Sustainable Finance and Forestry Sector: Encouraging Transparency

The European Commission defines sustainable finance as the process of taking environmental, social, and governance (ESG) considerations into account when making investment decisions. Sustainable finance is important because of the potential negative implications of companies failing to consider ESG aspects in their businesses.

ESG issues, which are attached to the entities in which the financial institutions invest, may cause reputational, social, and legal costs, not only to the investees but also the investors. One of sectors that is significantly affected by a number of ESG issues is forestry. Some of them are deforestation and climate change, land tenure, governance and human rights, as well as supply chain legality and traceability.

Addressing ESG Issues in Forestry Sector

Among the big banks, the Standard Chartered Bank already started ahead to embed sustainable finance standard throughout their operation and place ESG in the center of everything they do as a financial institution. Historically, the bank has been responsive to environmental and social issues by forming Environmental and Social Risk Management (ESRM) team since 1997, followed by the establishment of  Sustainable Finance team in 2019 to oversee their clients’ ESG performance globally. A set of policy frameworks and position statements have also been developed, including for their forest-risk sector clients.

Another financial service institution, the BNP Paribas Asset Management, has also recognized several activities in forestry-related operations that are considered ‘sensitive’, and therefore, receive particular attention in their Global Sustainability Strategy. BNP Paribas incorporates ESG standards into their investment criteria as a commitment to adopt a sustainable approach in its full range of investment strategies.

From regulatory aspect, in 2017, the Indonesian Financial Services Authority (OJK) published the Regulation on Sustainable Finance (called “POJK 51”) as a continuation of their Roadmap for Sustainable Finance. Indonesia is just one of countries to have a regulation on sustainable finance mandating the development of an environmentally sound financial system in financial service institutions. When it is fully in place, the POJK is deemed as an important step in addressing the role of banks and investors in financing forest destruction in the country.

Monitoring and Ensuring Compliance

In forestry sector, it is clear that financial service institutions under sustainable finance must acknowledge the environmental and social risks from their clients’ operation. In line with that, and also to ensure their ethical values are met, an engagement procedures must be conducted through a series of appraisal and continued monitoring.

One example, at national level, the Government of Norway appointed the Council on Ethics as an independent body to advice the Norway Central Bank on whether the sovereign fund’s investment in specified companies is inconsistent with the ethical guidelines. Under the assessment of the Council on Ethics, companies that are involved in environmentally destructive logging of tropical forest or the conversion of such forest into plantations may be excluded from the fund, especially when they are found responsible for severe environmental damages or systematic human rights violations.

At Standard Chartered Bank, regular review of environmental and social standards is conducted through a series of public position statements, especially for clients undertaking business across sectors with highly potential environmental or social impacts including those in agro-industries (i.e. fisheries, tobacco, forestry, and  palm oil). The Bank excludes transactions or relationships where clients show insufficient intent or progress to meet the set standards.

Challenges in Transparency

Furthermore, sustainable finance encompasses transparency when it comes to risks related to ESG factors that may have an impact on the financial system.  To mitigate the risks, the appropriate governance of financial and corporate actors is clearly needed.

To address transparency issues, the Zoological Society of London (ZSL) has already launched Sustainable Palm Oil Transparency Toolkit (SPOTT). SPOTT supports the financial sector and supply chain stakeholders to manage environmental, social, and governance (ESG) risks by publishing transparency assessments of soft commodity producers and traders.

SPOTT assesses more than 200 world’s largest producers and traders of soft commodities like palm oil, timber, and rubber. Companies are assessed on the publicly available disclosures of their policies, operations, and commitments. Those disclosures are mapped into more than 100 indicators across ten ESG categories. The publicly available data can be used by financial service institutions and supply chain companies as the basis for investment and purchasing decisions.

In the case of Standard Chartered Bank, every client is reviewed on an annual basis and asked for the evidences of continued compliance. Clients with direct financing to forestry sector must submit evidences for external monitoring and reporting to ensure they comply with ESG requirements. In the process, the Bank can use the publicly available data provided by SPOTT. The platform improves the transparency of the assessed clients and also provides valuable information for them on how they can meet the requirements of financial service institutions.

Though the platform supports a range of ESG metrics, those publicly available information and disclosures are often insufficient to better understand the companies actual impact on the ground. Hilde Jervan, Chief advisor at the Council on Ethics for the Norwegian Government Pension Fund-Global (GPFG) stated that, in managing commercial logging companies, the challenge remains in the lack of information of companies’ operations on the site level. To manage this knowledge gap, the Council of Ethics works closely with experts and local consultants to obtain public information locally through satellite imagery and assesses the available documents about the company’s activities.

Holding FIs Accountable

Nowadays, ESG related impacts of investment decisions has received attention from media and NGOs. Through high profile case studies like Forest and Finance, public have been putting more pressures on financial service institutions into being more environmentally conscious in funding their clients.

Nevertheless, collective action from industries and financial service actors, government, and public at large are still needed to promote sustainable finance in the forestry sector. With sustainable development agenda as a pressing matter, financial service institutions play an ever-growing role to assist in making strategic decisions on the trade-offs between economic, social, and environmental goals.

Author:

Amira Putri Ramadhina

Editor:

Dr. Semerdanta Pusaka – Country Director at SR Asia Indonesia

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