INSIGHT by Aviva Investors Global Services Limited (AIGSL), Global Canopy
Biodiversity loss is an increasingly well-recognised driver of potential financial risks, and yet the financial sector continues to contribute to the rapid decline in plant and animal species through its investment and underwriting activities. At Aviva we recognise our role in contributing to the Kunming-Montreal Global Biodiversity Framework of halting and reversing biodiversity loss by 2030 and are committed to make progress towards this goal, through implementation of our Biodiversity Policy.
Ending deforestation is a pre-requisite for both reversing biodiversity loss and meeting net zero targets, and we, along with over 30 other leading financial institutions that are members of Finance Sector Deforestation Action (FSDA), have committed to use our best efforts to eliminate agriculture commodity-driven deforestation in our portfolios by 2025.
Operationalising this commitment across our business is a key focus of our biodiversity-related efforts and our strategy for doing so draws in part from the Deforestation-Free Finance Roadmap, which charts a pathway for financial institutions to set policies, assess risks, engage with companies and clients and disclose on progress. This case study highlights some of our methodologies, findings and learning points from our efforts so far towards our 2025 goal.
| Assessing risk: corporate holdings
In 2022 we conducted our first deforestation risk assessment across our investment and underwriting activities and published the results within our Biodiversity Report.
When assessing our corporate holdings, we used datasets which provide policy strength indicators on deforestation from CDP Forests, Forest 500 and SPOTT, as, at the time, there is limited data attributing actual deforestation to companies across the full supply chain for all forest risk commodities to which they are exposed to. Combining data from across these sources allowed us to identify companies with exposure to deforestation and rate each company’s policy as strong, medium or weak.
CDP Forests, for example, provides information on company policies, volumes, traceability and certification, whilst SPOTT provides corporate disclosures of policies, operations and ESG commitments for palm oil, pulp and paper and rubber. Lastly, Forest 500 provides a ranking of 350 companies and 150 financial institutions which are exposed to commodity driven tropical deforestation.
We found that 26% of our corporate holdings by value were included in the combined datasets; half of which were financial institutions exposed to deforestation via the companies they finance, and the other half are companies which were exposed to deforestation via their supply chains.
It is our intention to build on this approach as more data becomes available, and in 2023 have integrated supply chain mapping from Trase data to provide an information on deforestation exposure in commodity supply chains and to estimate deforestation impact associated with soft commodity producers and traders. The aggregation of the three deforestation risk policy data providers, as well as Trase data sits within an internal tool to serve as a baseline for monitoring our changing deforestation exposure and aid tracking progress with companies we are engaging with.
| Assessing risk: Real assets, annuities, sovereign debt and general insurance activities
We used Global Forest Watch, which provides satellite imagery on near-real time monitoring of deforestation across the globe to assess our real assets, annuities, sovereign debt and general insurance activities.
When it came to assessing sovereign holdings, for example, we drew on country-level tree cover loss data to identify debt issuers with the greatest average tree cover loss between 2019-21. Most of our holdings are in countries with low tree cover loss, so we found minimal exposure to commodity-driven deforestation. This was concentrated in Brazil, Indonesia and Malaysia, and accounted for 1.2% of our overall sovereign debt investment. Based on our deforestation risk assessment we have identified that we have minimal exposure to direct or indirect funding of commodity-driven deforestation through our purchase of sovereign debt. Though our exposure is low, we will continue to engage with countries on their deforestation risk through IPDD.
Our exposure to forest linked commodity-driven deforestation across real assets and annuities was low as assets were located in countries that have been identified by Global Forest Watch to have low to no commodity-driven deforestation. Within our insurance business across the UK, Ireland and Canada, we assessed our exposure associated with commodity-driven agriculture. Our agricultural portfolio in Aviva UK was ≤0.5 of our Commercial Income and not associated in commodity-driven agriculture. In Ireland forestry was the main driver of tree cover loss between years 2019-2021 using Global Forest Watch data. In Canada the main driver of tree cover loss between the years of 2019-2021 was forestry and wildfires. We are considering how this can be integrated within underwriting from a risk and pricing perspective.
| Engaging with corporates: Working with FSDA
Engagement is one of the chief means by which we seek to exercise our rights and responsibilities as stewards to support our holdings to tackle deforestation and biodiversity loss. Given the absence of precise company-level deforestation data, it is also an important mechanism with which to collect information on our companies and clients’ approaches to tackling the issue.
In 2022, we engaged substantively 304 times with companies on biodiversity issues including sustainable land use and forestry, biodiversity management, circular economy and pollution, water conservation, reporting alignment/disclosures and animal rights on welfare., In 2022 we also strengthened our voting policy on deforestation and voted against management at 93 companies due to their weak approaches to deforestation, this year we have also included financial institutions as part of this policy.
As part of the FSDA working group, we used Global Canopy’s Forest 500 list to identify priority companies and financial institutions to engage with on deforestation risk. FSDA members are using a set of shared investor expectations with which to call for companies to commit, assess, transform and disclose their deforestation policies and activities, and we are leading engagements with five banks ,five companies as well as supporting other engagements which we are not leading on.
We have used the Deforestation-Free Finance Roadmap across our corporate engagement efforts to suggest tools, advise on policies, and educate banks on how best to implement efforts to tackle deforestation.
| Engaging on deforestation with corporates examples: Bank of Montreal
Aviva Investors is a member of the Finance Sector Deforestation Action (FSDA) Group, which acts to use its best efforts to eliminate commodity-driven deforestation from the it’s portfolios by 2025. The FSDA has identified priority companies and financial institutions to engage with on deforestation risk, using Global Canopy’s Forest 500 list, which tracks the most influential firms linked to deforestation in their supply chains and investments. We led the engagement with the Bank of Montreal earlier this year, to better understand and request further information on the company’s approach to deforestation and the steps they are taking to reduce exposure. We encouraged the bank to have an overall deforestation and land-conversion free commitment. Additionally our asks consisted of adding supply chain certification to their lending requirements for palm oil and timber as well as understanding their exposure to deforestation risk in South America. We appreciate the efforts the Bank of Montreal is making with clients to obtain physical asset location data and to request audits from its clients on the locations of their operations.
Whilst the outcomes are still being realised, the engagement with the Bank of Montreal overall proved fruitful. The bank is taking steps to collect information on their clients, and we look forward to seeing how the bank uses this data to reduce their exposure to deforestation risk. We will continue to engage with the company in collaboration with the FSDA later this year to gauge the progress the bank has made.
| Engaging with sovereigns
Aviva is a member of the Investor Policy Dialogue on Deforestation (IPDD) and, although our exposure to sovereign-related risk is low, are engaging with governments as part of this group. For example, we co-signed a letter calling on the Brazilian government to reduce deforestation rates, enforce Brazil’s Forest Code tackling illegal logging, and improve public access to data to enable external monitoring.
| Moving forward: towards a finance sector that protects and restores biodiversity
While we have made progress, there is still more required from Aviva, our financial services sector, and our governments, to achieve the global ambition to reverse nature loss in this decade.
We are encouraged by our work with FSDA, which has shown how knowledge exchange between financial institutions that have made a serious commitment can enable strides forward in tackling a challenging issue. Recent conversations around the forthcoming EU regulation on deforestation-free products with companies exposed to EU markets have proved productive in encouraging them to work towards deforestation and conversion-free supply chains.
Aviva’s ambition of achieving net zero by 2040 has led to an initial £100 million in funding for nature-based carbon removals by 2030. Partnering with several leading conservation groups and charities in the UK, Ireland, and Canada, Aviva’s efforts will focus on carbon removal as its primary goal and aims to support biodiversity and habitat benefits where possible. In October 2022, the company signed off on its first project, the Natural Capital Partnership agreement with The Nature Trust in Ireland, where efforts will be focused on native afforestation. In February 2023, Aviva provided a £38 million donation to help restore Britain’s lost temperate rainforests in the UK, partnering with The Wildlife Trusts. The project aims to re-establish temperate rainforest by planting a combination of native tree species across an area equivalent to around 5,200 acres. Additionally, Aviva has provided a £10 million donation to the Woodland Trust to support its Woodland Carbon Scheme, aiming to deliver carbon removal, boost air quality, and improve biodiversity through woodland creation and peat restoration.
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