Check out this Financial Times op-ed from Ben Goldsmith on the laws needed to stop banks from financing companies putting people and forests at risk.
Banks and investors in Southeast Asia have poured billions of dollars over the past five years into hot forest-risk commodity sectors – palm oil, pulp and paper, rubber – helping to ignite a firestorm – literally – of tropical deforestation, land conflicts and human rights abuses.
Last year the haze from Indonesia’s forest fires, set as a cheap way to clear land for further plantation expansion, sparked a regional public health emergency as choking smoke spread across Indonesia, Singapore, Malaysia and Thailand, closing schools, airports and businesses and leaving millions gasping for clean air. Scientists estimate fires in Indonesia emitted 1.5bn metric tonnes of CO2 into the atmosphere, more than Japan’s total annual fossil fuel emissions, while the World Bank said they caused more than $16bn in direct economic losses to the Indonesian economy. No wonder that Indonesia’s forest fires earned the title of the world’s worst environmental disaster of 2015.
With the September fire season again upon us, the Indonesian government is struggling to mobilise a more effective response to prevent and control the recurring fires and prosecute those responsible. But accountability for the fires does not stop at Indonesia’s borders.
If we value a habitable planet capable of supporting healthy societies well into the future, strategies to limit and halt deforestation are essential. Currently, though, there is no law anywhere in the world that could sanction a bank for providing finance to a company illegally clearing forests, using forced labour or stealing land from indigenous communities.
Variations of this ambition are written into the new Sustainable Development Goals, the Paris Agreement on Climate Change, the Asean Agreement on Transboundary Haze Pollution, and a raft of bold national-level plans such as deforestation moratoriums in key forest regions like Indonesia.
These initiatives collectively aim to protect biodiversity and the habitats of endangered species, slow climate change, respect indigenous societies and prevent public health crises. Then why are these roundly positive policy objectives effectively ignored by the international banking sector? Even major financial initiatives, such as the $1bn Indonesian-Norway deal to help protect Indonesia’s rainforests, are but a drop in the ocean of investment flowing into deforestation.
A new website published this week by the US-based NGO Rainforest Action Network (RAN) – forestsandfinance.org – reveals the scale of money going into companies whose business models rely on degrading or destroying forests. RAN has calculated that since 2010, more than $38bn has been provided by banks in loans and credit facilities to the forest operations of just 50 companies producing forest-risk commodities. Viewed this way, what chance do pro-forest public policy initiatives have against this globalised economic arrangement?
Responses to this challenge from the banks most exposed to these sectors, including major banks from across Europe, Asia and the US, have been too little, too late. Even those banks with so-called leading forest-sector lending policies in place do not consider client compliance as the responsibility of the bank itself. Instead, they typically defer to inconsistent and inadequate voluntary certification standards as proxy assessments of compliance with the banks’ own published standards. This practice evades accountability and builds loopholes into the system. It has resulted in leading banks knowingly retaining clients operating in violation of forest laws and abusing indigenous peoples’ rights.
While few banks would acknowledge knowingly taking on clients engaged in such practices, the reality is that many of the businesses engaged in them also offer lucrative and wide-ranging business opportunities for banks. The opportunities include advisory services, investment banking, rights issuance and private wealth management for some of Southeast Asia’s richest families. Little wonder the credit lines stay open.
Those in the sustainability departments of leading banks justify continued support to forest-risk companies. Their arguments typically fall into three distinct categories. First, if they tighten standards or enforce their policies then they might be sued for breaking loan contracts. Second, they are just a bank, so can’t be expected to monitor what activities their clients are engaged in. Third, engagement with high-risk clients is better than excluding them on the basis that the bank encourages improvements in company standards. Furthermore, if they exit a financial relationship, the client will simply seek finance from a bank with lower standards.
While there may be some logic to these arguments, they don’t stand up to scrutiny. At best, they suggest a passive acceptance of deforestation and human rights abuses. At worst, they are a deliberate evasion of accountability for fear of losing business to competitors. As long as banks choose to provide financial services to irresponsible businesses, they must be prepared for the ensuing reputational damage when exposed. More scrutiny on the role of the financial sector in driving deforestation is a good thing.
The stakes are too high and the logic too flawed to leave banks to self-regulate against financing deforestation. Instead, it is time to set binding financial sector regulations, agreed internationally where possible, with the explicit aim of defunding deforestation. Much work has already been done, with precedents already in place, for how to harmonise international banking standards to meet complex global challenges.
For instance, the OECD, under its Guidelines for Multinational Enterprises, has a working group on financial institutions. It already expects financial institutions to adopt systematic measures to identify environmental and social risks and prevent adverse impacts, and to conduct monitoring of business relationships and related operations. It could go much further. Wider still in scope is the Financial Action Task Force, an intergovernmental body with 37 members, including China, which requires members’ national banking regulations to be aligned in the fight against money laundering and terrorist financing.
It must no longer be acceptable to bankroll deforestation and the associated abuses inflicted upon the communities and activists resisting it. As long as banks keep the cogs of deforestation oiled, it would take at least 38 Indonesia-Norway deals simply to stand still, and that’s just for the rainforests of Indonesia.
Ben Goldsmith is head of Menhaden Capital Plc, an investment trust specialising in opportunities in efficient energy and resource use.