Deforestation Financing: A Hidden Risk to Chinese Banks' Long-Term Stability?

The global push to combat climate change and biodiversity loss has elevated environmental, social, and governance (ESG) standards to a critical determinant of corporate resilience. Yet, new analysis reveals that Chinese banks, including major lenders like CITIC and Industrial and Commercial Bank of China (ICBC), are increasingly exposed to deforestation-linked commodity financing—a trend that threatens their long-term financial stability and contradicts both China's own green finance policies and international climate commitments.

The Growing ESG Risk in Chinese Banking

Recent data from Global Witness and the Forests & Finance coalition paints a stark picture: Chinese banks have become the largest international creditors to “forest-risk” companies globally since 2018, excluding domestic financing in Brazil and Indonesia. These institutions provided $23 billion in credit to firms involved in deforestation-linked sectors like palm oil, soy, and timber between 2018 and mid-2024—a 28% increase from the $18 billion lent between 2014–2020. The top recipients of this financing include controversial companies such as Sinochem, Royal Golden Eagle Group (RGE), and COFCO, all of which face repeated allegations of sourcing commodities from illegally cleared lands.

The problem is compounded by the lack of robust ESG policies at Chinese banks. According to the Forest 500 ranking, four of six major Chinese lenders scored zero for deforestation policies, lagging far behind global peers like Schroders (58.5 points). Even China's 2022 Green Finance Guidelines, which urge banks to restrict financing for clients with environmental violations, remain voluntary and poorly enforced. This regulatory laxity creates a clear mismatch between China's commitments to the Glasgow Leaders' Declaration (aiming to halt deforestation by 2030) and the reality of its financial flows.

Why This Matters for Investors

The risks here are twofold: reputational damage and regulatory backlash.

1. Reputational Risk: As consumers and investors increasingly demand alignment with ESG principles, banks financing deforestation face growing scrutiny. For instance, RGE—a major beneficiary of CITIC and ICBC loans—has been accused of clearing forests in Indonesia, while COFCO's soy sourcing from illegally leased Indigenous lands in Brazil undermines its “deforestation-free” pledges. Such controversies could trigger investor divestment, boycotts, or exclusion from green financing initiatives.

2. Regulatory Risk: The EU's Deforestation Regulation, set to take effect in 2025, will ban imports of commodities like palm oil, soy, and timber linked to illegal deforestation. China's lack of comparable policies leaves its banks vulnerable to stranded assets if global supply chains shift to avoid deforestation-linked suppliers. Meanwhile, U.S. and European regulators are increasingly demanding transparency in supply chains, which could force banks to write down loans to non-compliant clients.

Investment Implications and Recommendations

The data suggests that investors should divest from banks with poor ESG frameworks and shift capital to institutions prioritizing deforestation-free financing. Here's how to navigate this risk:

1. Avoid Non-Compliant Lenders:
2. CITIC and ICBC are among the most exposed banks, given their significant lending to forest-risk companies. Their minimal deforestation policies and silence in response to Global Witness' findings highlight governance gaps that could amplify future liabilities.

3. Bank of China and Agricultural Bank of China also warrant caution, as they scored poorly in Forest 500 rankings despite slight improvements.

4. Favor ESG-Leading Institutions:

5. China Construction Bank (CCB) and Agricultural Bank of China (ABC) score marginally better than peers, though still low by global standards. Investors might consider them transitional bets if they commit to stronger policies.

6. Look for banks actively engaging in sustainability-linked loans (SLLs) with credible KPIs. For example, SLLs tied to verified reductions in deforestation-linked activities could signal a strategic pivot toward ESG compliance.

7. Engage in Advocacy and Due Diligence:

8. Pressure regulators to enforce China's Green Finance Guidelines and adopt a national deforestation import ban.
9. Use tools like the Forest 500 rankings or third-party ESG ratings (e.g., MSCI, Sustainalytics) to assess banks' risk exposure.

Conclusion: The Cost of Non-Compliance

Chinese banks' growing role in financing deforestation-linked commodities is a ticking time bomb for long-term value. As global markets demand transparency and sustainability, institutions lagging in ESG governance risk losing access to capital, facing litigation, or suffering reputational damage. Investors ignoring these risks may find themselves on the wrong side of a regulatory and consumer-driven shift toward green finance. The path forward is clear: divest from non-compliant lenders now, and reallocate to banks building deforestation-free supply chains. The forests—and your portfolio—will thank you.

Data sources: Global Witness, Forests & Finance coalition, Forest 500 rankings, China's Green Finance Guidelines.