Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
ESG & sustainabilitySeptember 16 2022

EU banks face new deforestation financing rules

As the world’s forests vanish faster than ever, the European Parliament moves towards tighter due diligence rules. But how effective are they? Philippa Nuttall reports.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
EU banks face new deforestation financing rulesImage: Getty Images

In a surprise move, the European Parliament voted on September 13 in favour of obliging EU-based banks to conduct due diligence to prevent investment projects linked to deforestation. The agreement, by the Members of European Parliament (MEP) meeting in Strasbourg, must be backed by all three EU institutions, including the European Commission (EC) and the Council, before it can become law across the 27 EU member states.

The decision by MEPs to toughen up the EC’s proposal for an EU Deforestation Regulation was “a ray of hope for the world’s forests and the indigenous communities struggling to protect them”, said Giulia Bondi, senior EU forests campaigner at Global Witness, an non-governmental organisation. “Preventing European financial institutions from financing the destruction of forests would be a monumental step forward in the fight to protect threatened ecosystems like the Amazon.”

Amazon under threat

Deforestation has soared in the Brazilian Amazon rainforest since right-wing president Jair Bolsonaro came to power in 2019. It reached a record high in the first six months of 2022, according to Brazilian government data. From January to June, 3988 sq km were cleared in the region, an increase of 10.6% from the same time last year and the highest level for that period since the data series began in mid-2015.

Environmentalists accuse Mr Bolsonaro of rolling back environmental protections and emboldening loggers, ranchers and land speculators to clear the forest. Deforestation and the fires lit to quickly remove trees have left the Amazon at a tipping point between carbon sink and carbon source, say scientists. The lungs of the planet are at risk of becoming a driver of climate change, rather than part of the solution to help slow global warming.

EU plays a part

EU-based financial institutions are implicated in this trend by their financing of agribusiness companies that profit from cleared land. Banks and asset managers based in the EU, UK, US and China have made deals worth $157bn with firms accused of destroying tropical forest in Brazil, south-east Asia and Africa since the 2016 Paris Agreement, according to Global Witness. During this time, EU-based banks struck €30.6bn worth of deals with 20 agribusiness companies, claims the research published in October 2021.

JPMorgan was cited as the biggest deforestation lender globally, with HSBC, Deutsche Bank, BNP Paribas, Rabobank and Bank of China also implicated in profiting from deals with companies invested in soy, beef, palm oil, and pulp and paper.

In 2021, only 50% of the 13 financial institutions that responded to a questionnaire by the Carbon Disclosure Project (CDP), a not-for-profit organisation, were engaged with forest-related issues, compared with 88% for climate-related issues. Further, half of the disclosing financial institutions did not assess forest-related risks in their portfolios.

Are due diligence rules effective?

There is disagreement, though, as to whether extra due diligence is needed to increase the focus on deforestation. “The EC claims the Corporate Sustainability Reporting Directive (CSRD) and the EU taxonomy are sufficient,” says Thomas Maddox, global director of forest and land at CDP.

The CSRD “in its current iteration” is only focused on larger companies, he says. Failing to accept the European Parliament’s proposal would risk missing “an important opportunity to address the fundamental market incentives for deforestation” and “put finance actors at risk from growing liabilities as governments implement legislation to control deforestation”.

Deforestation poses real material risks to business and investment

Thomas Maddox

Neither the CSRD nor the EU taxonomy – a classification system adopted last year which establishes a list of environmentally sustainable economic activities – includes obligations on investors or banks to “stop and prevent investments going towards harmful activities” or provides mechanisms to hold them accountable, says the European Coalition for Corporate Justice.

Keeping an eye on risk

The big banks are increasingly ready to accept change and want to know the “risks and opportunities of their portfolios”, says Mr Maddox. CDP has seen a “growing number of financial institutions introducing policies that cover their investment in or lending to companies involved in forest-risk commodity supply chains”. Deforestation poses “real material risks to business and investment” that are being “underestimated and overlooked”, he insists.

Two hundred and eleven companies reported potential financial impacts of up to $79.3bn from deforestation risks through CDP in 2021; addressing the risks was estimated at $6.7bn, one-eighth of the value at risk. Mr Maddox believes the risk figures are likely to be underestimated, with “only a minority of companies able to estimate financial values, and hundreds of high-impact companies have not disclosed”.

Negotiations between the three institutions are scheduled to start towards the end of September, with a final agreement due by the end of 2022.

Was this article helpful?

Thank you for your feedback!