Ward Warmerdam (Profundo) and Jan Willem van Gelder (ProFundo)
EU credit (banks) and investment institutions (asset managers, insurance companies, pension funds and private equity funds) finance large-scale agricultural projects outside the European Union. Credit institutions, or banks, do this by providing loans and underwriting bond and share issuances.
Investment institutions finance large-scale agricultural projects through equity investments. Without the financial support of these institutions such large-scale projects would never get off the ground.
However, these large-scale agricultural projects can potentially have devastating effects on local communities and the environment. Against this background, this study researched how EU regulations and policies could regulate investment by EU financial institutions and companies in non-EU agribusinesses.
This study looked at the mechanisms by which EU financial institutions and companies invest in non-EU agribusiness. It further analysed financier decision making processes, and assessed the existing and upcoming EU regulations relevant to this topic.
Current EU regulations regarding the financial sector are geared to maintaining financial and economic stability. They do not take into consideration the environmental, social and governance (ESG) risks that a financial institution is exposed to through the financing it provides. A growing financial institutions develop their own policies regarding the ESG risks of their financing out of concern that these risks might impact the profitability of the company, the ability of the company to repay its loans (risk of default), or the reputational risk that the financial institution might suffer as the result of being linked to a particular company. However, these policies are far from perfect and are completely voluntary.
For there to be any meaningful regulation regarding the financing of agribusiness in developing countries by EU-based financial institutions there needs to be fundamental reconceptualization of the role of the financial sector in society, and thus of the role of financial regulatory authorities.
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