Financial institutions simply cannot be left out of EU Deforestation Regulation

EU member states should stand with the European Parliament and require banks and asset managers to undertake due diligence checks to stop the financing of companies linked to the destruction of the world’s remaining forests. This is the only way to sufficiently address Europe’s contribution to deforestation, forest degradation and human rights violations, Friends of the Earth Netherlands and Global Witness write.

In the evening of Monday 5th December, negotiators from the European Parliament, the Council and the Commission will hold their third trilogue on the EU deforestation regulation. This is going to be a landmark legislation to finally address the role of the EU in global deforestation.

But the original Commission proposal did not target the financial sector, arguing that existing initiatives in the area of sustainable finance are well suited to address finance’s deforestation impacts. Think of the Taxonomy Regulation and disclosure rules such as the Corporate Sustainability Reporting Directive (CSRD). In September, however, the European Parliament took a firm stance in favor of including financial services such as loans and investments in the law.

With this move, the Parliament showed that it was willing to listen to its constituents. Recent research shows that 82% of EU citizens (in nine member states) want the European Union to develop strong deforestation legislation, which also applies to financial institutions. The Parliament’s proposal would require a EU-based financial institution to do a check before financing or investing in a company. With this check, a financial institution has to identify if a possible client may be linked to deforestation and related human rights violations. If a financier cannot rule this out, then it would be required to hold off financing a client’s operation until risks are negligible.

Financing known forest risks

Action is urgent. Between 2016 and March 2021, for example, the three largest Dutch banks (ING, Rabobank and ABN Amro) provided loans and underwriting services worth at least €3.1 billion for forest risk commodities such as beef, palm oil, soy, and rubber. Despite the fact that all three banks have extensive voluntary sustainability policies, they continue financing companies linked to deforestation and related human rights abuses.

Overall, between the Paris Agreement and 2021, EU-based financial institutions raked in €401 million in deforestation-linked revenues off the back of €30.6 billion worth of deals with agribusiness companies linked to the destruction of climate-critical forests and human rights abuses, according to a Global Witness report. A subsequent report shows that EU based banks are continuing their financial support for companies with a known forest risk.

What about the Commission’s original argument? Neither the Taxonomy Regulation, nor the Corporate Sustainability Reporting Directive (CSRD) introduces any mandatory due diligence rules for financial institutions. In the meantime, there is increasing recognition amongst officials and experts that there remains a yawning regulatory gap on deforestation finance.

That recognition, and the Parliament’s proposal to include rules for financiers in the deforestation regulation, has given rise to a new argument. This time put forward firmly by the financial lobby. Financial institutions and their associations state that the upcoming Corporate Sustainability Due Diligence Directive (CSDDD) will already cover requirements for financial institutions. We should stick to one bill, the argument goes, otherwise it will become too complicated. 

Two aspects the financial lobby overlooks

Regulatory gap closed? Not quite. There are two important aspects the financial lobby’s argument overlooks. First, the deforestation regulation would not be a duplication, but it would give a sectoral guidance to the general due diligence requirements in the CSDDD. Second, the CSDDD is still in a development phase and will not be transposed before 2025.

More outrageously, the financial lobby is doing everything in its power to weaken the CSDDD. The Dutch Fund and Asset Management Association (DUFAS) for instance, calls for a removal of investee companies from the directive. The Dutch Banking Association NVB argues that the civil liability for banks should be removed.

So far, their lobbying push has been successful, with Member States exempting the entire financial sector from due diligence requirements in their position on the CSDDD adopted on Thursday 1st December, meaning that there is now serious doubt that the financial sector will be covered by the law.

Different voices

Thankfully, we are also hearing different voices from the financial sector. 13 Financial institutions, with over €177 billion in assets under management, published an open letter to express their concerns about the ongoing destruction of natural forests and other ecosystems globally. They call on EU member states and the EU Commission to stand with the EU Parliament and support the inclusion of the financial sector in the Deforestation Regulation.

The urgency of the climate crisis, biodiversity loss and the bad state of our forests worldwide clearly calls for a strong Deforestation Regulation, and financial institutions cannot be left off the hook. This is a once in a generation opportunity that the EU cannot miss.

Jonas Hulsens, Senior Forest Campaigner at Friends of the Earth Netherlands
Karen Vermeer, Forest Campaigner at Friends of the Earth Netherlands
Giulia Bondi, Senior Campaigner Forests at Global Witness

Photo above: aerial drone view of the Xingu Indigenous Park territory border and large soybean farms in the Amazon rainforest, Brazil. © Shutterstock