Soft Commodities Compact
In 2018 the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) measured land degradation and its contribution to climate change. It found that deforestation on its own, excluding other land degradation and change, is responsible for around 10% of all global human-induced greenhouse gas emissions (report link).
At NatWest Group we view climate change, resource scarcity, and biodiversity loss, and their associated impacts as major risks to the livelihoods of our customers and society at large, both currently and in the years to come. For more information please see the NatWest Group Climate Report and ESG Supplement (PDF 13MB).
NatWest Group plc was a founding member of the Soft Commodities Compact (PDF 342KB) which was set up in 2014. Together with eleven other financial institutions, this voluntary initiative was led by The Consumer Goods Forum (CGF) and The Banking Environment Initiative (BEI). The Compact aimed to mobilise the banking industry to help transform soft commodity supply chains, thereby helping customers to achieve zero net deforestation by the end of 2020.
The Compact group concluded at the end of 2020 with the publication of the report Banking Beyond Deforestation. Despite the resolution of the Compact and other global efforts, deforestation has clearly not been halted. However, the Compact Technical Guidance was developed in consultation with banks and other stakeholders which enabled Compact banks to create leading positions for the industry. This was recognised within the Forest 500, where all Compact banks are within the top 35 of 150 financial institutions.
Following this, and with the recommendations stemming from the Banking Beyond Deforestation report, NatWest Group acknowledge that the current model of global supply chains require significant improvements in traceability for zero deforestation goals to be met internationally. This is not only critical for deforestation but also increases the resilience and value of supply chains to withstand shocks - for example from the impacts of climate change. Moreover, there are opportunities provided by nature based solutions, protecting environments, and improving ecosystem services that will help provide the sustainable growth our economies need.
NatWest Group joined the Taskforce on Nature-Related Financial Disclosures (TNFD) Informal Working Group in 2020 ahead of its full launch in 2021. With a mission to build awareness and capacity to enable the financial sector to address the market and systemic failures contributing to the destruction of nature, a key part of the group will be working to bridge the data gaps currently preventing financial institutions from assessing nature-related risks in granularity. The TNFD intend to deliver a framework for organisations to report and act on evolving nature-related risks by 2023. This framework aims to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.
In respect of these timelines and the importance of tackling deforestation, NatWest Group have decided to refresh our soft commodity reporting for 2021. In addition, for the first time we are reporting across all 7 import commodities that the Department for Environment, Food, & Rural Affairs (Defra) define as high deforestation risk (Soya, Cocoa, Palm Oil, Timber, Paper & Pulp, Beef & Leather, and Rubber).
Customer lending policy
NatWest Group has an Environmental, Social and Ethical (ESE) risk management framework, established since 2011, to help assess and manage risks associated with certain customers and activities. The purpose of such due diligence is to help establish the commitment and capacity of customers to manage the potential ESE impacts in accordance with international standards. Our policies set out Prohibited, Restricted and Normal activities. We do not support customers and/or transactions involved in prohibited activities. Customers engaged in Restricted activities undergo enhanced due diligence including review by a reputational risk forum or approver and evaluation every one or two years. Customers undertaking Normal (lower risk) activities are assessed for ESE on a five-yearly basis. Access to all publicly available policies can be found in our downloads section.
The ESE framework includes a sector ESE risk appetite position for Forestry, Fisheries and Agribusiness (FFA). This includes soft commodities from The Compact reporting: palm oil, soy, beef, and timber. The policy position for FFA expects and encourages customers to demonstrate a commitment to the responsible practice framework that pertains to the relevant soft commodity. The soft commodities that have high deforestation related risks for the UK are rubber, cocoa, pulp & paper, leather & beef, palm oil, soy and timber. We have therefore broadened our scope of analysis in 2021 to encompass these. Please note our FFA policy details that we do not provide project finance to projects involving unsustainable vegetation clearance or peatland clearance/extraction. This includes for example areas of High Conservation Value, High carbon stock and primary tropical forests.
2021 Soft Commodities Reporting
It is important to highlight the limitations and the approach taken by the Compact - the Compact targets direct production, import and trade of soft commodities. The proposed due diligence legislation in the UK Environment bill seeks to address the issue from the other end of the supply chain requiring all large companies to conduct due diligence on the 7 specified soft commodities.
This reporting is completed on a best-efforts basis, for the purposes of this report, Commercial Banking and NatWest Markets customers who fall within scope of the FFA ESE sector risk appetite process are included. The customers are screened to ascertain if they are operating or importing soft commodities from tropical regions. Source data was extracted August 2021 and December 2020. NatWest Group is a UK-centred bank and therefore has limited direct geographical focus on countries experiencing high risk of tropical deforestation. Through this customer analysis, best efforts to trace in-scope customers have been made however it may not reflect the complete in-scope exposure.
Natwest Group total exposure, including undrawn exposures, to the customers assessed was £136.9m of lending as at 31.12.20, which is under 2.1% of our total exposure to the agriculture sector. Despite being a relatively small exposure, the tropical agribusiness sector can have high CO2 intensity and biodiversity impacts meaning that there are opportunities to help improve the sector.
To ascertain certification data for our customers, publicly available information has been used (including the certification schemes online databases, webpage disclosures and annual reports, as well as annual ESE reviews with the customers). Limitations of this approach are recognised through the BEI and the Compact, where certification coverage is also not reported.
Whilst certification of palm oil improved from 68% to 83%, there is still a gap to reach our goal of 100% by 2024 or sooner. The in-scope timber clients with valid FSC certification has decreased from 100% to 96%. This was due to an inadvertently expired FSC certificate, the holder of the certificate has been informed. It was found that a number of SME customers who primarily sell wood-based products with valid FSC certification also stock a small number of pulp-based products e.g. hardboard however only have the FSC certification for wood products. These, and palm oil related customers have been contacted. To reach our goal of 100% by 2024 or sooner customers certifications are reviewed as part of the ESE process with timebound steps agreed between the customer and relationship manager.