Big banks to the rescue of threatened forests: No loans for shady firms

A recent pledge by 10 of the world's biggest banks not to lend money for projects that harm the environment in developing countries is good news for forests and other fragile ecosystems.

Among those agreeing to follow the new "Equator Principles" code of conduct for private lending, sponsored by the World Bank, were Citibank, Credit Suisse, and ABN AMRO.

Assuming the banks keep their word, the initiative should make it much less likely that they will lend money for pulp mills, logging companies, cattle ranches, soybean farms or oil palm estates in Asia, Latin America and other parts of the world without first checking whether such projects might damage natural forests and endangered species.

The banks' move follows closely on the heels of an announcement by the European Commission a few weeks ago that it will press banks to be more careful about funding companies caught up in illegal forestry activities. The Europeans have become increasingly worried that such activities are not only destroying many of the few remaining undisturbed forests, but are also costing governments billions of dollars in unpaid tax revenues and contributing to violent conflicts in places like Liberia, the Indonesian province of Aceh and the Democratic Republic of the Congo.

The European Commission has put banks on notice that under existing money-laundering legislation they could be held liable for giving loans to companies involved in bribery, fraud and other practices often associated with illegal logging. It has also encouraged European governments to include illegal logging more explicitly among the crimes covered by their money-laundering laws.

What such steps have in common is a growing recognition that private lending is just as powerful a global force as trade and investment in reshaping people's lives and the way we treat our natural environment. It usually takes big bucks to cause large-scale environmental destruction, and that means some bank has put up the cash.

Environmental activists are increasingly targeting banks with their campaigns, governments are holding them more accountable and consumers are beginning to ask what banks are doing with their money.

At the World Economic Forum this year in Davos, Switzerland, instead of just focusing on companies that chop down trees or run sweatshops, environmental groups used the occasion to issue their first high-profile declaration focusing on private lending institutions. The activists called on banks to adopt environmentally and socially responsible policies.

But it is not only such pressure that has made banks sit up and listen. Many bankers are coming to realize that paying attention to the environment makes good business sense. Projects embroiled in controversies are less likely to turn a profit and companies engaged in shady forestry practices rarely publish reliable accounts. After getting burned on a couple of bad multibillion-dollar loans, such as one to the Indonesian pulp and paper industry, the bankers are starting to catch on.

Private banks and government loan guarantees are also getting more attention these days because governments can focus on them without getting entangled in the thorny issues surrounding trade restrictions. Although many governments sympathize with environmentalists' calls to stop imports of illegal timber, most are wary of taking any action that might be construed as violating international trade agreements.

What governments can do, without restricting trade, is to encourage banks to be more cautious, strictly enforce existing money-laundering laws and refuse to guarantee loans that are bad for the environment.

Seeing private companies, government agencies, environmentalists and the World Bank all taking concrete positive measures in the same direction gives real cause for hope.

For those of us sitting in Indonesia, where the haze from burning forests on the island of Sumatra is already signaling the start of another season of destruction, the good news comes not a moment too soon.