The majority of financial institutions do not have policies requiring clients to comply with forestry regulations, a new study from the UN Environment Programme has warned.
Of 30 financial institutions assessed, most has no mechanisms in place to promote sustainable forest conservation.
Just 13% had developed financial products specifically aimed at promoting the production of sustainable commodities.
The study, entitled Bank and Investor Risk Policies for Soft Commodities, highlighted policies that banks and investors can adopt to help reduce deforestation and degradation risks that result from unsustainable practices across agricultural supply chains that are major drivers of tropical deforestation.
It coincides with the introduction of a new lending and investment policy tool for financial institutions aimed at reducing the deforestation risk caused by the unsustainable production, trade, processing and retail of soft commodities, especially soy, palm oil and beef.
UN Under-Secretary-General and UNEP Executive Director Achim Steiner, said:
Addressing deforestation is high on the twenty-first century policy agenda. The continuing loss of the world’s tropical rainforests represents a significant threat to the security of water, food, energy, health and climate for millions worldwide. Banks and investors who engage in the destruction of forests through their lending and investment practices expose themselves to potentially significant regulatory, reputational, legal, operational and market risks, which could affect the credit risks and market value of underlying assets.
The research – a joint project by the UNEP and the Natural Capital Declaration – scored institutions out of 100 on the scope, strength and monitoring methods of the companies.
It suggested a benchmark of 67/100 to judge effective forest sustainability.
12 of the institution scored more than 67, with another 50% scoring between 33 and 67.
Almost half of the financial institutions evaluated have some form of policy in place to identify, manage and control or mitigate risks linked to loans or investments in companies involved in soft commodities.
But, despite the recent deforestation commitments in the New York Declaration on Forests, Country commitments under the UNFCCC, and other leading initiatives such as the Consumer Goods Forum and Tropical Forest Alliance, few financial institutions were systematically quantifying their exposure to risks.
The study aimed to help financial institutions gain better insight into way of addressing risks and opportunities, such as the potential to support sustainable production through financial products and services.
Banks and investors are encouraged to adopt internal policies and procedures to strengthen monitoring and management of the risks.