Have European banks cashed in on deforestation and slavery?

European banks, including Switzerland’s UBS, the UK’s HSBC and Spain’s Santander, have been thrown into the spotlight after two recent reports linked them to significant environmental damage.

The revelations come as these “green” investments, so called because they were made to fund environmentally friendly activities, are increasingly falling under scrutiny: The UK Financial Conduct Authority** is investigating** the sustainability-linked loans market, while a new European Green Bond Regulation is coming into effect next year – a gold standard that aims to eliminate any greenwashing from the bond market.

How Brazilian ‘green bonds’ link European banks to allegations of deforestation and slave labour

At the centre of the allegations is the green bond market in Brazil, which environmental campaigner Greenpeace says UBS and Santander, among other non-European banks, have acted as intermediaries in.

The banks helped investors to purchase green investment assets, according to a report by Greenpeace’s investigative journalism project Unearthed, which generated funds that were ultimately used to finance controversial companies including deforesters, land grabbers and ranchers accused of slave labour in Brazil.

The banks orchestrating these bond transactions define the price of the bonds and sell them to investors in exchange for a fee, which is usually 3% to 5% of the total offer.

The allegations focus on so-called Agribusiness Receivables Certificates (CRA) – an asset backed security which represents investment in agribusiness, financing those on the ground in the hope of a hefty return on investment.

These are referred to as green bonds and they were initially created to support small-scale, sustainable farmers’ practices in Brazil.

But in reality, the market has swollen by around €8 billion and the bonds often finance large companies and their suppliers.

It’s these bonds that have linked European banks to claims of deforestation and even slave-like working conditions.

According to Unearthed, UBS helped Brazilian grain trader Caramaru to raise funds worth of €66.5 million in CRAs in October 2021.

Part of the money ended up in the hands of Caramuru’s soy suppliers, Unearthed said, some of whom have a history of illegal deforestation and land grabbing. Another has even been sued for alleged slave-like labour.

Caramuru denies wrongdoing, claiming that it monitors the environmental compliance of all its suppliers and that the company hasn’t done business with all of the suppliers. As such, “it is possible to state that soy was not acquired from places with issues of illegal deforestation or land grabbing, nor from farms with work similar to slavery,” the company said.

For its part, UBS said it does not “knowingly provide financial or advisory services to clients” associated with damages to high conservation value forests, child labour and forced labour, among other practices.

UBS isn’t the only European bank caught in the crosshairs. Spain’s Santander was involved in raising funds to the tune of €280 million in CRAs for JBS, the largest meat processing enterprise in the world, in August 2023, according to Unearthed.

JBS admitted in 2022 to buying cattle from a farmer that prosecutors dubbed “one of the biggest deforesters in Brazil”, despite saying it has strict, self-imposed rules on who it does business with.

Santander also helped Uisa, one of the largest ethanol and sugar producers in the world, to issue a R$150 million green CRA, for a fee of roughly €710,000.

Uisa has received a dozen environmental fines for illegal deforestation, and was also responsible for leaking toxic material into a river that is vital to the Umatina Indigenous people in the Brazilian state of Mato Grosso.

Like UBS, Santander claims to have a strict rulebook to eliminate environmental and social risks in its business, the latter stating that CRAs are regulated by the Brazilian Securities and Exchange Commission.

“Santander has strong governance processes in place to ensure that required market standards are adhered to,” the bank said in a statement.

How European banks may be further harming threatened species

Aside from the Unearthed report, a new study from the Environmental Investigation Agency (EIA) has linked 62 banks and financial institutions, including some in Europe, to harming threatened animal species.

The report states that the banks have invested in three companies that produce traditional Chinese medicine, using leopard and pangolin parts. Both animals are classified as highly threatened species – a stone’s throw from being considered endangered.

UBS is once again named as having invested in the companies, but so are UK lender HSBC and Germany’s Deutsche Bank. All three are members of The Royal Foundation’s United for Wildlife (UfW) Financial Taskforce, which was launched in 2018 to stop the trafficking of wildlife, according to the report.

While HSBC and Deutsche Bank are not direct investors in the Chinese companies according to the report, they are linked to them via asset management companies. They claim that these investments came about through passive funds – a type of automatic investment, that is channelling money in shares based on a linked index, the BBC reports.

UBS has not responded to a request for comment.

Both the EIA and Unearthed reports are just two of many which claim to shed light on the impact that major banks’ business practices have on the environment.

The worsening dangers of climate change have prompted investors and companies across the globe to increasingly turn towards green financial products, including green bonds, and present themselves as sustainable businesses that care about the environment.

Yet the concept of greenwashing – which refers to when a company makes misleading claims about the positive effect it has on the environment – is looming large too.

The number of instances of greenwashing by banks and financial service companies around the world has risen by 70% in the past 12 months, according to RepRisk, a Swiss environmental, social and corporate governance data provider.

EU to put a stop to greenwashing

The European Union is hoping to stem the flow of greenwashing with its new European Green Bond Regulation, which is due to come online in 2024.

It will introduce legal sanctions for any misleading business practices related to sustainability and the environment.

The newly-approved rules against greenwashing in the bond market include a registration system and supervisory framework.

Under the new regulations, companies issuing green bonds will have to disclose more information about their practices with special regards to show how these investments feed into the companies’ plans to transition to a net zero carbon emissions economy.

The new law also specifies that at least 85% of funds raised would have to be allocated to activities that are sustainable according to EU law.

At the same time, the European Banking Authority will require banks to publish their so-called green asset ratio, a percentage of environmentally sustainable assets, in their books. 

A common classification system – the EU’s taxonomy – will define what makes a ‘green’ asset.

Swiss banks campaign for self-regulation

The EU isn’t alone in wanting to regulate greenwashing: Reuters reports that the Swiss government will consider the matter as part of a plan to introduce overall state regulation on sustainable finance in the country.

Switzerland, a huge centre for asset and wealth management, accounted for sustainable investments totalling around 1.6 trillion Swiss francs (€1.69 trillion) in 2022, according to industry association Swiss Sustainable Finance.

The Swiss Bankers Association, which represents lenders like UBS and Julius Baer as well as Switzerland’s smaller banks, wants to continue with self-regulation rather than be subject to tighter government rules, according to Reuters.

UBS, the country’s biggest bank with $5.5 trillion in invested assets, also supports self-regulation, saying it sets a “minimum standard”.

“There is a wave of regulation coming to Swiss banks…it will really hit (them),” said Daniel Schmid Perez of banking consultancy ZEB.

He estimates the total cost for lenders to adjust their processes would be around 100 million to 200 million francs. Yet many consider the cost worth it to boost sustainability in the effort to avoid climate disaster.