Comment: Why humanity needs more investors to back deforestation-free legislation

An aerial view shows a cleared forest area under development as a palm oil plantation in Indonesia's West Kalimantan province. REUTERS/Crack Palinggi

November 29 - A global agreement to limit temperature rises to within 1.5 degrees Celsius is on life support after the unambitious climate deal agreed in Egypt, but some investors are providing the world with a few precious rays of hope.

At COP27, more than 35 financial institutions, representing more than $8.9 trillion in assets under management (AUM), launched a Finance Sector Deforestation Action plan, following up on the commitment they made at COP26 in Glasgow last year to address commodity-driven deforestation impacts in their investment and lending portfolios by 2025.

Forests are essential for fighting climate change, curbing biodiversity loss and protecting human rights. Deforestation and forest degradation alone cause an estimated 15% of climate change, with seven agricultural commodities driving the bulk of all global deforestation.

Along with stepping up engagement with companies, investors will encourage policymakers to adopt and implement regulations to ensure protection of natural assets, including forests and human rights.

In Europe, investors representing $6.3 trillion in AUM have come out in favor of deforestation-free regulation by the European Union.

Such action is also happening in the United States, where $2.7 trillion of investor support has been thrown behind important pieces of legislation introduced at the federal and state levels.

A protest in Brasilia, Brazil, against violence suffered by Pataxo Indigenous people and for land demarcation. REUTERS/Adriano Machado

As someone who has worked to end deforestation and fight climate change, I helped write and launch the investor letter of support for U.S. regulation. These three bills could combine powerfully to reduce deforestation and human rights abuses in U.S. supply chains, while creating vital precedents for better global norms.

The FOREST Act, which was introduced in Congress in 2021 with bipartisan support, would stop agricultural commodities entering the U.S. if these grew on illegally deforested land. In a nutshell, it means the U.S. would require traceable supply chains in at-risk countries. “Stick” elements of the bill come with a generous “carrot”, as the bill provides for U.S. support to producing countries for them to curb deforestation and embrace sustainable agriculture.

Complementing the FOREST act, California and New York have proposed public procurement laws to require purchases by state governments to be deforestation-free and respect human rights. While not as impactful as the federal bill, these state bills still carry major weight, as they would reform demand in two globally significant markets. Passage in these behemoth states could create a bandwagon effect where other U.S. states begin to pass similar bills.

The California and New York bills were introduced recently, and legislators are now working to address the concerns from the last legislative cycle, giving rise to optimism that the bills (with amendments) will pass in 2023. Perhaps inspired by California and New York, Colorado’s governor recently passed a related executive order, to curb deforestation in his state’s procurement.

Investor support for these deforestation-free bills is vital, because it sends a strong signal to lawmakers that a large swath of the financial sector is already affected by the impacts of climate change, feels concerned about losing future revenue and welcomes regulatory reform – especially if that would create a level playing field for all companies when it comes to curbing deforestation.

The Inflation Reduction Act is a superb piece of legislation, but does almost nothing to reform global food and agriculture, which contribute to one-third of climate change.

Cattle are seen next to a tract of Amazon jungle burning as it is cleared by farmers in Itaituba, Para, Brazil. REUTERS/Ricardo Moraes

If the U.S. better regulates its imports of forest-risk commodities, like palm oil, cocoa, rubber, soy and cattle, America would be one step closer to meeting its environmental commitments, and ensuring our species ends deforestation by the end of the decade.

We are hurtling towards a number of tipping points, and require aggressive regulatory reforms to avert catastrophes. For example, recent studies indicate that as it shrinks in the face of soy and cattle expansion, the Amazon rainforest is tipping from being a carbon sink to a carbon source.

Deforestation can trigger major company-specific risks for companies and their financial backers. Losing forests often means pollinator collapses, which in turn can upend crops, yields, and our global food system. Massive financial losses can ripple from farmers, to traders, to supermarkets to banks.

Killing forests also jeopardises ecosystem services they provide such as cooling, soil health, erosion control, steadier rainfall and water cycling services. Fewer forests means more droughts and floods, which in turn bring a trifecta of lower yields, stranded land assets and market risks.

Forests also bring benefits to tourism, metallurgy, hydropower energy, construction, or pharmaceuticals, with over one quarter of all pharmaceuticals derived from the genetic compounds of wild plants, many of which come from forests.

To quote the $2.7 trillion investor letter: “Fiduciaries recognize material systemic and specific risks posed by deforestation to companies, their portfolios, and markets broadly. In the U.S., 40% of GDP is generated from sectors directly exposed to tropical forest, food, and land risk.”

The problem is that total assets under management globally last year amounted to $112.3 trillion. The critical question is: will the bulk of global finance remain hostile or indifferent to regulation, or will more investors join the deforestation-free party?

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Sustainable Business Review, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.

Etelle Higonnet is senior advisor at the National Wildlife Federation. Previously she served as campaign director at Mighty Earth and Waxman Strategies, where she focuses on advocacy for zero deforestation in Southeast Asia and Africa, with an emphasis on cocoa, palm oil, rubber, and soy industries.