What Is Deforestation and How to Financially Fight It

What Is Deforestation and How to Financially Fight It

The sad situation of the Amazon rainforest, from the green lung of the planet to a source of pollution due to deforestation. Let’s see how banks and hedge funds can stop its destruction before it’s too late.

Deforestation means a massive reduction of natural green areas of the planet caused by the excessive exploitation of forests. Forests cover about 30 percent of the planet and also play a fundamental role in preserving the ecosystem, guaranteeing water filtration, increasing humidity, curbing soil erosion and absorbing carbon dioxide while introducing oxygen in the environment. Reducing the number of trees decreases the amount of beneficial effects they have on the environment, putting the ecosystem at risk more and more.

This phenomenon has always been practiced by man to obtain firewood or construction wood, to have new land for agriculture and also to make room for urban expansion. Forests are often subject to tree felling with a method that is truly harmful to the environment: if the land is intended for agricultural purposes, once the trees are cut down, they get set on fire as their ashes act as a fertilizer for short time. However, this system causes serious damage to the ecosystem; in fact, the destruction of the undergrowth damages the rainforest habitat, accelerating soil erosion. This dangerous method of deforestation is mainly used in southern China, central Africa, but also in all those countries that include the Amazon rainforest in it, like Brazil.

When it comes to the Amazon rainforest and deforestation, the consequences cannot be overlooked. The Amazon rainforest is the largest green lung on the planet and guarantees the protection of biodiversity and climate balance by absorbing billions of tons of carbon caused by the combustion of gas, oil and coal. It is home to between 10 percent and 15 percent of the animal species in the world, as well as having 75 percent of plant species unique exclusively to this place. The Amazon rainforest is equivalent to more than half of the rainforests in the world and, due to uncontrolled deforestation in the past years, it has reached a point of no return, meaning some areas will never recover. According to a recent study, the Amazon rainforest is emitting more carbon dioxide than it can absorb due to uncontrolled deforestation.

From 2005 to 2015, the Amazon rainforest experienced one of its hardest times having to deal with severe droughts. Thanks to the growing awareness of the climate and the environment, in addition to the serious socio-economic damages that led to changing policies interested in the great gain that the exaggerated deforestation of large areas involved , big changes were made to try to recover the Amazon rainforest. In the last 20 years, Brazil has strongly decreased the amount of deforested areas compared to the peaks reached in the ‘90s. It went from around 20 thousand square kilometers a year, just over 20 years ago, to 5 thousand square kilometers a year in 2022 . Brazil’s next challenge is to fight illegal deforestation to preserve its territory and align with global environmental policies.

Deforestation is an expensive but profitable business that need an initial investment to pay for labor, tools and logistics. Banks, hedge funds and other financial institutions, which hold stocks or provide credit to companies that have ties to deforestation, are behind this process. Financial institutions have many commercial reasons to support the issue of sustainability and talk about deforestation in their lending and investment practices. The impact of corporate deforestation can lead to many financial risks, including operational, regulatory, legal and reputational risks. These risks can affect investors and lenders through various ways. For example, financial institutions can be affected if their customers, namely the companies engaged in deforestation activities, are unable to provide services, if the assets become ‘stranded’ due to changes in market and political conditions, or if the market value of the companies deteriorates.

As revenue and profits are affected in these companies, financial institutions are also vulnerable. For this reason, large financial institutions are moving towards a more ethical investment from an environmental point of view and safer from an economic point of view. In September 2019, 251 investors representing approximately $17.7 trillion in assets signed a letter urging companies to “redouble their efforts and demonstrate a clear commitment to eliminating deforestation within their operations and chains supplying.” By focusing on clients who adopt strong sustainable practices, banks and investors are not just effectively managing their risks but also safeguarding a biome that is vital for planetary health.

Food for thought:

  • What do you think about ethical investments?
  • Do you think states and institutions are doing enough to safeguard forest health?
  • How could illegal and uncontrolled deforestation be stopped?

Suggested readings:

Amazon Deforestation and Climate Change

Can investors save the Amazon?

Investors warn Brazil to stop Amazon destruction

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What Is Deforestation and…

by Luca Pompili time to read: 3 min