International Banks and Companies Team Up to Combat Deforestation

A unique collaboration between leading international banks and consumer goods companies aims to drive deforestation out of soft commodity supply chains. Barclays’ Head of Trade and Working Capital, Asia Pacific, explains why.

By Brandon Feng, Head of Trade and Working Capital, Barclays


When 50 CEOs of the largest retail and manufacturing companies in the world announced their intention to take deforestation out of their supply chains by 2020, a group of leading international banks interpreted this as a market opportunity: to work closely with their clients (and their competitors’ clients) to find solutions that facilitate this globally significant goal.
There is an emerging consensus among global consumer goods companies that medium term security of the supply of staple soft commodities depends on a range of fundamental environmental ‘services’ being in place—the water cycle, soil health, biodiversity and climatic stabilisation provided by forests. They understand that ignoring deforestation to secure short term soft commodity supply will simply erode medium term shareholder value. With commodity price increases and volatility already being affected by environmental supply side factors (alongside growing demand), the leading firms in this sector are taking steps to address this fundamental issue.
Banks with clients that are dependent on soft commodities for raw materials are also increasingly aware of the environmental issues that affect this marketplace. An influential group of international banks, including Barclays, has now embarked on a process to engage with and support these clients as they seek to transform their soft commodity supply chains.
The Banking Environment Initiative (BEI) is a CEO-led group of 10 global banking institutions convened by the University of Cambridge. Its mission is to lead the banking industry in collectively directing capital towards environmentally and socially sustainable economic development. It has launched a partnership with the retailers and manufacturers of the Consumer Goods Forum (CGF), a group of more than 650 companies from 70 countries that account for at least $3 trillion in annual revenues and directly employing nearly 10 million people. Through a process of dialogue and collaboration over a number of months and advised by WWF’s Commodities Finance Program, the BEI and CGF are defining best practice standards for banking that support the CGF’s ambition to achieve zero net deforestation in their supply chains by 2020.

Preventing deforestation as a strategic priority

Consumer goods companies require secure, resilient supply chains capable of delivering growing volumes of key soft commodities.
For the last decade, supply and demand factors have contributed to markedly higher and increasingly volatile soft commodity prices. The 2007–08 and 2010–11 spikes in soft commodity prices hit all-time highs, impacting product pricing, demand and margins within the sector. The ripple effects on poverty and hunger, social and political instability and international trade were significant and noticeable. Food security has consequently risen up the socio-political agenda and become a major concern of governments, NGOs and the media.
Supply factors have included environmental constraints such as flood and drought (and related soil erosion), changing weather patterns and less predictable seasons linked to the loss of essential services from the natural environment, including forests; and climate change, for which deforestation is estimated to account for around 20% of global greenhouse gas emissions.
While deforestation enables new land to be brought into productive soft commodity production, thus alleviating short term price pressures, it is now well understood by consumer goods companies that this strategy is unsustainable for an organisation that has medium to long-term ambitions for commercial growth and expansion.

Banking on partners

Banks have a vested interest in the medium-term growth and success of their clients, and the viability of the wider economies in which they operate. Where clients identify an issue of potential significance to their medium-term objectives, there is a shared interest. International banks are well aware of the medium-term threats to food security, social stability and economic growth presented by environmental and resource constraints caused by climate change and deforestation.
At a tactical level, there are further benefits, including improved access to and relationships with clients, tighter management of reputation risk associated with ‘unsustainable’ banking practices, reduced credit risk through alignment of value chains with sustainable stewardship practices, and the opportunity to generate revenue streams from new forms of finance that facilitate the transition to sustainable supply.

Where is this going?

The BEI and CGF have now created a Compact that articulates best practice standards that support the CGF’s deforestation ambition. They recognise that other banks may want to participate in the process and ultimately adopt the Compact, responding to the opportunity of alignment with their clients, the global brands of the consumer goods sector. They are open to expressions of interest.