Advocating on the EU deforestation regulation

Sustainable Finance

February 3, 2023

What lessons can be learnt from a French diplomat from the XIX century?

By Adrien Boudet

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

Meet the Advocacy Team

  1. « Défiez-vous de vos premières impressions, ce sont souvent les bonnes. »
  2. Informal negotiations between the Commission, the Council and the European Parliament.
  3. In order to be formally adopted, the text must be voted by the European Parliament in plenary session and formally approved by the Council.
  4. « Tout ce qui est excessif est insignifiant. »
  5. « Si cela va sans dire, cela va mieux en le disant. »

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ESBG responds to the ESAs call for evidence on greenwashing

The European Supervisory Authorities (ESMA, EBA, EIOPA) received a request for input from the Commission relating to greenwashing risks and supervision of sustainable finance policies. Therefore, they asked for input on potential greenwashing practices in the EU financial sector. On 10 January 2023, ESBG provided the ESAs with its contribution.

ESBG welcomes this call for evidence since greenwashing is an issue which must be tackled at the EU-level and would like to recall that banks and savings banks are intensively dedicated to the traceability, transparency and credibility of the sustainability features they have to consider in investment advice and financial portfolio management. The EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) and the Markets in Financial Instruments Directive (MiFID II) already aims at tackling greenwashing. Nonetheless, ESBG regrets that these different regulations are currently based on a different understanding of greenwashing. The existence of a large amount of complex ESG information and data that needs to be provided to investors and clients can also create a perverse effect through an information overload which can facilitate greenwashing.

Therefore, in the interest of customers, banks, saving banks and issuers of financial products, ESBG assesses that there is an urgent need for a harmonization of the understanding of greenwashing within the framework of European legislations and supervisory practices. ESBG believes that it could be achieved through the following steps:

  • First, there is a need to strengthen transparency through a consistent enforcement of existing EU regulations’ requirements.
  • Then, a clear and scientifically comprehensible, as well as uniform legal definitions of both sustainability and greenwashing for financial instruments must be implemented, keeping in mind the need for practicality and feasibility for banks and saving banks when implementing these requirements.

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Joint letter to Commissioner McGuinness on the EFRAG consultation regarding its first set of draft ESRSs

Sustainable Finance

October 5, 2022

On 27 September, the ESBG, together with the European Banking Federation (EBF), the European Association of Co-operative Banks (EACB), Insurance Europe, Accountancy Europe, Business Europe and European Issuers, has submitted a joint industry letter to Commissioner Mairead McGuinness regarding the European Financial Reporting Advisory Group (EFRAG) public consultation on its first set of draft European Sustainability Reporting Standards (ESRS).

In the letter, ESBG strongly emphasized the necessity to phase-in the submission of the disclosure requirements from EFRAG to the Commission. In this respect, it is considered that EFRAG should deliver a limited set of crucial ESRS by November 2022. After this, EFRAG and the Commission should agree on a detailed plan to deliver the rest of the first set of standards and all the other deliverables required by the Corporate Sustainability Reporting Directive (CSRD). All these will constitute the minimum requirements to be delivered within the pre-set deadlines by the Commission.

Download the Joint Letter

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ESBG response to the EFRAG consultation on its first set of draft ESRSs calls to ensure levelled global playing field

ESBG submitted its response to the European Financial Reporting Advisory Group (EFRAG) public consultation on the first set of Draft EU Sustainability Reporting Standards (ESRSs) on 4 August. The consultation comes in response the European Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD) which envisages the adoption of EU Sustainability Reporting Standards (ESRSs). As part of this, the Commission mandated EFRAG to provide technical advice in the form of draft sustainability reporting standards.

In its response, ESBG highlighted the need for consistency between the International Sustainability Standards (ISSB) sustainability disclosures and the EFRAG ESRSs in order to ensure a levelled global playing field. Moreover, ESBG emphasises the lack of proportionality with respect to disclosure requirements, specifically for smaller/unlisted companies and proposes the provision of certain reporting requirements being made optional.

With respect to implementation challenges, ESBG considers that the data availability issue is the most critical challenge for financial institutions. Taking into consideration the above, ESBG proposed two phase-in solutions that are mutually complementary: i) first year reporting on own operations and gradual reporting on information from the value chain and ii) prioritisation of climate topics and gradual consideration of other environmental, social and governance topics.

Furthermore, we believe that there is not enough guidance in the exposure drafts with respect to the application of the double materiality principle (the requirements for companies to disclose not only the risks that affect, but also their impacts on society and on the environment). In this sense, this concept needs to be clarified and more guidance is needed in relation to specific sectors in due time.

ESBG stresses the limitation on disclosing value chain information for companies. We consider it is difficult to obtain information from companies that are not under the control of the institution (e.g. associate companies). We propose that a phase-in period of 2 years must be granted to financial undertakings to allow them to adapt their processes to collect the necessary information from their value chain.

As a next step, ESBG will evaluate if there is interest from members in submitting input into the up-coming EFRAG consultations on SME specific standards as well as on sector specific standards (EFRAG consultations are expected to be published in 2023).

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EU Taxonomy minimum safeguards: Criteria for the application of external checks should be further defined

ESBG submitted its final response to the Platform for Sustainable Finance (PSF) consultation on its draft report on minimum safeguards (MS) on 6 September. In its response, ESBG highlights that assessing whether a company complies with the due diligence processes should, other than relying on external checks as only possibility, be demonstrated by: i) proving that the applicable national legislation provides for sufficient guarantees concerning the specific topic; ii) self-declarations made by the client concerning the specific topic.

ESBG submitted its final response to the Platform for Sustainable Finance (PSF) consultation on its draft report on minimum safeguards (MS) on 6 September.

The report is intended to provide advice on the application of the minimum safeguards which bring a social and governance component to the EU Taxonomy. The report looks at human rights including workers’ rights and consumers´ rights, bribery/corruption, taxation and fair competition as core substantive topics for which compliance with minimum safeguards has to be defined. The draft report proposes a two-pronged approach for identifying non-compliance with MS, namely one related to adequate due diligence processes implemented in companies (internal checks) and the other related to the actual outcome of these processes or the company’s performance (external checks).

In its response, ESBG highlights that assessing whether a company complies with the due diligence processes should, other than relying on external checks as only possibility, be demonstrated by: i) proving that the applicable national legislation provides for sufficient guarantees concerning the specific topic; ii) self-declarations made by the client concerning the specific topic.

Moreover, ESBG emphasises that gravity thresholds for non-compliance should be defined, so that not every minor violation (e.g. of taxation or work laws) leads to the establishment of an external check.

Furthermore, when assessing compliance with MS, the report recommends that the focus should be on assessing the human rights due diligence processes of a company, rather than on controversy checks e.g. media coverage (currently employed by ESG ratings agencies), as it is considered that the latter is based on value judgement and is sometimes difficult to justify. ESBG believes that the administrative cost derived from direct analysis of due diligence processes would be too burdensome for institutions and emphasizes that they should rely on ESG ratings agencies in order to not impair financial activity.

Finally, ESBG calls for further clarifications on the level of application of MS in particular cases, e.g. an exposure to a company active in sectors that by definition do not fulfil the minimum safeguards to be taxonomy-eligible or -aligned, even if the specific transaction finances activities that fulfil all requirements.

As a next step, the Platform will analyse the feedback received and prepare the final report. ESBG will continue to monitor this very important topic, with the possibility to get involved at a later stage.

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International Sustainability Standards Board consultation on Sustainability Disclosures

The International Sustainability Standards Board (ISSB) has been established at COP26 with the purpose of developing a comprehensive global baseline of sustainability disclosures for the capital markets. The purpose of the consultation is to develop a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value.

To this end, the consultation includes proposed standards on general sustainability-related disclosure requirements as well as on climate-related disclosure requirements |Position – Executive summary | August 2022 |

CONSISTENCY BETWEEN ISSB STANDARDS AND EFRAG ESRSs
WSBI-ESBG believe that it is crucial to achieve consistency of sustainability reporting at global level and especially a full alignment of reporting requirements between ISSB standards and EFRAG European Sustainability Reporting Standards (ESRSs) to ensure a global playing field in terms of sustainability reporting. This convergence between both standards will address the risk of additional disclosures.

DOUBLE MATERIALITY
WSBI-ESBG highlight that the IFRS sustainability standards are based on an ‘enterprise value creation’ or financial materiality approach, in which sustainability impacts are measured in terms of impacts on the financial position and prospects of the company itself. On the other hand, the EFRAG ESRSs are being developed based on the ‘double materiality’ principle, where disclosure is required both from the point of view of financial impact on the company and on the impact of the company on society and the environment.

TRANSITION PLANS
WSBI-ESBG notes that the EFRAG ESRSs make a clearer reference to alignment with limiting global warming to 1.5°C in line with the Paris Agreement. On the other hand, IFRS sustainability standards allow the entity to choose its own target. By way of consequence, WSBI – ESBG requests that the ISSB takes into consideration including a clear reference to the 1.5°C target of the Paris Agreement in order to ensure comparability between the two standards.

BOUNDARIES AND VALUE CHAIN
Although, WSBI – ESBG considers it essential that sustainability reporting should capture the entire value chain, we ask for clearer and more defined boundaries as it is considered difficult and complicated to obtain information from companies that are not under the control of a financial institution, especially regarding scope 3 GHG emissions.

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World savings and retail banks call for harmonised taxonomies on sustainable finance

WSBI Chairman, Isidro Fainé, says banks face the future with hope and optimism, despite the short-term turbulent context.

 

Read the full WSBI Paris Declaration

Paris, 8 July 2022 – The World Savings and Retail Banking Institute (WSBI), a global network representing over 7,000 savings and retail banks, called today on policymakers for the harmonisation of taxonomies on sustainable finance. This as a necessary step for banks to play an effective cross-regional role providing the investment needed to achieve the ambitions of the 2015 Paris Agreement.

At the end of the WSBI World Congress, the association’s members approved the Paris Declaration which detailed the call to policy makers to develop a set of principles for designing taxonomies that are centred on pragmatic and science-based targets.

“As WSBI members are present in remote areas, close to the people, and focus on SMEs and private households, they are aware of the necessity of having ambitious, yet pragmatic, progressive and proportional, targets”, states the document.

The Declaration called for taxonomy design principles that encourage interoperability and mutual recognition to promote cross-border sustainable finance and to reduce compliance costs. It points out the need for a common language to ease comparability while preventing duplication of efforts and points to the EU-China Common Ground Taxonomy (CGT) as a promising first step in the right direction.

The WSBI Chairman, Isidro Fainé, closed the World Congress with a message of optimism despite the short-term turbulent context the world is living.

“The WSBI community of banks is facing the future with hope and optimism. An optimism that translates into specific actions for social progress. This is evidenced by our impeccable track record in the way we do banking, where financial inclusion is our flag and with our philanthropic actions, where our priority is to help those most in need through a wide range of social and educational programmes”, said Isidro Fainé.

The Chairman also emphasised that “the determination of our community to contribute to a better world, as our DNA dictates. Our WSBI members on five continents believe that a better world is possible”.

Founded in 1924, the WSBI members share a business model that has social responsibility at its core and is focused on serving local communities, households and SMEs. WSBI has 65 members in 88 countries. They serve over 1.7 billion customers, have total assets of over 15 trillion dollars, and employ 2.2 million workers.

The 26th World Congress was held in Paris on 7-8 July.

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World savings and retail banks moving forward on sustainability

World Savings and Retail Banking Institute (WSBI)'s members get together for the first time since 2018 at the 26th World Congress, in Paris.

Paris, 7 July 2022 – The World Savings and Retail Banking Institute (WSBI), representing over 7,000 organisations globally and serving some 1.7 billion customers, held today its 26th Congress ‘Regionally rooted, globally responsible’ with focus on how to move forward with financial sustainability in the current challenging times.

“Feeling and acting socially responsible is inextricably linked to our identity. The fact is we were born that way, it forms part of our DNA, and it is our vocation. All of this translates into our way of doing banking that is fundamentally different from other players in the sector, and furthermore, it is profitable, efficient and fair”, said WSBI President, Isidro Faine, as he addressed over 200 participants from 4 continents who gathered today in Paris for the first time since 2018.

Sustainability was the key topic at the centre of the discussions and panels, as savings and retails banks seek the most effective ways to move forward on the topic and contribute to address the pressing environmental needs.

The internationally renowned mountaineer and activist, Reinhold Messner, presented his vision for a sustainable future.

Sustainable financial regulation, the role of the physical branch in the digital era, and the most recent geopolitical shifts were some of the topics covered today.

“This kind of crisis moments are the time that we have to realise our power and to fulfil our duty to the fullest by contemplating on what we can deliver in the face of these challenges,” said WSBI Managing Director, Peter Simon, at the end of the first day of this event.

The 26th World Congress is held in Paris on 7-8 July.

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ESBG calls for more feasible rules on the new corporate sustainability due diligence

In its response to the European Commission (EC)’s call for feedback on the proposal for a Directive on Corporate Sustainability Due Diligence, the ESBG suggests several changes to make the rules more feasible.

ESBG members support the goal to tackle environmental issues and human rights abuses as they commit to sustainable, responsible and future-oriented banking and support the creation of a coherent legal framework. Nevertheless, ESBG finds that the proposal foresees a role for financial entities that is too ambitious and could create legal uncertainty.

To avoid unfeasible implementation and monitoring costs, accompanied by uncertain legal consequences, we request further clarification on the role of financial entities in the context of the proposed Directive.Rules must be proportionate, feasible and should not restrict competition and innovation. The current environment might not be adequate for requirements that could hamper economic and financial recovery.

The ESBG feedback calls to limit the scope to companies with less than 1000 employees, and for a voluntary common due diligence framework of best practices for regulated financial undertakings that takes into account a specific connection to the provision of services by banks. It also calls for the introduction of a grandfathering provision for the identification of actual and potential adverse impacts and the creation of a uniform standard for the preparation of a Code of Conduct.

ESBG members underline that there is no need to establish new corporate directors’ duties and that existing liability regimes already provide appropriate rules. In consideration of the right to the presumption of innocence, businesses should not be held for damage in their supply chain if they did not directly cause it.

Additionally, several terms need to be further clarified and disproportionate provisions should be eliminated.

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ESBG response to ESMA’s consultation on guidelines of MiFID II suitability requirements

On 27 April 2022, ESBG submitted its response to the European Securities and Markets Authority’s (ESMA) consultation on guidelines on certain aspects of the MiFID II suitability requirements. Published in January 2022, the paper builds on the text of the 2018 ESMA guidelines, which are now being reviewed following the adoption by the European Commission of the changes to the MiFID II Delegated Regulation to integrate sustainability factors, risk and preferences into certain organisational requirements and operating conditions for investment firms.​

In our response, we stressed that ESMA should give investment firms more flexibility in implementing the new rules. In particular, we consider that the process for collecting client information is too detailed and impractical for both the client and the investment firm, hence we proposed that it should be optional. We also noted that the two-step approach of the suitability assessment is overly restrictive and time-consuming. For these reasons, we urged that the firm be permitted to collect all information from the customer at once.

Moreover, we understand that Level 2 Regulation allows an investment firm to recommend a product that doesn’t meet the client’s sustainability preferences, if the issue is explicitly stated and explained to the client as well as documented in the suitability report. This practice is contrary to the guidelines which require the client to first adapt his or her sustainability preferences before any further discussion. Additionally, we recommended that collecting extensive client’s information should not always be necessary when, for example, an investment firm does not have any financial instruments included in its product range that would meet the client’s sustainability preferences.

Lastly, we proposed an alternative treatment of investment advice with a portfolio approach in terms of collecting client information on sustainability preferences. We believe it would be more beneficial for the client if firms were allowed to collect such information in each advice session rather than for the entire portfolio as in the case of providing portfolio management.​

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