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July 14, 2017
Greenhouse gas (GHG) emissions from tropical deforestation are among the key contributing factors to climate change, contributing around 10 percent of total GHG emissions based on 2010 figures. Natural forests are under threat of deforestation and forest degradation, leading to significant carbon emissions, loss of biodiversity and livelihoods of indigenous communities, and other adverse sustainability impacts. Such conversions are often driven by the expansion of agricultural commodity production in tropical countries. Noteworthy examples include the Chain Reaction Research focus countries, Brazil, Colombia, Ecuador, Indonesia, Peru, Democratic Republic of the Congo, and Liberia. As shown in Figure 1 (left), 2012 to 2016, commercial banks financed over USD 50 billion to support tropical timber, pulp & paper, palm oil, and rubber expansion in SE Asia.
The Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD) published June 29, 2017 their final report with key recommendations for the Agriculture, Food, and Forest Products Group.
As stated by the UNEP Finance Initiative, international financial banking regulation generally does not recognize environmental and social risks including those from deforestation as material risks to financial stability. The Basel Capital Accord III has not yet addressed deforestation risk. Yet the sector is changing: over the past ten years sustainable banking initiatives by national policymakers and regulators have emerged. These initiatives can support the commercial banking sector in mitigating deforestation risk while enabling sustainable economic development.
The Chain Newsletter: UBS and Aviva Investors State Financial Stability Board’s New TCFD Proposal Supports Deforestation Risk Mitigation
July 19, 2017
On June 29, the Financial Stability Board Task Force on Climate-Related Financial Disclosures (TCFD) published their final report including key recommendations for the Agriculture, Food and Forest Products sector. The Financial Stability Board (FSB) monitors and makes recommendations about the global financial system with FSB members including all G20 economies, the European Commission and other relevant financial and monetary leaders. Its current chair is Mark Carney, Governor of the Bank of England.
Bruno Bertocci, Managing Director, Head of Sustainable Investors, UBS Asset Management and TCFD member stated:
“TCFD framework enables addressing material deforestation risks in agriculture supply chains and for downstream buyers.” (Interview, July 19, 2017).
Steve Waygood, Chief Responsible Investment Officer, Aviva Investors stated and TCFD member stated:
“The TCFD will be both a mirror and a widow. A mirror as it will help companies study where they can improve their own risk management practices. A window as it helps the market understand where climate risks exist in their portfolios. This is particularly important where those risks are not being managed well.” (Interview, July 19, 2017).
The purpose of the TCFD work is to develop voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear and efficient. They also aim to provide information to lenders, insurers and investors the aids decision making. The TCFD was developed in response to Mark Carney’s Breaking the Tragedy of the Horizon: Climate Change and Financial Stability speech in fall 2015. The FSB chose 32 members to lead the TCFD. These individuals represent financial markets and economic sectors from the G20 and broadly cover both users and preparers of disclosures of financial data. Over an 18-month period, the TCFD developed voluntary guidance on climate-related financial disclosures, seeking input from global stakeholders through an exhaustive set of engagements, and then published their final recommendations.
These TCFD disclosures and their specific Agriculture, Food, and Forests Products sector recommendations are built upon years of experience from implemented disclosure platforms and knowledge generated from recent sustainable banking initiatives. As an industry-led initiative, the TCFD recommendations bring climate-related disclosures to a mainstream audience. The TCFD process is important for investors to be aware because it provides voluntary guidelines for better data as a climate risk mitigation tool in the Agriculture, Food, and Forests Products sector.
The TCFD stated in their findings that they see clear evidence for the need for climate-related financial disclosure in the Agriculture, Food, and Forest Products sector’s financial statements, specifically its:
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Chain Reaction Research conducts sustainability risk analysis for financial analysts and investors. Our special focus is on sectors that deal with environmentally intensive commodities, especially those sourced from tropical regions like palm oil, and pulp and paper.<
We explore whether unsustainable corporate practices and actions have introduced unreported risks – and how or whether sustainability leadership can mitigate those risks and possibly provide competitive advantage. Where possible, we provide pre-IPO checking of claims about risk and assets reported in prospectuses. We also review claims made by publicly traded companies.
Chain Reaction Research has received support, in part, from the David and Lucille Packard Foundation, and from the International Climate and Forest Initiative (NICFI) scheme managed by the Norwegian Agency for Development Cooperation (Norad). Chain Reaction Research statements and materials do not necessarily reflect the standpoints of the Packard Foundation or Norad.