How financial institutions can help stamp out deforestation in supply chains

This article is brought to you by the Food Systems, Land Use and Restoration (FOLUR) Impact Program.

To mitigate global warming, it’s critical to reduce the impact of agriculture on land degradation and biodiversity decline. Incentives and legislation are emerging to curtail the sector’s environmental impact, influencing both public and private investment activities – and encouraging sustainability and reducing deforestation in commodity-based supply chains around the world. By setting standards, advising, and carrying out due diligence, financial institutions can contribute to reducing the carbon footprint of food items that people rely on.

At the 6th Global Landscapes Forum Investment Case Symposium in Luxembourg, a session led by the Food Systems, Land Use and Restoration (FOLUR) Impact Program offered expert insights and case studies on how these financial institutions are proactively driving change in landscapes and across value chains.

The session, titled ‘Addressing commodity-driven deforestation in investment portfolios: How financial institutions can drive sustainability and value creation,’ was moderated by Ivo Mulder, head of the United Nations Environment Programme’s Climate Finance Unit. The panel of experts included representatives from the World Bank Group’s International Financial Corporation (IFC), the European Investment Bank (EIB), and the Central Bank of Paraguay.

Regulating to make forests “worth more alive than deforested”

Paraguay’s export-oriented economy relies on the production of agricultural commodities such as soy and beef. But panelist Maria Elena Acevedo, the Central Bank of Paraguay’s representative to the Public-Private Partnership for Sustainable Finance, said regulations that protect the forests from encroachment for plantations and cattle ranching are “not a challenge for development, but a catalyst, because they create the right atmosphere for development and investment.” 

Seeking a new way of looking at Paraguay’s natural resources that “make[s] the forest worth more alive than deforested,” the bank brought together the National Forestry Institute, the Ministry of the Environment and Sustainable Development, the Sustainable Finance Roundtable and the country’s financial sector to promote sustainable finance across public and private spheres.

Monitoring lending risks holistically 

As a public-sector lender, the EIB – the lending arm of the European Union – integrates its focus on climate- and biodiversity-related risks in both primary production and the supply chains it depends on, said panelist Felipe Ortega Schlingmann, head of the EIB’s Bioeconomy Division. This allows for a holistic approach to monitoring those risks.

“Since 2021, all our finance has had to be aligned with the Paris Agreement [on climate change] and the low carbon pathways it defined,” he said. “Fifty percent of our overall finance – between EUR 60 and 70 billion – needs to comply with countries’ [emissions reduction] contributions.” In line with this approach, the EIB has moved out of financing biofuels and biomaterials that are based on food staples, among other efforts.

Ortega said that elevated environmental performance standards are not reducing the amount of financing going out. “There is a huge amount of investment needed,” he said. “At COP15 [the 15th Conference of the Parties to the UN Convention on Biological Diversity] in Montreal, there was a huge financial need identified. The question is: how do we mobilize this financing for those environmental investments that would not necessarily be at odds with economic growth?”

Helping companies comply

Olivia Elliot, sustainable protein advisor at the IFC and head of its Practices for Sustainable Investment in Livestock, pointed out that if some multilateral development banks pull back from financing projects that are not sustainable, “finance is still going to flow – but it’s going to come without strings attached. So we have to make sure that sustainable investment is possible, and that we work with the companies to ensure that they can meet our standards.”

“We’re asking countries wherever we are investing to do things that are way above what their national legislation says,” she said, referring to the IFC’s recently published Practices for Sustainable Investment in Livestock, which cover areas such as animal welfare, the use of antibiotics, biodiversity protection, and climate change, “We believe it makes sense for us to assist clients as we go.” 

The IFC has recently worked with Chinese multinational COFCO to make use of new data analysis tools to set up a traceable soy supply chain in Brazil’s Cerrado region. The institution has also collaborated with the Smithsonian Center for Conservation and Sustainability on the development of an online geographical information system to support sustainable finance decision making in Paraguay’s Chaco region.

Once it goes through a validation process with local stakeholders in Paraguay, the tool will be publicly available and will likely be of use to other development finance institutions “who want to invest in the region but don’t know how because there’s so much risk,” said Elliot. 

What happens if companies don’t meet the standards?

Questions from the audience opened a discussion on what happens if a company receiving financing fails to meet or comply with the IFC’s or the EIB’s standards. 

Using the livestock sector as an example, Elliot said that the IFC will only invest in companies where both the animals and their feed can be traced back to origin. After the investment has been made, “we work with the company to ensure they have a sustainable supply chain in place, that they know their third-party suppliers, and that they can trace back to origin,” she said. “What happens if they don’t comply? We divest and we don’t re-invest.”

While Ortega has found that most counterparts are either willing to put traceability systems in place or already have them, the EIB does assess credibility and what kind of action is taken when remediation is needed. “If we see a non-compliance issue, we can go up to a prepayment requirement. Beyond this legal framework, it is difficult to do more, but not give any more investment,” he said.

The discussion ended with an announcement by Naoko Takahashi, Forestry Officer at the UN’s Food and Agriculture Organization (FAO), of a new initiative – the FOLUR Forest Positive Finance expert working group – and a call to participate. Its objective, she said, “is to understand the needs of financial institutions, and make sure a diverse range of views are included.”

With three-fifths of such institutions still lacking a deforestation policy in lending and investment, these efforts are particularly urgent: “There is a pressing need to decouple agricultural supply chains from deforestation,” she said.