As Charles-Maurice de Talleyrand, a French diplomat from the XVIII and XIX centuries who was notably the French negotiator during the Congress of Vienna in 1815 used to say, “Beware of your first impressions, they are often the right ones (1)”. This maxim finds a particular echo regarding the deforestation regulation.

Before going any further, let us come back to the regulation itself. It was initiated when the European Commission adopted a proposal on 17 November 2021. It aims to curb deforestation and forest degradation that is provoked by EU consumption and production. It also lays down rules regarding the placing and making available on the European Union market, as well as the export from the Union market, of cattle, cocoa, coffee, oil palm, soya and wood (‘relevant commodities’) and products.

Nonetheless, at a very late stage of the negotiations, several members of the European Parliament (MEPs) tabled amendments that included financial institutions in the scope of the regulation considering that their services could contribute to the activities linked directly or indirectly to deforestation and forest degradation. According to the MEPs’ proposal, the regulation should have established obligations for financial institutions operating in the Union that provide financial services to entities or corporate groups doing business in the commodities and products covered by the regulation. In particular, financial institutions would have been prohibited from providing financial services to customers if there was a risk (more than negligible) that the services in question may provide support directly or indirectly to activities leading to deforestation and forest degradation.

After several months of advocacy and negotiations in the “trilogues (2) ”, EU negotiators finally agreed not to include financial institutions in the scope of the regulations in December 2022. Even if the text has not yet been formally adopted since amendments can be tabled in the European Parliament until 21 April, it will be surprising to have a different outcome when it comes to the exclusion of financial institutions (3) . So, “fin de l’histoire?” Well, it seems that one must “beware of his first impressions”. Why so? Several points come to one’s mind.

On the one hand, regarding the procedure, it is quite worrying that this dossier could set up a precedent. Indeed, tabling a last-minute amendment to include financial institutions in the scope of the regulation whereas such a possibility was neither assessed by any proper impact assessment nor suggested by any other key stakeholder, does not seem to be the best way to proceed. In terms of legal certainty as well as implementation feasibility, this method could be quite dangerous and troublesome if it was to become the norm.

On the other hand, regarding the substance of the text, one must be careful as well. As the compromise draft stands, even though financial institutions are not included in the scope, this might not be the case in the medium-term. Indeed, the text mentions that a review clause must be conducted by the Commission two years after the adoption of the text at the latest: “The assessment… shall also evaluate the role of financial institutions in preventing financial flows contributing directly or indirectly to deforestation and forest degradation and assess the need to provide for any specific obligations for financial institutions in EU legislation in that regard, taking into account any relevant existing horizontal and sectoral legislation.” In other words, financial institutions should, from now on, be prepared to comply with the regulation’s requirements and to reflect on some key messages to push forward. If they do not, they will run the risk of being ineffective when addressing again the EU policymakers in two years. Advocating for the non-inclusion in the scope will be repetitive. Instead, they must be proactive and come up with concrete and implementable solutions to efficiently tackle the financing of deforestation. Especially so since addressing this issue is a fair request.

Overall, this dossier also reveals the current trend among EU policymakers to implement new requirements for financial institutions. Whether banks should contribute to sustainability is beyond question. Nevertheless, they already have to comply with several EU legislations’ requirements in this regard, such as the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and probably as well the currently discussed Corporate Sustainability Due Diligence Directive (CSDDD), to name a few. All these regulations imply different requirements and are not necessarily always coordinated between one another. Hence, the number of rules financial institutions must comply with regarding sustainability is increasing continuously and may lead eventually to difficulties. In other words, financial institutions will struggle (and already are struggling to some extent) to understand what is exactly expected from them. As stated by “le diable boiteux” Talleyrand, “Anything excessive is insignificant (4)”.

When all arguments have been heard, financial institutions shall contribute to sustainability in every way that they can. Now, they must begin to think on how they could effectively fight the financing of deforestation. If they do not, they might end up being obliged to comply with complex and burdensome requirements. In the meantime, EU policymakers should make sure that rules are clear and that a consistent framework is being implemented. “If it goes without saying, it goes better when it is said (5)”.

Adrien Boudet is WSBI-ESBG advisor with expertise on sustainable finance