Farmers and forest owners have been taken aback by Latvijas Banka's guidelines for identifying economic activities that are harmful or beneficial to biodiversity, and although the document is not a legal act, it is binding on commercial banks when they decide on lending.

Latvian farmers have justified grounds for surprise at how these guidelines came about: the sector itself – farmers and their representative organisations – was not given proper involvement, even though organisations opposed to the real economy were granted access, which inevitably raises the question of whose interests Latvijas Banka is now serving. That question becomes especially pressing given that the guidelines will effectively serve as a benchmark for commercial banks, not only when issuing new loans but also when reassessing the risk on existing obligations, says Rolands Feldmanis, Chairman of the Board of the Latvian Agricultural Cooperatives Association. In his view, the guidelines directly affect farmers' development prospects, since access to financing is a critical precondition for competitiveness and growth.

“Latvijas Banka's guidelines should not impose different or stricter parameters on the agriculture and forestry sectors than those already set out in Latvian legislation,” R. Feldmanis is convinced. Specifically, if the guidelines literally impose a requirement to leave, say, 10% of land unmanaged, with no legal or reasonable basis or restriction on economic activity behind it, this directly reduces the farmer's income, weakens competitiveness and undermines the ability to meet existing obligations – including to commercial banks.

“What's more, that 10% concerns the specific rights of specific owners, while the one pushing the idea is a pseudo-economist who wants to impose his will on something that isn't his, and would happily use someone else's property for nothing,” explains R. Feldmanis, stressing that if commercial banks start applying these guidelines in their lending practice, farms that receive a so-called unfavourable rating could face higher interest rates, smaller amounts of available financing or stricter collateral requirements.

“Looking at it formally – yes, it isn't legally prohibited, but in essence it creates substantial, systematic pressure on the land-use sectors – agriculture and forestry,” explains R. Feldmanis.

Slowly across the bridge!

Normunds Šmits, Parliamentary Secretary of the Ministry of Agriculture, believes Latvijas Banka has overstepped the mark with these guidelines. “The Law on Latvijas Banka provides that it carries out macroeconomic analysis and research, sets and implements macroprudential policy, and regulates and supervises the financial market and its participants, but it has not been given the power to determine how many metres wide a buffer strip should be for a given type of land use, or how large a share of land should be left to nature, when no restrictions or prohibitions on economic activity have actually been imposed,” N. Šmits assesses. In his view, if Latvijas Banka is already setting such figures in its guidelines, it needs to be understood what impact and consequences this document, which does not carry the force of law, will have on land use and on the development of the sector.

“If Latvijas Banka knows better than everyone else, then it's worth asking whether Latvia really needs so many other institutions and bodies at all. But perhaps it's also worth checking whether this all-knowing institution has caught the bug of ‘we know everything best’, especially given that even the State Audit Office is not allowed to examine its operations,” N. Šmits stresses, pointing out that agriculture is the main provider of people's food, which is why great caution is needed with highly avant-garde ideas in this field and their implementation.

“There is no shortage of precedents for experiments that end in food shortages and even famine; the forced narrowing or partial destruction of domestic agriculture is, after a while, reflected on food shop shelves, where the volume and range of imported food products grows. One has to ask whether anyone has drawn up the same kind of guidelines for the producers and growers of imported food products that commercial banks will now apply to those working in Latvia?” N. Šmits wonders. In his view, these questions are highly existential and matter not only to land managers, but also to the Latvian state, since what is at stake is not just jobs but also the taxes paid and their size.

“That is precisely why the Minister for Agriculture has invited the Governor of Latvijas Banka for talks and a concrete explanation of what impact the implementation of the guidelines will have on Latvian agriculture, food availability, employment, and the taxes paid specifically by the land-management sectors and by the related fields that serve them,” N. Šmits reports.

The winners will not be local

“In economic terms, financing costs will rise for those who don't comply with the guidelines and fall for those who do,” explains R. Feldmanis. He points to a structural asymmetry: “Two farms with an identical balance sheet and identical output can receive different lending terms depending on how carefully their self-declarations have been filled in and whether they are flagged in local institutions' databases as being on the favourable list. In the long run, cheaper capital means faster equipment renewal, bigger investment and stronger growth – and that advantage compounds. This raises an uncomfortable question: who does this asymmetry actually serve – companies with foreign capital, built up over centuries, or our own national capital, which is still insufficient? Compare investment per capita in Germany, Sweden and Latvia! Surely Latvijas Banka's well-paid specialists aren't unaware of this fact?” R. Feldmanis stresses.

He points out that Latvian-origin companies, which are still building up their own capital and for whom every percentage point on a loan rate is felt, are in the more disadvantaged position. “These are not hypothetical concerns, this is market logic. The biggest problem, though, isn't any single criterion, but the sum of them all,” explains R. Feldmanis, noting that the document contains around 20 pairs of criteria for agriculture and 18 for forestry.

“A farmer who wants to build a favourable profile across the whole spectrum faces repeated self-declarations for every round of lending, coordination with at least five state institutions – from the Rural Support Service, the Nature Conservation Agency, the State Plant Protection Service, the State Environmental Service and the State Forest Service, right through to bringing in a habitat expert, whom he has to pay for himself. Bird-watchers, for instance, will once again be able to earn money, expand their business and even raise their rates,” R. Feldmanis concludes. In his view, another aspect at stake is the rural population and the small operator who produces a real product every day.

“Every step in Latvijas Banka's recommendations can be interpreted, formally justified, but taken together they create a significant burden – one that weighs incomparably more heavily on the small farm, where one person is simultaneously the operator, the accountant and the one filing EU support applications. For a large farm with administrative support, this system is manageable. For a small family farm, which is what sustains the rural population, it is one more barrier beyond which better lending terms remain out of reach.

So the question is: where do such ideas come from? From the European Central Bank, the European Commission, the European Parliament, or from whoever is setting the agenda for our own kinsfolk?” R. Feldmanis rightly asks. He notes that the gap in experience between those who shape the regulatory environment and those affected by it is not unique to Latvia – it is a structural problem across EU financial regulation as a whole.

“The areas where this shows up most clearly are precisely the rural and forest economy: a regulator who has never earned a living from a plough or a saw builds a system of requirements whose practical consequences are not intuitively obvious to him. Consultants are chosen from the same administrative circle the regulator himself lives in. The real voice of the sector is not heard in this process, because its representatives are out working in the field, not building publicity for themselves,” R. Feldmanis is critical. He points out that what is being created is a document that is intellectually substantial and perhaps even theoretically sound, but at the same time places a proportionally greater burden on those least equipped to comply with it – Latvian businesses.

“There's probably no ill intent behind it, it's a distance effect,” says R. Feldmanis. In his view, the right question is not whether the biodiversity criteria are or are not justified, since they are largely grounded in promoting green nature.

“That simply means protecting the green idea, because who doesn't like it, but on a gut level it seems that becoming a farmer, an entrepreneur, earning money and building something – that would be a challenge for Latvijas Banka, which ‘sits’ on the interest income from Latvia's state reserves, that is, on our money,” says R. Feldmanis. He also asks whether the national banks of Lithuania and, in particular, Poland – both major suppliers of food products to Latvian consumers – have likewise drawn up the same kind of guidelines for identifying economic activities harmful or beneficial to biodiversity, and whether they set out the same parameters: leaving 10% of land unused, not clearing scrub from farmland, not ploughing land in autumn, skipping soil preparation before planting new forest, and forgetting about drainage systems in forests, even though these are a key factor in stand growth and the volume of timber it yields.

“If such identical requirements exist in Lithuania, Poland and Estonia, that's a level playing field, but if they don't, then Latvijas Banka's guidelines hand a substantial advantage to farmers in neighbouring countries, and consumers in Latvia will end up buying even more produce grown next door. Is Latvijas Banka really working in the interests of businesses operating in competitor countries? I don't want to believe it, but time will tell,” R. Feldmanis concludes bluntly.

Opinions

A tool for understanding, not for refusals. Raivis Kakānis, Chairman of the Board of Industra Bank

Including biodiversity considerations in the financial sector's risk assessment is understandable, since in the long run business too depends on the quality of land, water, soil and ecosystems. At the same time, it is very important that such guidelines are not applied mechanically in Latvia and do not turn into yet another administrative burden for businesses, particularly farmers and regional companies. Latvia needs to be wary of a situation in which good intentions lead us to impose stricter restrictions on ourselves than our competitors in other European countries face. In our view, the biggest risk lies not in the guidelines themselves, but in how they are applied in practice. If every action – say, clearing overgrown land or removing scrub – is automatically treated as elevated risk, we could end up in a situation where financing becomes harder to obtain for economically sound projects that Latvia's countryside actually needs.

Converting scrubland into arable land may, from a biodiversity standpoint, be assessed as an unfavourable factor, but that doesn't mean every such case is essentially the same. Banks should use these criteria as a tool for better understanding, not as automatic grounds for refusal. It is essential to look at the specific area, its status, its natural value, the purpose of the economic activity, and any possible risk-mitigation measures.

In one case, clearing scrub might mean depleting a biologically valuable area; in another, it might mean bringing long-neglected land back into economic use and tidying up the landscape.

Industra Bank's approach to assessing financing for corporate development projects will continue to be based on individual assessment.

We believe sustainability requirements should help people make better-informed decisions, not create a situation in which Latvian businesses end up at an unequal disadvantage compared with competitors from other countries.

When financing corporate projects, it is important to maintain a balance between environmental goals, economic logic and regional development.

The guidelines differ substantially from the terms of the regulation. Dagnis Dubrovskis, Sustainability Director at Latvijas valsts meži

It is puzzling that Latvijas Banka has published its guidelines at a time when the European Union has already adopted the EU Taxonomy Regulation – a single classification system, or roadmap, that defines which economic activities are considered environmentally sustainable, including those aimed at protecting biodiversity and ecosystems.

The EU Taxonomy Regulation and the Corporate Sustainability Reporting Directive (CSRD) were issued to achieve the goals of the European Green Deal: to prevent greenwashing, eliminate incomplete data, and channel capital towards companies that genuinely comply with environmental and social standards. The guidelines issued by Latvijas Banka contain no reference to these EU legal acts, and for entirely unclear reasons they differ substantially from the terms of the regulation used to assess the sustainability of economic activity, imposing far stricter requirements than those set at EU level. Nor do the bank's guidelines contain any specific references to research findings for each particular type of economic activity that would demonstrate its impact on biodiversity.

The published guidelines are aimed at credit institutions whose clients also include LVM's partners – forestry service providers and buyers of timber resources. To provide publicly available, comparable information, and to give an understanding of how its operations affect sustainability issues and how sustainability aspects in turn affect the company's development and performance, LVM publishes sustainability reports every year in line with international standards. In carrying out its operations, the company complies with high international environmental standards set by the PEFC certification system – by far the leading forest certification system in Europe. At every stage of forest management, the preservation of ecological values and the prevention of pollution are strictly controlled. It is therefore all the more puzzling why the guidelines issued by Latvijas Banka reference only one system – FSC forest certification – which is used considerably less in Europe, and whose certified area in Europe has, moreover, shrunk substantially since 2022. In light of the above, it must be concluded that the guidelines published by Latvijas Banka lack a clear purpose and, if applied, carry a risk of greenwashing.

A biased view. Māris Liopa, Chairman of the Board of the Latvian Forest Owners and Managers' Confederation

On first reading the guidelines for identifying economic activities harmful or beneficial to biodiversity, the initial impression is that they were written by so-called friends of nature or activists, whose conscious or unconscious aim is to undermine the backbone of the Latvian economy – the land-management sectors, which are the most significant direct and indirect employer in the countryside, a taxpayer of billions of euros, and the source of nearly half of Latvia's goods export revenue. It turns out, however, that the guidelines – which class autumn ploughing, soil preparation before planting new forest, land drainage, and setting aside 10% of economically usable land as unfavourable activities – are in fact Latvijas Banka's own handiwork.

Shocking, unbelievable? Or... Unfortunately, it is a harsh, biased reality. Namely, the bias in Latvijas Banka's sustainability management shows up in the fact that the banking supervisor in Latvia is essentially behaving like a theorist who wants to be the best possible champion of some noble goal, and is setting conditions that cannot be found in any legislation, while ignoring the real impact on the economy. The Bank of Finland, by contrast, manages to balance strict European regulation with pragmatic support for its main export sector, ensuring that the flow of capital into forestry does not dry up.

That means the Bank of Finland cares not only about jobs and taxes paid, but also about the use of land capital – growing on it the food or forests everyone needs. Does Latvijas Banka care about that?

Time will tell! Sustainable, productive land use needs to be considered together with biodiversity conservation, applying the principles of territorial stratification.

Landowners must be trusted and must have the freedom to make their own business decisions; it is the state's task to support this and to build mutual trust between people who think differently – farmers, foresters and the so-called friends of nature, for instance – because otherwise Latvia will end up eating food grown in other countries that have no such guidelines and never will.