Fresh calls have been made for regulation of the financial system to slow the destruction of rainforests, as UK-based institutions continue to pump money into companies that harm the environment, according to research by the World Wide Fund for Nature (WWF).
Agricultural commodities such as Brazilian beef and soy, and Indonesian palm oil are among the products responsible for more than a quarter (27%) of deforestation.
Almost £40bn ($54.9bn) in investment and lending has gone to companies that directly produce, trade and buy these products as a primary business activity, by 303 different UK-domiciled financial institutions and funds, the new report found.
In the UK, there is currently no requirement for products to be sourced sustainably — there are only voluntary commitments — leaving the UK and its value chains highly exposed to deforestation risk.
Risks were also likely to be concentrated, WWF said. Over 50% of finance was provided by just 15 large banks and investors in such supply chains.
Corporate loans and revolving credit are more likely to be used for consolidated global traders who have established relationships with producers, many of whom are private companies and as such may have concentrated risk exposure.
Almost none of these investee or client companies can guarantee they are not exposed to deforestation and conversion risks. Therefore, these investments represent a deforestation risk for the financial institutions providing services to them.
The WWF has argued that this threatens the UK government’s ambitions for the City of London to be the green finance capital of the world and its credibility to demonstrate global leadership in the run-up to the COP26 climate talks in November.
The Global Futures report (February 2020) estimates that the decline of natural assets will cost the world at least £368bn a year, with the UK suffering annual damage to its economy of at least £16bn by 2050.
What's more, the UK financing of forest-risk commodities has not significantly reduced since the Paris Climate Agreement in 2015. Despite deforestation being a major cause of climate change, the level of UK investment in forest-risk commodities, especially palm oil and soy, remained largely consistent in the five years following the Paris Climate Agreement, between 2015 and 2020.
"At present, a lack of clear standards and transparency requirements make it difficult to accurately assess the level of risk, so we urgently need to improve transparency and accountability, and the financial sector has a critical role to play in achieving that," the WWF said.
WWF has called on the UK government to develop a consistent, coherent and robust due diligence obligation that covers both the trade and financing of UK forest risk commodity value chains.
Enhanced due diligence on deforestation and conversion should be an integral part of any net-zero transition plans, it said.