Companies linked to deforestation pose potentially significant risks for financial institutions

Tom Bregman

The Soft Commodity Risk Platform (SCRIPT), a new system to help banks and investors analyse their exposure to risk in soft commodity supply chains is launched today.

Every year over nine million hectares of tropical forests are cleared to make way, principally for the production of soft commodities such as palm oil, soy, cattle and timber. Over half of the world’s tropical forests have been lost to date and new deforestation frontiers are opening up as demand for these products increases.

SCRIPT is a freely-available system to help financial institutions which fund companies in these soft commodity supply chains understand the risks associated with deforestation. With more than US$1.4 trillion in investments, credit and underwritings in companies involved in the production and procurement of these soft commodities, financial institutions can play a crucial role in reducing deforestation and forest degradation.

While these risks are increasingly recognised, it can be difficult to identify which companies are most exposed. SCRIPT has been developed to support financial institutions in assessing these growing risks. The platform supports these institutions in identifying the business risks associated with financing unsustainable companies and, understanding and adopting corporate best practices for reducing deforestation associated with soft commodities. It encourages effective engagement with companies operating in soft commodity supply chains with step-by-step engagement guidance.

SCRIPT hosts two tools:

· The Policy Benchmarking Tool allows financial institutions to assess the strength of policies against 150 peers and develop new or stronger deforestation policies based on customised analysis;

· The Portfolio Risk Tool screens for highest risk companies across a portfolio. It covers up to 1000 companies and provides the data and information needed to build capacity for effective engagement with companies on deforestation;

· Users are able to adjust the tool methodologies to ensure that analysis aligns with their institution’s priorities;

· The platform has been developed by Global Canopy in partnership with WWF (Policy Benchmarking Tool) and Ceres (Portfolio Risk Tool) and ZSL SPOTT and CDP as data partners;

· The project is funded by the Moore Foundation.

The purpose of SCRIPT is to facilitate more productive engagement between financial institutions and companies on deforestation. By encouraging users to monitor the progress of portfolio companies and engage those not doing enough to minimise their business’ impact we hope to shift the needle on improving practices of companies in soft commodity supply chains.

Addressing deforestation driven by soft commodities is critical to achieving the transition to a low-carbon economy and meeting international ambition to prevent warming beyond 1.5/2°C. Deforestation and forest degradation account for approximately 10–15% of the world’s greenhouse gas emissions.