Pension funds must engage with managers and follow through with actions to ensure they do not contribute to deforestation, a panel has said.
The panel at the Sustainable Investment Festival 2023, chaired by Make My Money Matter chief executive Tony Burdon, discussed how pension funds can use data to analyse their portfolios and identify where their assets are held before using this to engage with companies on deforestation.
Burdon referenced quarterly polling from Make My Money Matter which showed the majority of savers would be unhappy if their portfolio contributed to deforestation, adding that this issue resonated more strongly with the public than other environmental issues.
He added that while only four in 20 defined contribution (DC) schemes had a policy on deforestation, a working group in association with Global Canopy would be able to share learning and thought leadership on deforestation.
Global Canopy senior research associate Pei Chi Wong said they had developed detailed "step by step" guidance with "usable and pragmatic" information for schemes to engage their asset managers with deforestation.
She called for companies to "integrate deforestation into their investment agreements, work with service providers to engage companies", and use the guidance - which "can be picked up no matter what stage a scheme is at" - to eliminate deforestation and human rights issues from portfolios.
"There is no net zero without zero deforestation", Wong said, who added that anecdotally, there has been more discussion of deforestation in relation to portfolios.
"We know since we launched our pensions guidance that collective action is really the only way that we can effectively tackle deforestation in terms of getting data from companies, engaging in companies to take action. Asset owners and asset managers together need to send supply chain actors a strong signal that they need to put in place policies relating to deforestation… and implement those policies, though, for example, ensuring they have invested in full traceability so they can verify and ensure their supply chains are really free of deforestation."
Identifying deforestation risk
Aviva Investors earth lead Eugenie Mathieu said that signing up to the COP26 commitment to eliminate agricultural commodity-driven deforestation was one first step. She said it was important to firstly identify where there is a deforestation risk, adding this can be hard to tie back to listed companies, particularly given complexity of supply chains.
She said: the "next best thing" was being able to identify who has the best policies, referencing the ‘Forest 500' data source created by Global Canopy which covers 350 companies and 150 financial institutions globally.
Mathieu said Aviva Investors used this information to compile this into datasets to rank and see how much they own in the companies.
Using this method, Aviva found that they had low exposure to the highest risk companies, with 38% of their deforestation-exposed holdings judged to be weak at managing the risk, while 43% were medium and 19% were strong. She said it was important to take a "three-pronged approach" of identifying, engaging, and voting against companies where appropriate.
Responding to a question on carbon credits, Wong pointed out that while having an "airtight carbon credit scheme" can be effective, where biodiversity is concerned, this is not always the best way forward, with tropical forests storing the most biodiversity.
She said: "Biodiversity and ecosystems have unique values that are not easy to replace once they're lost, so I think it is very important to put a lot of effort and investment into preventing those ecosystems from being lost in the first place."
Responding to an audience question on whether there are opportunities to sue individual directors of companies if they do not meet their fiduciary duty on climate change, Mathieu said it is possible to try to "increase director liability for ecocide", given that they do not currently face any personal disincentives for inaction.
She explained: "One thing that we are lobbying for is director disqualification - that you cannot be a director on a board, and go onto another series of well-remunerated board positions if you prove yourself to be incompetent or incapable of managing environmental risks."
When asked about the most impactful action schemes can do, Wong said the first step should be to understand what is in a scheme's portfolio: "That first step of being able to map your portfolio to understand the context, which countries and commodities that you have invested in, which are relevant to portfolio - that kicks off the whole process, one you know what is there, you are going to want to do something about it."
Wong added that schemes can use dialogue in investment meetings: "ask pointed questions about exposure, policy commitments, and bond structures specifically targeting deforestation". Additionally, schemes can put in contracted clauses to reward or penalise performance.
Mathieu pointed out that Aviva Investors had joined the Investors Policy Dialogue on Deforestation to engage with global governments, adding it was a "growing area for fund managers to engage with governments, not just companies".