct link the company is, the harder it becomes to identify; as the complexity of such connections grows, the ability of many institutions to trace, and take steps to sever, them declines.

Trase Finance

A new tool launched this month, however, offers a data-based aid to assist in this process. Trase Finance, the freely-available product of a partnership between SEI, Global Canopy and Neural Alpha, aggregates public data to map financial flows between commodity traders and financial institutions, allowing financial institutions to identify their exposure to deforestation risk.

For these entities, Trase Finance provides a crucial tool from the very beginning of the examination process. For instance, by using it to identify areas in which deforestation exposure is more concentrated, institutions can narrow down the volume of information which they need to sort through in order to formulate a clearer picture of their own portfolio’s environmental impact.

Trase Finance also allows these actors to understand which of their, often vast numbers of, subsidiaries hold the highest deforestation risks. Beyond this, the data it provides can be used to push for greener finance options, such as green bonds, as well as the institution of routine environmental reviews.

With an estimated US$700 billion of current equity investment in companies that manufacture Indonesian palm oil and Brazilian soy and beef, the importance of Trase Finance’s role in identifying where this money is coming from is clear, and the focus on these products is just the beginning.  Currently covering exports of Brazilian beef, Brazilian soy and Indonesian palm oil, regular updates to the platform and the data it uses are set to extend its mapping of deforestation risk to cover a greater number of countries, companies and commodities.

The blueprint for Trase Finance’s use of data is not new; in 2016, Trase launched their first tool, Trase.Earth, which operates similarly but centres on companies rather than financial institutions. Also designed to aid in combatting deforestation, it focuses on agricultural commodity supply chains and uses publicly-available data to facilitate greater transparency by clearly charting the links between end-products, intermediary processes and the environmental and social risks at their roots in tropical forest regions.

Building on this, Trase Finance looks beyond the primary actors in these supply chains and examines the larger and, often hidden, forces driving international trade. Not only are both Trase.Earth and Trase Finance intended to prompt introspection from these actors, and encourage regular, thorough and systematic overviews of the sustainability of their own activities, they are also designed for use by parties beyond the walls of these institutions.

Both platforms serve as vital resources for governments, members of civil society, journalists and activists who are pressing for increased transparency, investigating the ways in which financial institutions may be contributing to deforestation and promoting improved environmental conduct. Whether by monitoring progress towards existing climate commitments or by pushing institutions to make such pledges in the first place, Trase.Earth and Trase Finance are invaluable in efforts to hold institutions to account and make protection of the environment a priority.