QE-funded deforestation linked to financial instability

September 30, 2022|Written by Graham Caswell|Bank of England, European Central Bank, Federal Reserve

Two new reports reveal the links between central banks and destruction of the world’s forests. Their combined analysis shows that even though deforestation poses a threat to financial stability, many central banks hold significant amounts of debt in companies linked to nature and biodiversity loss.

Race to Zero, a campaign supported by the UN, has found that deforestation could create a loss in value as great as 2008 financial crash, due to climate change, biodiversity loss and net-zero transitional impacts on the food and agricultural sector.

The analysis shows that deforestation and land conversion for agricultural commodities account for 11% of global emissions, yet are ignored in mainstream climate scenarios such as those developed by the Network for Greening the Financial System.

Deforestation threatens to be the “new coal” in investors’ portfolios, it finds, as exposure to companies driving this environmental destruction represent considerable financial, regulatory and reputational risks. Firms at the centre of the global food supply system could face a permanent, non-cyclical loss of up to 26% of their value by 2030, the analysis shows. This lasting impact would be comparable in magnitude to value loss following the 2008 financial crisis.

The report is based on the “high-confidence, realistic, policy-based” Forecast Policy Scenario developed by the UN-backed Principles for Responsible Investment as part of its Inevitable Policy Response initiative.

A second report, from environmental group Global Witness, shows that, despite the financial stability implications of deforestation, major central banks continue to hold large amounts of debt issued by companies linked to deforestation and biodiversity loss. Accusations against firms represented in the portfolios of the Bank of England (BoE), European Central Bank (ECB) and Federal Reserve include illegal rainforest and peatland clearance, as well as other instances of “serious environmental degradation”.

The study examined bond holdings in the Fed’s secondary market corporate credit facility, the ECB’s corporate sector purchase programme, and the BoE’s corporate bond purchase scheme. Portfolios were compared against a list of companies identified by another investigative group, Forests and Finance, as being directly involved in commodity supply chains including beef, palm oil, and timber, and whose operations may impact natural tropical forests.

The findings include BoE holdings from Cargill, a major player in the ecologically destructive Brazilian soya industry. The Fed has purchased debt from ADM and Bunge both tied to human rights abuses by purchasing from soya suppliers in conflict with Indiginous communities in Brazil. The ECB was also found to be invested in debt issued by Bunge.

Central banks should divest from all deforestation-linked corporate bonds, the paper recommends, calling for them to adopt an explicit zero deforestation policy as part of their climate, nature, and biodiversity strategies. It also recommends that central banks assess exposure to deforestation as part of their prudential supervision activities.

“I think this report is a very useful piece of analysis which highlights the need for central banks to look at their exposure to deforestation in their portfolios,” said Nick Robins, professor of sustainable financing at the London School of Economics, in response to the Global Witness study. “2022 really is the year that central banks recognised nature risk as a threat to institutions. The focus up to now has been on the energy sector, but this is another signal that deforestation and land use needs to be put at the heart of climate scenarios.”

This page was last updated September 29, 2022

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