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Ten things you should know to stop banks funding controversial land deals

Wednesday, 27 July 2016 10:04 GMT

* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

EU-based banks play a large part in financing land deals for palm oil and rubber plantations

By Mark Gregory

An insatiable demand for agricultural commodities is driving deforestation and land grabs on a vast scale in the tropics.

From Malaysia to Sierra Leone, Indonesia to Cambodia, Laos to Brazil, millions of hectares of forest have been destroyed and people stripped of their homes and livelihoods to clear land to produce palm oil, cocoa, soy, beef, leather, biofuels and other agricultural products that permeate our lives.

The European Union’s role is significant. Among the body of evidence underlining this, Fern established that in one year‚ the European Union imported 6 billion euros ($6.5 billion) of agricultural commodities which were grown or reared on land illegally cleared of forests – almost a quarter of the total world trade.

Policy-makers and campaigners alike are preoccupied with finding ways to end this destruction. Multi-pronged action is clearly required.

One way of influencing the companies involved in land grabs and deforestation is through their financiers. After all, it’s difficult for companies to expand or stay in business without support from banks and investors.

Yet before we can pressure EU financial institutions to improve the environmental and social records of the companies they fund, we need to know their role and how much money they provide.

To this end, we examined 23 large agriculture businesses to find their sources of credit, the assistance they got in raising capital through issuing new shares and bonds, and who owns their shares. All the companies we researched have been accused of land grabbing or human rights abuses linked to land deals in a part of their business. All operate in sectors where deforestation is a major issue.

These are our 10 key findings:

1)  The funding received by companies accused of land grabs and deforestation is enormous: banks had provided the businesses we examined with $50 billion  dollars in loans and had helped them raise another $20 billion through underwriting new bond and share issues between 2010 and 2015. Additionally, financial institution investors held more than $50 billion worth of shares.

2)  EU banks are at the forefront of providing loans and financial services which have helped companies accused of land grabs and deforestation raise capital. Since most of the companies accused of environmental destruction are based in Asia and have their main operations there, it’s not surprising that Asian banks collectively lent them the most money, providing 44 percent of the loans in value. EU banks weren’t far behind, providing 37 percent of the loans in value.

3)  Of these, French and British banks overwhelmingly led the way with $6.2 billion and $6.1 billion in loans respectively.

4)  In contrast, our research showed that EU-based investment institutions were fairly insignificant shareholders. [1]

5)  There were some revealing examples of shareholdings, with European financial institutions having significant holdings in companies accused of being involved in clearing ecologically vital rainforests and peatlands to make way for palm oil and rubber plantations.

6) This means that the best way to harness EU financial institutions’ power to change the behaviour of the companies they fund, is almost certainly by focusing on EU-based banks – as our research shows them to be the most important EU financial players in terms of the finance they provide to large companies in sectors where land grabbing and deforestation prevail.

7)  At the same time, the limits of EU banks’ influence should be recognised. Banking is a competitive international business. Most of the companies we looked at would probably have other options for borrowing money if EU banks were seen as too demanding in setting environmental and social conditions for loans. Also, in many loans EU banks were just one of a number of banks involved, which may dilute their potential to influence the companies they lend money to.   

8)  Malaysian financial institutions were the most significant Asian force, with shareholdings worth $25.7 billion, accounting for almost half (49 per cent) the value of all the shares held by financial institutions worldwide.

9) Our research was carried out before Britain, Europe’s major financial power, voted to leave the EU. Post-Brexit, the EU is likely to become less important as a place where companies in sectors which drive land grabbing and deforestation go to raise money.  Although, even after excluding British banks, EU banks accounted a quarter of the value of all loans made to the companies we studied.  

10)  Greater transparency is required on numerous fronts. Records on almost every type of transaction, even legal ones, are incomplete and hard to interpret. Publicly accessible data about private equity funds and companies which are not publicly listed is very difficult to obtain. There are still large gaps in our understanding especially of how smaller and privately held companies are financed in high risk sectors for land grabbing and deforestation. 

[1] Figures on shareholdings are based on an analysis of the most recent regulatory filings carried out in October and November 2015.  

Mark Gregory is a finance and trade campaigner at Fern, an environmental and social justice NGO. For more than 20 years he worked at the BBC, where he was a business correspondent.