Chain Reaction Research: Sustainable Banking Initiatives – Regulators’ Role in Halting Deforestation

Greenhouse gas (GHG) emissions from tropical deforestation are among the key contributing factors to climate change, contributing around 10 percent of total GHG emissions based on 2010 figures. Natural forests are under threat of deforestation and forest degradation, leading to significant carbon emissions, loss of biodiversity and livelihoods of indigenous communities, and other adverse sustainability impacts. Such conversions are often driven by the expansion of agricultural commodity production in tropical countries. Noteworthy examples include the Chain Reaction Research focus countries, Brazil, Colombia, Ecuador, Indonesia, Peru, Democratic Republic of the Congo, and Liberia. As shown in Figure 1 (on the first page of the report), 2012 to 2016, commercial banks financed over USD 50 billion to support tropical timber, pulp & paper, palm oil, and rubber expansion in SE Asia.

The Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD) published June 29, 2017 their final report with key recommendations for the Agriculture, Food, and Forest Products Group.

As stated by the UNEP Finance Initiative, international financial banking regulation generally does not recognize environmental and social risks including those from deforestation as material risks to financial stability. The Basel Capital Accord III has not yet addressed deforestation risk. Yet the sector is changing: over the past ten years sustainable banking initiatives by national policymakers and regulators have emerged. These initiatives can support the commercial banking sector in mitigating deforestation risk while enabling sustainable economic development.

Findings and Recommendations 

  • Binding regulation is more likely to be effective than voluntary initiatives. Sustainable banking initiatives are generally not older than a decade. Previously, the field was led by voluntary and industry-driven initiatives. On their own, these non-binding guidelines and recommendations may not be sufficient to mitigate deforestation risk. Binding regulation is more likely to be effective, especially when it is accompanied by detailed implementation guidance and standardized disclosure formats, as in Bangladesh and China.
  • Financial regulators should address environmental and human rights risks in economic sectors driving deforestation. Requirements can prevent further loss of tropical forests and related impacts on biodiversity, climate and livelihoods. Experience from Brazil shows that initial sector-targeted banking regulations can be efficient in reducing deforestation.
  • Financial institutions should be obligated to mitigate deforestation risks linked to the activities they finance. Assessing their own risks arising from their exposure to these industries could help to contain damaging practices like rampant deforestation, land grabbing and human rights breaches.
  • Experiences on binding regulation from Bangladesh, Brazil, and China may be useful to other regulators as indicators for what may work. While it is too early to make generalizing conclusions on the effectiveness of different sustainable banking measures and frameworks, there are some encouraging indications from Brazil, Bangladesh and China.

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The Chain Reaction Research is a consortium effort of Aidenvironment, Climate Advisers and Profundo.

For more information, please contact Tim Steinweg.

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