Over the last few quarters, I collaborated with Kiran Sehra at Aviva Investors to co-author the development of investor expectations on deforestation for commercial and investment banks. This was supported via the coordination of members of the Climate Champions, IIGCC, and other FSDA investors. The set of expectations, which are the first of their kind, call for more ambitious engagement on commodity-driven deforestation among banks and investors in banks.

Deforestation accounts for around 11% of global carbon emissions and poses a financial risk to investors and banks from a top-down systemic and bottom-up individual company level.[1] Without stable forests, net zero and a 1.5°C scenario are simply out of reach.

Boston Common began engaging banks on deforestation in the mid-2000s, focusing initially on direct financing of palm oil producers and forestry in high-risk geographies such as the Amazon, Malaysia, and Indonesia. In 2018 and 2019, we expanded our approach, adding explicit questions on deforestation approaches in our engagement with 60 banks under the “Banking on a Low Carbon Future” initiative, which included a definitive recommendation to adopt a No Deforestation, No Peat, No Exploitation (NPDE) approach. In the years that followed, we have continued to feel frustrated by the lack of consistent, robust approaches by banks.

While engaging banks directly or under FSDA and other initiatives, we were consistently asked how we could apply our deforestation expectations of food manufacturers, consumer goods companies, and agricultural producers—namely, those responsible for the production and sourcing of commodities such as palm oil, soy, paper and pulp, and cattle—to bank financing and investment. Our mission to answer this question and adapt the existing FSDA expectations appropriately led to the development of new expectations.

Central to the guidance are five engagement expectations:

• Risk Assessment
• Commitment and Governance
• Expectations of Clients
• Monitoring and Compliance
• Disclosure

This list is underpinned by 19 criteria for best practice, with an acknowledgment that banks are at various starting points and levels of exposure.

Regardless of where they are on their journey, the first focus for all banks should be lending and investment activities. Commitments must be backed by robust action and policy. Deforestation policies must complement and align with net-zero commitments, especially in relation to decarbonization targets for high-impact sectors where deforestation and climate risk overlap. And banks’ expectations of clients and associated policies should be reviewed at least every two years.

We are beginning to integrate these expectations in existing dialogues with banks, including Fifth Third, Morgan Stanley, and Bank Rakyat, and we will add more banks to the engagement in the coming months. Please stay tuned for ongoing updates on our findings, insights, and progress.

1. Risk assessment: Conduct a deforestation risk assessment of exposure to commodity-driven deforestation through its financing activities to determine highest risk related to commodities, sectors, and regions.
2. Commitment and governance: Set a public commitment to deforestation- and conversion-free banking across all material non-consumer financing activities, including all forest-risk agricultural commodities and all operations and geographies to which the bank has material risk exposure while ensuring human rights are respected. The target date should be aligned with best efforts to eliminate deforestation caused by high-risk commodities no later than the end of 2025.
3. Expectations for clients: Set expectations of clients that encourage them to establish traceability, manage non-compliance, support the economic inclusion of value chain actors in deforestation-free production models, and provide financial products to support clients in investing in innovative solutions.
4. Monitoring and compliance: Perform ongoing due diligence on clients for deforestation commitments, integrate monitoring systems into existing bank processes, set expectations on non-compliance engagement and escalations, and require annual client reporting on deforestation risk. Reporting requirements are suggested across two categories: (1) for financing clients directly involved in upstream forest-risk commodities and (2) for financing clients sourcing or trading commodities.
5. Disclosure: Disclose the bank’s deforestation policies and publicly report progress on an annual basis, including across the following categories: risk assessment, commitment and governance, monitoring, engagement, and compliance.