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A call for action to ensure strong regulation of the financial sector to avoid environmental, social and governance risks

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A call for action to ensure strong regulation of the financial sector to avoid environmental, social and governance risks

14th June 2017

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Across Africa, Latin America and Asia families are being forced off their land and rainforests razed to the ground – for projects backed by European money.

Companies looking for land to grow crops for industries, such as oil, gas or mining or for housing or infrastructure, rely on finance and loans from the financial institutions we in the European Union (EU) invest in. However, with few rules in place to regulate those institutions, there is little to stop them funding projects that are socially or environmentally damaging.

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Global Witness, Friends of the Earth Europe (FoEE) and others are campaigning for Europe’s financial regulations to be strengthened with robust Environmental, Social and Governance (ESG) safeguards, to stop investors from propping up companies that are grabbing land, abusing human rights and causing damage to the environment.

It is commonly believed that increased regulations will reduce European competitiveness and make financial sector institutions less profitable. This belief holds that companies can keep themselves in check when it comes to their social and environmental footprint. But the reality on the ground tells a very di erent story. EU-based investors are in fact putting themselves at significant financial and reputational risk by operating in regions where there are few guarantees, if any, that land has not been grabbed to make way for development.

The Capital Market Union (CMU) relaunch in September 2016 offers an ideal opportunity to ensure that the EU commits to fully integrating ESG factors into its financial regulation framework. Hailed as the final part of Europe’s response to the financial crisis, the CMU is the EU’s plan to develop different sources of finance to complement the banking system, to give savers more investment choices and offer businesses a greater choice of funding at lower costs.

It is our concern that without a strong regulatory framework this system risks making land-grabbing and environmental crime outside the EU even worse than it is currently by opening land and resources up to increased investment.

Other pieces of EU legislation currently regulating the financial sector at best contain only limited provisions relating to environmental and social concerns. This is the case for the Shareholders’ Rights Directive, Institutions for Occupational Retirement Provision Directive, Non-Financial Reporting Directive, Prospectus Directive, Prospectus Regulation and the Packaged Retail and Insurance-based Investment Products Regulation. These are all reviewed in this briefing.

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