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Seeds of change: Engaging on deforestation

22 April 2024 |
Halting and reversing tropical deforestation will be essential if we are to avoid the consequences of severe climate change and biodiversity loss.
SDG Engagement High Yield Credit, Annual Report 2023

This fact is increasingly calling investors to action, as well as:

  • Regulatory developments: Regulators are strengthening their demands for traceability, and companies run the risk of fines and reputational damage if they do not comply.
  • Changing consumer preferences: Conscious consumption is on the rise, with consumers increasingly factoring sustainability into their purchasing decisions.1
  • Heightened visibility: Improvements in data collection and satellite technology have enabled better detection of deforestation “hotspots” to focus attention on.
  • Global standard-setting: The Kunming-Montreal Global Diversity Framework2 in 2022 and the Taskforce on Nature-related Financial Disclosures (TNFD) guidance in 20233 have provided industry-wide blueprints for addressing impacts and dependencies on nature.

While governments certainly have a role to play to halt deforestation, the private sector has to take action to prevent irreversible damage to the earth’s ecosystems. The forest, land and agriculture sectors find themselves at the forefront of this battle, as conversion of primary forests for the production of several key commodities accounts for 70-80% of tropical deforestation globally.4

Figure 1: Commodities driving tropical deforestation

Federated Hermes Limited signed the financial sector commitment to eliminate commodity-driven deforestation in 2021 at COP26 in Glasgow, alongside over 30 financial institutions representing a total of US$ 8.7tn. Engagement will be a key tool for achieving this, both directly and through collaborative engagement initiatives such as the Finance Sector Deforestation Action (FSDA).

We have stepped up our engagement focus on deforestation with companies held in our SDG Engagement High Yield Credit Strategy, with companies in high-risk sectors already showing some promising signs.

While governments certainly have a role to play to halt deforestation, the private sector has to take action to prevent irreversible damage to the earth’s ecosystems.

Pulp & paper

Pulp & paper production accounts for 13-15% of global wood consumption5. Many companies in the sector manage their own forests to secure a continuous supply of timber, though this is still often supplemented with external wood supplies. As a result, companies are responsible for both sustainably managing their own forests, and ensuring their suppliers do the same.

Food retail

New regulatory requirements are requiring food retailers to put traceable products on shelves. The EU’s Deforestation Regulation is one such example, mandating verified deforestation-free origins for a defined list of high-risk products. Compliance will require changes to procurement processes and more information gathering on vast networks of indirect suppliers, bringing new challenges and costs.6

Figure 2: Deforestation and conversion-free commitments across 10 major global supermarket groups, by commodity


Banks failing to take action to eliminate deforestation from their lending portfolios could open up the possibility of significant financial losses and threaten financial stability overall7. Banks must therefore mobilise to identify deforestation risks across their portfolios, establish strong policies to prevent investments linked to deforestation, engage with and support clients to tackle deforestation across their operations and supply chains, and capture opportunities to invest in nature-based solutions.

Figure 3: Deforestation commitments across 15 global banks, by commodity

SDG Engagement High Yield Credit, Annual Report 2023

The above does not represent all of the securities held in the portfolio and it should not be assumed that the above securities were or will be profitable. This document does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

1 ‘Consumers care about sustainability – and back it up with their wallets,’ published by McKinsey & Company in 2023.

2 The Kunming-Montreal Global Biodiversity Framework consists of a set of global targets to be achieved by 2030 and beyond to safeguard and sustainably use biodiversity.

3 The Taskforce on Nature-related Financial Disclosures (TNFD) is a market-led, science-based, and government-backed initiative providing organizations with the tools to act on evolving nature-related issues.

4‘Drivers of Deforestation, published by Our World in Data in 2021, citing Florence Pendrill et al 2019.

5 ‘Pulp and Paper’, published by WWF in 2024.

6 ‘Food companies under pressure to source deforestation-free products under new EU law’, published by ING Think in 2023.

7 ‘Statement on nature-related financial risks’, published by the Network for Greening the Financial System in 2022.

SDG Engagement High Yield Credit, Annual Report 2023

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