Updating Your Credit Score: Include Deforestation Risk in Debt Scoring

How can investors use debt markers to reduce deforestation and promote nature-positive outcomes?

The Anthropocene Fixed Income Institute (AFII) has released a report introducing the Deforestation Debt Universe (DDU), which is aimed to help investors identify and assess debt-linked exposure to deforestation. From sovereign bonds tied to road construction in tropical forests to corporate bonds financing deforestation-prone agribusiness, the DDU spans over 350 entities and billions in outstanding debt. But there is good news: nature-aligned finance is emerging, and many examples demonstrate how and why.

Why This Matters

• If investors ignore deforestation in their portfolios, they risk reputational damage and climate misalignment.

• If debt instruments fund extractive land use, nature loss and climate breakdown accelerate.

• If frameworks like the DDU gain traction, investors can assess and engage with forest-risk issuers.

• If nature-positive investment tools scale, markets can finance regeneration instead of degradation.

  
  

Some Historical Context Industry leaders have been addressing deforestation related finance for more than 40 years.

Some notable dates include:

• 1980s: Launch of the Tropical Forest Foundation.

• 1982: Thomas Lovejoy proposed debt-for-nature swaps.

• 1987: Bolivia and Conservation International initiate the first debt-for-nature swap quickly followed by debt-for-nature swaps in Costa Rica, Dominican Republic, Guatemala, and Brazil.

• 1994: Launch of the Forest Stewardship Council (FSC).

• 2003: The EU adopted the European Union Forest Law Enforcement, Governance and Trade Action Plan (EU FLEGT Action Plan) to address illegal logging and the social, economic and environmental harm it causes.

• 2006: Malaysian Nature Society designs a green bond that resulted in the protection of more than 250,000 acres of rain forest.

• 2008: First international forest carbon offset trade on the Chicago Climate Exchange.

• 2008: Publication of guidance on financial accounting for forests carbon offsets.

• 2010: Guidance published on financial risk management guidance by S&P and others on forest carbon offsets.

• 2012: Green Century Capital Management filed a shareholder proposal with Starbucks resulting in the company published a commitment to sustainably source 100% of its palm oil by 2015.

• 2012: The Nature Conservancy offered its landmark conservation notes to unaccredited retail and other impact investors. The notes, which yielded between 0% and 2% for one to five years, did not trade. Moody's rated them AA.

• 2013: Launch of Chain Reaction Research, with Profundo, AidEnvironment, and Climate Advisers, leading industry to include deforestation risks in portfolio management and investment analysis.

• 2014: Investors including Calvert Investments representing more than $270 billion in AUM pushed Wilmar to tackle deforestation in its supply chain.

• 2016: The World Bank launched the first bond that offered investors an option of receiving interest payments in the form of environmental impact — in this case, verified carbon credits generated through REDD.

• 2017: Launch of Deforestation Free Funds, so that individuals could review their investment funds for deforestation risks.

• 2019: The Conservation Fund raised $150 million by issuing a green bond underwritten by Goldman Sachs dedicated to land conservation.

• 2020: The launch by the Principles for Responsible Investment (PRI) Investors Policy Dialogue on Deforestation (IPDD).

• 2023: WBCSD publishes its Deforestation-free finance: a guide on tools and frameworks for financial institutions.

• 2024: The Inter-American Development Bank supports Natura in the launch of its sustainability-linked bond focused on bio-ingredidents from the Amazon.

• 2024: The Inter-American Development Bank supports Natura Cosméticos in the launch of its $240 million sustainability-linked bond focused on bio-ingredients from the Amazon.

  
  

Understanding the Deforestation Debt Universe

AFII categorizes forest-linked debt across three tiers:

1.      Tier 1 – Companies directly driving deforestation (e.g., palm oil, soy, cattle).

2.      Tier 2 – Financial or logistical enablers of Tier 1 (e.g., banks, supply chains).

3.      Tier 3 – Sovereigns or agencies funding deforestation-linked development.

Key Facts

• Many green and ESG bonds still fail to rule out deforestation-prone activities.

• Over $500 billion in bonds may be exposed to forest risk.

• Sovereigns in forest-rich regions often issue debt with limited ESG scrutiny.

AFII urges investors to screen bonds for nature risk, demand better use-of-proceeds transparency, and engage with issuers on land use policy.

Challenges and Considerations

Despite growing interest, nature-focused debt financing still faces barriers:

• Transparency gaps: Most sovereigns and corporates do not disclose forest-related use of proceeds.

• Lack of exclusion criteria: Many green bonds fail to screen out deforestation.

• Limited nature-labeled assets: Few funds or bonds are truly tied to biodiversity outcomes.

• Scale and replicability: Projects like Althelia remain exceptions, not yet the norm.

To advance, investors need better frameworks, such as TNFD, and stronger commitments across markets.

Investor Action Items

Investors can start by using the Deforestation Debt Universe to identify and assess nature-related risks in their bond portfolios. From there, they should engage issuers on land use and forest impacts, and explore thematic funds that support conservation, like the presented Althelia Sustainable Ocean Fund. Partnering with public or philanthropic actors can help to de-risk these investments. Staying aligned with guidance from ICMA and TNFD ensures best practices in impact reporting and nature-based finance.

Bottom Line

Debt can either accelerate deforestation or stop it. The Deforestation Debt Universe reveals how deeply fixed income is entangled with nature loss. But nature-aligned capital, when structured smartly, offers a blueprint for change. The shift from extractive to regenerative finance has already begun and it is time for the bond market to catch up.