Align financial flows with international forest goals

Public support to the agricultural sector, usually made in the form of subsidies,  can pose risks to forests when not aligned with forest protection goals. While subsidies are often geared toward advancing development objectives related to food security and poverty reduction, they are also  often influenced by policy priorities, political economy considerations, and powerful agricultural lobbies, without full consideration of environmental impacts. Subsidies can reduce farmers’ production costs and distort decisions about where and how much to produce. This can directly promote expansion of production, increasing the strain on available land resources and incentivizing conversion of forests and other natural ecosystems.

Various studies (see Detox Development Report and A multi-billion-dollar opportunity – Repurposing agricultural support to transform food systems) have identified coupled subsidies as the most environmentally damaging type of subsidy. As such, coupled subsidies, along with other forms of subsidies and public financing, are considered “gray” finance due to the particular risks they pose to forests. Coupled subsidies provide financial incentives based on production volume, which can inflate market prices and thereby incentivize environmentally harmful production by, for example, encouraging the overuse of agrochemicals, promoting monoculture, and driving deforestation. Coupled subsidies contribute to approximately 2.2 million hectares of forest loss annually, accounting for 14% of all deforestation.

Estimates suggest that from 2013 to 2018, gray public finance flows – measured as the total value of subsidies provided to agriculture coupled with the production of a particular commodity, as well as other forms of Official Development Assistance (ODA) such as grants and loans benefiting the agricultural sector – ranged from USD 172 billion to USD 275 billion per year, globally. The upper bound for all countries is estimated at as much as USD 1 trillion per year. Gray finance continues to dwarf finance dedicated to forest protection and restoration (“green” finance), which the 2024 Forest Declaration Assessment estimated at USD 2.4 billion per year since 2010.

Private finance flowing to the forest sector – both “green” finance earmarked for forests and potentially harmful “gray” finance – remains poorly tracked and difficult to measure. However, available evidence suggests that private investment into unsustainable agricultural commodity production and extractive activities such as mining – both known drivers of tropical deforestation – continues to flow largely unchecked.  

Forests & Finance tracks the credits and investments received by companies directly involved in forest-risk commodity supply chains and mining. Their data shows that financial credit provided to forest-risk commodity companies involved in beef, soy, palm oil, pulp, paper, rubber, and tropical timber supply chains from 2013 to 2023 amounted to USD 427 billion, with a further USD 38 billion provided in investment during 2023. Credit provided to mining companies from 2016 to 2021 amounted to USD 38 billion, and USD 61 billion was provided to mining companies in investment during 2022. The above graph shows credit provided to forest-risk commodity companies each year from 2013 to 2023 and credit provided to mining companies from 2016 to 2021.

Data from Forest 500 confirms that major financiers continue to invest in companies that trade or sell forest-risk commodities and products made with these commodities, despite the risks of fueling further deforestation. As of 2022, a total of USD 10 trillion was invested in the 350 companies with the highest exposure to tropical deforestation, nearly double the amount invested as of 2020.

While there is growing recognition that companies and financial institutions should consider the risks their activities pose to the environment, recent analyses of the lending behavior of financial institutions with forest-risk investments showed that most still do not have deforestation safeguards in place. For example, 85% of the financial institutions funding the 350 companies with the highest exposure to tropical deforestation lack a comprehensive policy approach on deforestation.  

Green budgeting involves reviewing government budgets to identify how all aspects of public expenditure affect environmental policy aims, such as sustainable land use, biodiversity protection, and climate goals. Green budgeting leads to more coherent policy-making by analyzing the ways in which all elements of a government budget help or hinder the achievement of climate and environmental objectives. It can also make public expenditures more accountable to public interests by enhancing the transparency between the government and civil society. An increase in the number of countries adopting green budgeting will indicate that more governments are on track to implement policies that promote positive social, economic, and environmental outcomes.  

As of June 2020, 14 of the Organisation for Economic Co-operation and Development’s (OECD) 38 member countries had adopted some form of green budgeting – 7% of countries globally. At least five additional countries – Chile, Greece, Latvia, Poland, and Slovenia – currently have plans to adopt green budgeting.

A sustainable or green taxonomy is a classification system that provides a common language and clear definition for what constitutes sustainable economic activities and assets, which helps to facilitate the alignment of financial flows with environmental and climate goals. Taxonomies provide businesses and investors with appropriate definitions for economic activities that are considered environmentally sustainable and help prevent greenwashing – misleading claims about environmental performance. The use of taxonomy-based approaches for scaling sustainable finance has gained traction, and since 2019, global taxonomy development has reached notable milestones in various countries. 

As increasing amounts of capital are mobilized around sustainable themes, commensurate frameworks must be developed to ensure that they deliver their intended impact. By applying a regulatory framework that establishes structure and clarity on what is considered environmentally friendly, a sustainable taxonomy provides countries with assurance that financing and investments in the low-carbon economy are being channeled to truly sustainable activities.

 As of April 2022, 36 countries have developed green taxonomies, including China, South Korea, and countries of the European Union. An additional 12 countries have taxonomies under development. Between those developed and in development, 24% of countries globally are covered by a sustainable or green taxonomy.

The right to a clean, healthy, and sustainable environment is an umbrella right that includes substantive rights to clean air, water, a safe and stable climate, sanitation, healthy and sanitary food, non-toxic environments, and healthy biodiversity and ecosystems. It also includes the procedural rights of access to information, public participation, and access to justice. In 2022, the United Nations General Assembly adopted a resolution recognizing this human right and called on states to implement multilateral environmental agreements and take other steps, such as policy, capacity building, cooperation, and scaling of good practices, to implement it fully. Legal recognition is not the same as implementation, but it is an important first step. 

As of 2020, 156 out of 193 (80%) countries had recognized the human right to a clean, healthy, and sustainable environment through treaties, constitutions, and laws. A growing trend of climate litigation is also being brought on human rights grounds. Notably, in 2023, a court in the US state of Montana ruled in favor of 16 youth plaintiffs that the state’s environmental law prohibiting the consideration of greenhouse gasses in environmental reviews violated the plaintiffs’ constitutional right to a clean and healthful environment.

To address deforestation, it’s essential to understand how much forest loss is driven by illegal activities because the tools to tackle illegal deforestation are different than those needed to combat deforestation in general. This indicator quantifies the extent to which agricultural commodities are grown on illegally cleared lands.

Forest Trends assessed forest loss in the 23 countries that comprise 87% of tropical forest loss from 2013 to 2019. In a 2021 report, they found that almost two-thirds (60%) of tropical forest loss was driven by commercial agriculture from 2013 to 2019. Almost three-quarters (69%) of this agriculture-driven forest conversion was in violation of national laws and regulations. The rate of illegal deforestation during this period increased by 28% compared to 2000 to 2012: from 3.5 million hectares (Mha) per year to 4.5 Mha per year.

These estimates are conservative. In countries where governance is weak and corruption widespread, the lack of evidence of illegality is typically not an indication that agro-conversion is in compliance with laws, but an indication that more reporting is required. Many countries have only limited data on which to assess illegality. Thorough audits rarely happen. The absence of evidence of illegality should not be taken as evidence of compliance with laws and regulations.

Given the evidence available, Forest Trends reports with confidence that at least 69% of agro-conversion (i.e., forest clearing) in the tropics was illegal between 2013 and 2019. If, instead of relying on the evidence available, it is assumed that all of the un-audited agro-conversion were illegal, Forest Trends’ estimates of illegal tropical agro-conversion would jump to 94%, or 59%of all tropical forest loss. If it were assumed that none of the un-audited agro-conversion were illegal, then Forest Trends’ global estimate of illegal agro-conversion would only drop from 69% to 61%. These could be considered the upper and lower bounds of illegal agro-conversion between 2013 and 2019: unlikely less than 61%, but maybe as high as 94%.

Good governance is foundational to implementing national forest policies and  achieving international commitments (e.g., the Glasgow Leaders’ Declaration). Governance can be undermined by corruption, whereby decision-making and implementing policies, is undercut by those in power for political or financial gain. Corruption tends to be worse where resource constraints have weakened institutional capacity and where there are significant disparities in power. In the land-use sector, corruption has been linked with the allocation of concessions, the sale of timber and carbon credits, and prosecution decisions, to cite just a few examples. 

This indicator from the World Justice Project Rule of Law Index assesses the absence of corruption in governments on the basis of three forms of corruption: bribery, improper influence by public or private interests, and the misappropriation of public funds or other resources, and scores countries on a scale of 0 to 1. Countries where corruption is largely absent (countries that receive a score of 0.7 out of 1 or higher) represent 32% of all countries. This figure has remained generally stable since 2012, which indicates that corruption remains present in two-thirds of all countries.

Robust governance systems, including the capacity of governments to implement political priorities, are needed to accelerate the transition to an economy that is resilient and advances forest, sustainable land use, biodiversity, and climate goals. The Berggruen Governance Index, which assesses the quality of governance and democracy globally, defines “delivery capacity” as the state’s ability to set and achieve priorities by  allocating resources, developing technical capacities, ensuring an absence of public sector theft, and providing predictable enforcement. 

As of 2019, only 23% of countries (31 out of the 134 assessed in the Berggruen Index) demonstrated good capacity to deliver on public policies. This proxy indicator suggests that governments have limited ability to implement their policy commitments.