The environmental, social and governance (ESG) factors could increasingly influence global banks' financing activities relating to commodity producers in forest-risk regions as deforestation is under growing scrutiny from activists and policymakers, Fitch Ratings has said.
Clearing of natural forests for agricultural and forestry use is still rising globally and contributes to increased carbon emissions, biodiversity loss and climate change.
Commodity production -- primarily beef, palm oil, soy and timber or pulp -- is the leading cause of forest loss. Forest land conversion for agricultural use results in deforestation while logging can cause temporary loss with the possibility of future regrowth. Illegal logging, however, tends to have a permanent impact on forests.
Beef and palm oil account for more than half of the annual greenhouse gases from deforestation although other crops like maize, rice, soybeans and rubber are also significant contributors. Fitch said government responses to address the issue have been varied with different approaches applied in producer and consumer countries.
Following previous successes in the fossil fuels sector, non-government organisations and inter-governmental agencies have encouraged institutional investors to divest from companies involved in the production or consumption of forest-risk commodities.
Several large pension funds and investors have engaged in pressure campaigns on such companies, resulting in some significant corporate policy changes and in some cases government policy changes.
Fitch said global investment banks have become increasingly attentive to the issue of deforestation and are incorporating it into their ESG policies. They have signed onto various voluntary commitments and are aligning their policies with these standards.
Adoption of products like sustainability-linked loans which provide interest rate discounts to companies who achieve environmental targets is growing.
"We expect attention on deforestation to remain high in the short term with the formal establishment of a task force on nature-related finance disclosures and the UN Climate Change Conference both scheduled for 2021," said Nneka Chike-Obi, Director for Sustainable Finance at Fitch Ratings.