The House of Lords will soon vote on an amendment to the Financial Services and Markets Bill that could stop UK financial institutions knowingly bankrolling companies carrying out deforestation abroad. 

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Yesterday, peers from all major parties came out in favour of Amendment 199 to the Financial Services and Markets Bill, which would make sure financial institutions carry out due diligence when investing in or lending to businesses producing “forest risk” commodities such as beef, palm oil and soy.

It extends the obligations introduced for supply chain companies under the Schedule 17 of the Environment Act in November 2021.

The amendment was passionately backed by Labour frontbencher Lord Tunniclife, Liberal Democrat spokesperson Lady Sheehan, Green peer Lady Bennett and crossbenchers Lady Boycott, Lady Hayman and Lady Meacher.

Schedule 17 makes it illegal for large UK businesses to use certain forest risk commodities (or derived products) in their commercial activities unless they can demonstrate they complied with relevant local land use and ownership laws in the country where they were produced.

The government’s own expert body, known as the Global Resource Initiative (GRI) Taskforce, has said this law should apply to financiers. Sir Ian Cheshire, the former Chair of Barclays and head of the GRI Taskforce, recently wrote an open letter reiterating the Taskforce’s support for mandatory due diligence.

The GRI Taskforce concluded its work in May 2022 by reiterating the need for new legislation to provide due diligence obligations for financial institutions equivalent to those that will be placed on supply chains companies under the Environment Act 2021. - Sir Ian Cheshire, in a letter to the government.

Several peers including Lady Sheehan questioned why the government were not following their own expert advice: 

Regulating the financial sector is important because investment offers a lifeline to companies involved in deforestation – regardless of whether they are importing to the UK or not.

Over 90% of tropical deforestation is driven directly or indirectly by agriculture, but there are currently no laws requiring UK lenders to check if their cash is leading to deforestation or human rights abuses on the ground.

It is not sufficient that UK firms stop importing deforestation risk commodities, as the Environment Act requires; UK financial firms must stop funding them too. - Crossbencher Lady Hayman, during the debate.

British banks and asset managers are major lenders in the global agricultural market. They poured $16.6 billion between 2016- 2020 into just 20 businesses implicated in deforestation, while over £300 billion in UK pension funds is at a high risk of contributing to deforestation.

An estimated 69% of forest clearance for agricultural purposes was illegal between 2013 and 2019, exposing investors to money laundering, corruption and criminal environmental damage.

Our existing regulations are practically an open invitation to banks to launder the proceeds and profits of forest crime. - Lady Boycott, a crossbencher backing the amendment.

Deforestation and related biodiversity loss is also a threat to the UK economy. Globally, agribusinesses are expected to lose an average of 7% in value by 2030 due to unpriced nature and climate risk. The UN has called deforestation the “new coal” in investors’ portfolios. 

Human rights are non-negotiable

The amendment – which was tabled by Lord Randall, Lord Tunnicliffe, Lady Sheehan and Lady Boycott – ensures that financial institutions must also check whether indigenous peoples have given their free, prior and informed consent (FPIC) to the underlying project or production being financed.

This is an important procedural right that helps to safeguard the land rights and resources of local communities.

At least 200 land and environmental defenders were killed in 2021 according to Global Witness’s tracker – nearly four people a week. Over 40% of all fatal attacks targeted Indigenous people, despite them only making up 5% of the world’s population.

We cannot deforest our way to sustainable growth nor a robust financial system. - Lord Tunnicliffe, backing the amendment on behalf of the Labour Party.

Sir Ian Cheshire stated in his letter that human rights should be considered in the due diligence conducted by financial institutions.

It remains unclear to what extent Schedule 17 of the Environment Act covers human rights compliance, as much of what will be required from businesses is yet to be decided through secondary legislation. MPs have questioned why Defra has not yet completed the secondary regulations, over a year after the Environment Act was agreed.

Global Witness recently gave expert evidence in Parliament, where we recommended the secondary regulations make clear that “compliance with local land use and ownership laws” – as stipulated in Schedule 17 – means that businesses must comply with a broad category of human rights protections, including labour and environmental laws, as well as respect for customary land rights.

The government’s counterarguments are wrong

The government claims more corporate reporting about business harms to nature will stop UK financial institutions making deforestation deals in the future.

The UK is the largest financial backer of the Taskforce on Nature-related Financial Disclosure (TNFD), a body developing a framework for financial institutions to report their dependencies on nature. However, the GRI Taskforce has already said it will not stop deforestation finance and called for regulation instead.

In our briefing, Global Witness and others argued TNFD will not work to stop deforestation finance because:

  1. TNFD is not preventative, unlike due diligence.
  2. Reporting on deforestation finance is not the same as reducing it.
  3. TNFD mainly helps companies identify threats to their profitability, not harm to nature.
  4. Financial institutions keep the profits of deforestation under TNFD.
  5. The theory of change is wrong: a lack of data or awareness is not the problem.

We must wake up to the fact that just identifying it is not the same as reducing it. Indeed, a lack of data is not at all the problem. - Lady Boycott

Speaking on behalf of the government, Minister Penn also recycled the argument that due diligence is too hard for the banks - but financial institutions already have the necessary data and due diligence tools needed to identify and reduce their exposure to deforestation and human rights abuses.

We explain more about why the government is wrong to rely on TNFD here.

Lords will soon vote on the amendment   

A “yes” vote from the House of Lords would send the amendment back to the House of Commons, where the law has significant cross-Party backing from Labour, the Liberal Democrats, Greens, DUP and Plaid Cymru.

I am sure the Government will realise the error of their ways and accept this [amendment], because it is incredibly important. - Lord Randall, Conservative peer

Chris Grayling MP – who proposed an earlier version of this law – is leading the charge from the Conservative backbenches in the House of Commons.

Commodity-driven deforestation must end by 2025 to limit warming to 1.5°C. Neither the UK nor a single financial institution can reach net zero without an end to deforestation.

The House of Lords must take this rare opportunity to change financial regulation for the better, securing the future of the world’s forests – and the people and wildlife who depend on them.