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Making Deforestation Due Diligence Work in Practice
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In summer 2024, Datura's team at Climate & Company, published a practical guide to help financial institutions implement deforestation due diligence effectively:
Making Deforestation Due Diligence Work in Practice - A Practical Methodology & Implementation Guidance for Financial Institutions
Developed in collaboration with Andra AP-fonden (AP2), a Swedish sustainability-focused pension fund, and data pioneer Global Canopy, this methodology has been tested and applied in-house by AP2, ensuring it is ready for broader adoption by financial institutions worldwide.
Existing tools and data products often cover only a limited set of companies. Our methodology, however, uses a pragmatic and scalable data collection process to deliver results for every company in the portfolio. While the quality of available data affects accuracy, our approach ensures that all companies are included in the assessment.
Unlike climate finance, nature finance is highly location-dependent. Carbon emissions impact global warming regardless of where they occur, but the environmental consequences of deforestation vary dramatically based on location. Our methodology systematises the collection of location-specific data, answering the key question: Where is a company doing what?
For publicly listed equities - which are often large-cap stocks in developed economies - most environmental impact occurs in the supply chain, not in direct operations. We leverage an input-output model that integrates global trade patterns at the country-sector level, linking them to the latest deforestation data. This approach - while still being an approximation - propagates deforestation risks throughout supply chains, offering a scalable estimate for the entire portfolio.
Inspired by the deforestation guidance developed by Global Canopy et al, our methodology focused on systematising and automating the required data collection process as much as possible.
Step 0: Collecting location-specific company data: We gather detailed geographic data on where companies operate and in which sectors. This step integrates multiple data sources, such as open-source asset-level datasets, corporate structure information, and disaggregated revenue data.
Why it matters: Nature-related risks are inherently location-specific. A company in a high-risk sector but far from deforestation hotspots faces a different risk profile than one operating in a sensitive region.
Step 1: Assessing companies' deforestation exposure
We assess direct and indirect deforestation risks, leveraging a broad set of data points, such as sectoral risk classifications, satellited-based deforestation hotspot analysis, or supply chain exposure analysis using input-output modeling.
Why it matters: Companies can contribute to deforestation either directly (own operations) or indirectly (via suppliers). This step quantifies their real exposure.
Step 2: Assessing Companies' Deforestation Risk Management
Furthermore, we evaluate wheter companies have policies in place to mitigate deforestation risks and how strong those policies are. This step systematises the data collection process from various proprietary and open-source data providers.
Why it matters: Even if a company is highly exposed to deforestation, strong governance and risk management can mitigate the associated risks.
Step 3: Aggregationg & deriving decision-useful metrics
We turn the data collection process above into decision-useful metrics, by assigning companies into low, medium, high or very high risk buckets (or by deriving numerical scores).
Why it matters: Financial institutions can quickly spot and prioritise high-risk companies (i.e., those with high deforestation exposure & poor governance)
Jointly with Datura’s team, AP2 implemented the deforestation due diligence methodology, resulting in a detailed dataset for AP2’s portfolio, benchmarked against MSCI ACWI.
Key Steps in AP2’s Analysis:Combined multiple deforestation exposure data points (see Step 1) to calculate an overall risk rating.--> Applied a percentile-based scoring system (range: 1 to -1) to normalize risk indicators for comparability.
--> Increased weight on supply chain exposure, using the Input-Output (IO) model to capture indirect deforestation risks.
--> Integrated geospatial risk factors, combining proximity to deforestation hotspots with sector exposure to identify high-risk assets.
Key Findings from AP2’s Assessment:
--> 155 companies (~10% of AP2’s listed equity portfolio) flagged as high or very high risk
--> Financial sector companies excluded from this screening; they will be assessed separately
--> 21 high-risk companies identified for direct engagement to improve deforestation risk management (see Step 2)
See report (link) for visuals.
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