Blog | Feb. 24, 2021

The EU needs to hold the financial sector to account if it is to end its complicity in global deforestation

With the European Commission due to introduce a legislative proposal to tackle EU-driven deforestation, the EU has a key opportunity to show global leadership by addressing forest destruction and the associated biodiversity loss, climate impacts and human rights harms. But for this law to be effective, it is crucial that it takes on the role of the EU’s finance sector, which is bankrolling deforestation.

2020 saw growing momentum behind calls to urgently protect the world’s forests. In October 2020 the European Parliament sent a bold message on the need for stronger rules to address EU’s deforestation footprint; legislation is moving forward in the UK and recently the Amsterdam Declarations Partnership Group, a group of countries dedicated to end deforestation, renewed its commitment to combat deforestation in its 2025 statement. When asked, almost 1.2 million people told the European Commission they want strong rules to end EU’s complicity in deforestation, including for finance.

According to Global Forest Watch, the tropics lost 11.9 million hectares of tree cover in 2019. Nearly a third of that loss, 3.8 million hectares, occurred in tropical primary forests, which are hotspots for biodiversity, home to indigenous communities and vital in halting climate breakdown. In a more recent analysis, the think tank reveals that just seven agriculture commodities – exported to global markets including Europe – led to the destruction of 71.9 million hectares of forest between 2001 and 2015. That is an area of forest more than twice the size of Germany torn down to produce soy, beef, palm oil and other goods.

The role of EU banks in global deforestation

The EU finance sector provides a lifeline for companies involved in global deforestation. As revealed in our landmark investigation Money to Burn, renowned EU-based banks, such as Santander and Deutsche Bank, funnelled a staggering €7 billion between 2013 and 2019 to six of the most harmful agribusinesses groups involved in deforestation in the world’s three largest tropical rainforests in the Amazon, Congo Basin and Papua New Guinea, despite some of those banks being members of the Banking Environment Initiative which set out to help the banking sector achieve zero net deforestation in its financing by 2020.

This shows that voluntary banking commitments and initiatives to address the financial sector’s role in deforestation, such as the Soft Commodities Compact, have proved toothless. In reality, banks and financiers have continued investing in agribusinesses implicated in the destruction of climate-critical forests and related human rights abuses.

That is why, together with global partners and allies, we are advocating for the introduction of mandatory due diligence legislation that would not only cover all products sold in the EU but also EU-based financial institutions that finance the production of forest-risk commodities, to ensure neither EU consumption nor finance is fuelling deforestation or human rights abuses.

False solutions to real problems

One of the counter-arguments often put forward to dismiss the need for due diligence laws to cover the finance sector is that there are other mechanisms that do a better job of addressing its links to deforestation, such as climate reporting requirements. However, relying on these reporting mechanisms alone will not stop financial institutions funding forest destruction and human rights abuses.  

Since its introduction in 2014, the Non-Financial Reporting Directive has required companies and financial institutions to disclose high-level information on environmental, social, human rights and anti-corruption matters in their annual reports. However, as studies revealed, companies and financial institutions continue struggling to respect their reporting obligations. While this year’s review of the Directive may address some of its shortcomings, it will still fail to tackle agribusiness’s links to deforestation.

Our research tells us that banks who already report on their aggregate financing to the agribusiness sector continue to be exposed to companies linked to deforestation. Additionally, they may also be helping put money in the pockets of companies further up the supply chain involved in deforestation – for example, through helping to sell company bonds or investment products that buy company shares.  

Banks and investors will not feel compelled to shift their money unless they run the risk of financial loss or regulatory action. That is why reporting mechanisms alone will not solve the problem, but need to be accompanied by measures to ensure accountability for banks on the impact of their financing decisions.

With a comprehensive due diligence framework in place, financial actors would be required to identify, assess and mitigate risks more carefully. Ensuring that banks and investors are following the same rules as their clients also provides clarity and consistency by helping ensure that they have to place the same importance on addressing deforestation. Even some agribusiness companies are suggesting that due diligence on loans and investments should be considered in a proposed EU law.

A key opportunity for the EU to show environmental leadership

The outbreak of the COVID-19 pandemic brought a profound realisation that a healthy society is directly dependent on a healthy planet. World leaders including the European Commission’s President Ursula Von der Leyen have acknowledged the urgent need to increase biodiversity protection and strengthen corporate accountability.

A key part of this is tackling deforestation, which is continuing at alarming rates and helping fuel the displacement, threats and murders faced by indigenous peoples and local communities who are fighting to protect their land and forests.

If the EU is serious about stopping climate breakdown, protecting human rights and promoting corporate accountability, it is crucial that it heeds the growing calls from the public and politicians to take urgent action. The EU’s credibility as a global leader depends on it, as does the future of our planet.

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