Expert View: EU corporate sustainability due diligence rules should fully apply to the financial sector

This blog was first published by Profundo

The proposed EU Directive on Corporate Sustainability Due Diligence (CSDD) places obligations on companies to identify, prevent and remedy adverse human rights and environmental impacts in value chains. It could set a precedent in implementing strong provisions on responsible and sustainable business conduct. However, the current draft has some crucial loopholes, among which the exemption of financial institutions from the due diligence requirement. Meanwhile, voluntary policies and business conduct in the financial sector fall short in identifying, preventing, and mitigating impacts on human rights and the environment. The example of the Brazilian beef industry illustrates how EU financial institutions are providing financial means to a high-risk industry while relevant policy provisions are inadequate to mitigate these risks.

In April 2020, the European Commission (EC) committed to introducing rules for mandatory corporate environmental and human rights due diligence as part of a Sustainable Corporate Governance initiative. The European Parliament as well as more than 100 companies, investors, and initiatives urged the EC to present an ambitious proposal that includes strong requirements and creates accountability of businesses.

In February 2022, the EC released the highly anticipated proposal for the CSDD Directive, presenting it as a landmark step towards achieving corporate accountability in supply chains and providing new avenues for justice. However, the proposed text has been weakened in comparison with several recommendations formulated by the Parliament. Among the shortcomings of the proposal are the applicability only to large companies (more than 250 employees), which limits it to around 0.2% of EU businesses, the restrictive definition of high-risk sectors, its gender-blindness, and its failure to adequately consider vulnerable rightsholders.

Banks and investors not considered

Importantly, banks and investors are not considered as actors in a high-impact sector, despite their crucial role in facilitating business activities that can be linked to severe sustainability impacts. Moreover, due diligence by financial institutions is limited to the pre-investment stage rather than making it a responsibility throughout the relationship. With this, the EC proposal is divergent from existing international due diligence standards and legislation, like the UN Guiding Principles on Business and Human Rights (UNGP) or the OECD Guidelines for Multinational Enterprises.

These exemptions disregard the responsibility and leverage that banks and investors have in addressing adverse environmental and human rights impacts in the business activities and supply chain relationships of their clients. Among the many sectors that can serve as examples of this role, the Brazilian beef sector and its leading actors are a case in point.

Brazilian beef sector linked to deforestation and human rights abuses

In Brazil, cattle pastures today are showing a high concentration in the Amazon and Cerrado biomes in the states of Acre, Maranhão, Mato Grosso, Pará, Rondônia, and Tocantins. Mato Grosso state has become Brazil’s leading state for cattle production with a share of 14%. During the last decade, the Amazonas and Cerrado states showed a disproportionally strong growth in their herds, while also being marked by high deforestation rates. Amazon biome states like Pará and Rondônia showed an increase in cattle herds by respectively 31% and 24% in the ten years to 2021, making them the third and sixth largest herds in the country.

While beef as well as leather are important economic sectors for the country, cattle pastures are with around 70% also the largest use of cleared lands in the Brazilian Amazon, making cattle ranching a major driver of deforestation. Moreover, this forest destruction has also repeatedly been linked to human rights abuses against indigenous peoples, traditional communities, and land rights activists.

Research published in October 2022 shows that cattle production inside Brazil’s protected areas, including indigenous lands, continues to contaminate supply chains from the Amazon, more than ten years after efforts to eliminate deforestation from the sector were launched with the signing of the zero-deforestation cattle agreements by key meatpackers. Between 2013 and 2018, almost 1.1 million heads of cattle were sold directly from private pastures inside protected areas to slaughterhouses in Mato Grosso, Pará, and Rondônia states.

Illegally deforested farms

During the last years, evidence on the role of cattle as a driving force behind forest conversion has mounted. Key corporate actors in this industry, including the three leading meatpackers JBS, Marfrig and Minerva, have repeatedly committed to clean up their supply chains, but are still frequently linked to deforestation and other sustainability issues in their supply chains. Efforts to improve traceability and monitoring especially of the important indirect supply of cattle to slaughterhouses (via middlemen) are still falling short.

To name just two recent examples: In November 2022, following an investigation by Reportér Brasil, Greenpeace Brazil and Unearthed, Brazil’s largest and scandal-ridden meatpacker, JBS, admitted that it bought almost 9,000 cattle from illegally deforested farms in the Amazon belonging to a criminal that prosecutors in Rondônia described as “one of the biggest deforesters in Brazil”. Minerva, another large meatpacker, was linked to purchases of more than 650 animals in 2021 from this rancher.

Despite the claims by Marfrig, the third Brazilian meatpacker, that it does not purchase cattle from operations that illegally encroach on indigenous lands or destroy rainforest, investigations by the Bureau of Investigative Journalism (TBIJ), O Joio e O Trigo, NBC News and the Guardian published in September 2022 found that hundreds of cattle raised inside the claimed Menku Indigenous territory were slaughtered in the company’s Tangará da Serra (Mato Grosso) abattoir. The analysed suppliers were linked to 150 km² of deforestation in recent years.

A large share of around 80% of Brazil’s beef production is consumed on the domestic market. Important export destinations for beef are in Asia and the Middle East, and also leather is exported globally. Looking at links of the sector with the EU market, imports of fresh, frozen, or processed beef from Brazil accounted for around 25% of beef imports from outside Europe. Due to the high self-sufficiency in the EU meat market, the volume of around 63,000 tonnes in 2021 equaled only 1% of domestic production. Brazil is also an important supplier of bovine hides to the European leather market, with important customers in the automobile, upholstery, footwear and fashion industry. In its current form, large European downstream companies buying Brazilian meat and leather will fall under the provisions of the CSDD directive.

European financial institutions finance high-risk beef sector

Next to these commodity flows, European financial institutions are providing substantial services and financing to Brazilian beef industry actors. Data by Forests & Finance, an initiative by a coalition of campaign and research organisations including Profundo, shows that several European financial institutions are among the large banks and investors financing JBS, Marfrig and Minerva between 2016 and September 2022. Among them are Santander (Spain, US$ 774 million) and Rabobank (Netherlands, US$ 116 million). European investors include Algemeen Burgerlijk Pensioenfonds (ABP) (Netherlands, US$ 55 million) and Pensioenfonds Zorg & Welzijn (PFZW) (Netherlands, US$ 29 million).

Due to the high-risk nature of the sector and the fact that these meatpackers are still not able to guarantee deforestation-free supply chains, it would be crucial for financial institutions to formulate and implement strict policies and due diligence procedures in relation to forests and human rights.

Policies fall short

However, Forest & Finance’s assessment of policies related to the beef sector shows severe shortcomings in the provision of relevant safeguards. On a maximum scale of 10 points, Santander reached 3.6, Rabobank 7.4, ABP 3.6 and PFZW 0.8 in relation to provisions with high relevance for the beef sector. In comparison with the previous year, Rabobank saw a weakening of provisions for the protection of Indigenous Peoples’ and Local Communities through free, prior, and informed consent (FPIC).

These inadequacies in voluntary commitments illustrate the urgent need for legislation to implement mandatory due diligence requirements to prevent environmental and human rights breaches. Provisions under such legislation must cover all businesses involved in the physical supply of relevant commodities to the European market, but importantly also include the banks and investors that enable business operations with high risk to biodiversity and livelihoods through the provision of financing.

(photo: Mike Kononov on Unsplash)