With the authors' kind permission, we publish their views on Latvijas Banka's guidelines for identifying economic activity favourable and unfavourable to biodiversity, which we previously noticed on social media

Valdis Kalns

Latvijas Banka has drawn up guidelines recommending that banks lend to companies practising low-productivity, overly cautious forms of land management. Not everything in them is wrong, but a great many of the recommendations in these guidelines are, in substance, actually harmful. In forestry — referred to here as “timber harvesting” (!!!) — the document sets out things that are scientifically impossible and even unlawful.

A few of my conclusions:

- A complete halt to timber harvesting from 1 April to 30 June is deemed acceptable and favourable, even though this has a huge impact on the economy of the forestry and woodworking sectors. Anyone who does otherwise is unwelcome.

- Preparing the soil for planting when regenerating forest is deemed unfavourable. Never mind that costs at the regeneration and tending stage will rise, since seedling losses will be greater and tending will have to be done more often because of heavier weed growth (additional CO2 emissions).

- The species mix required in every stand is actually unlawful, since in nine forest types only pine is allowed, i.e. at least 80% of the tree count.

- Outright discrimination against spruce stands, with any forest planting where spruce is the dominant species classed as unfavourable.

- Land drainage aimed at managing forest more productively and with greater carbon sequestration is automatically deemed unfavourable.

- Leaving 25 retention trees per hectare of clear-cut can still be done in theory, but if the felling site does not contain 25 m3 of dead wood, then harvesting the timber crop is automatically deemed unfavourable. First you'll have to fell some trees and let them rot.

- Only non-clear-cut, or selective-felling, management gets favourable status. So there will be no new pine forests in Latvia. Latvia has no examples of pine stands regenerating successfully under selective felling. The biology of pine as a species requires large openings for successful regeneration.

- Any one-sided entry recorded in the Ozols system noting owls or woodpeckers in a given stand triggers a protection regime that has no basis in law.

- Clear-cutting in river protection zones, except for grey alder, is already prohibited, so why assess something that isn't permitted anyway? If what is meant is deforestation, or forest clearance, then that is what should be written. Clear-cutting is not deforestation, and clear-cutting is not allowed in protection zones.

So there you have it...

Mārtiņš Ailts

For some time now there has been considerable uproar from farmers and forest owners over the guidelines drawn up by Latvijas Banka. Various opinion pieces have also appeared in the public arena, in which each side often pulls in its own direction and occasionally overstates its case, so I wanted to look at the issue more calmly and neutrally. That is why I took the time to research it in more detail with the help of AI, and to understand for myself what the story actually is — especially for someone who does not follow every political and financial regulatory process that directly affects, or will affect, all of us in everyday life.

Perhaps this will help you too.

Will banks now be assessing how we're allowed to farm our fields and manage our forests?

In recent days, justified concern has arisen over the guidelines Latvijas Banka has drawn up for identifying economic activity that is favourable or unfavourable to biodiversity.

Formally, it is not law. This document does not directly forbid anyone from ploughing land, managing forest, preparing soil or maintaining drainage systems. The problem is that commercial banks can start using guidelines like these when assessing the loans they issue to farmers, forest owners and other land managers.

And then a document that isn't law can, in practice, start to function almost like one — through loan availability, interest rates, collateral requirements and extra bureaucracy.

That's really where the main sting lies.

Biodiversity matters. In my view, there's no arguing with that. Banks, too, need to understand climate and nature risks in the long run. The European Central Bank, the European Banking Authority and other institutions do the same. So the direction itself hasn't been pulled out of thin air.

But the real question is different — has Latvijas Banka gone too far?

Elsewhere in Europe, nature-related risks are mostly assessed at the level of the financial system: what risks sit within banks' loan portfolios, which sectors depend on soil, water, climate and ecosystems, and how these risks might affect financial stability.

In Latvia's case we're seeing something different — a very specific list of economic activities sorted into “favourable” and “unfavourable”.

For example, in forestry, mechanical soil preparation ahead of forest regeneration has been placed on the unfavourable side. Not doing it — on the favourable side. But anyone who actually works in the forest understands that soil preparation isn't damaging nature for its own sake. In many places it's a precondition for quality forest regeneration.

It's much the same with drainage. There's a big difference between new, ill-considered drainage and maintaining or repairing an existing drainage system. If all of that simply gets dropped into the “unfavourable” box, it no longer looks like financial risk analysis. It starts to look like land-management policy, just written in banking language.

The practical effect can be very simple. When assessing a loan, a bank may demand more documentation, extra explanations, risk-mitigation measures, greater collateral, or offer worse terms.

For a large company with lawyers and sustainability specialists, that will be an inconvenience. For a small farmer or forest owner, it can be a real obstacle to development.

The next question — is anywhere else in Europe acting just as foolishly?

As far as can be seen from other countries' approaches, nature-related risks are assessed, but this usually happens at the level of financial risk, data and loan portfolios. For a national banking supervisor to draw up a practical list of “right and wrong” farming and forestry practices is an entirely different level altogether.

That's why one gets the sense that Latvia may once again have overreached. At the European level, the direction given is to assess risks to nature, but we turn it into a document that could start dictating how a farmer works the land and how a forest owner regenerates the forest.

Another important question concerns the parties involved.

The document shows extensive involvement from natural science experts, state institutions and environmental organisations, which isn't bad in itself. But was there equal involvement from those the document will actually affect: farmers, forest owners, forestry companies, the wood-processing industry, and the practical borrowers out in the regions?

On top of that, questions have also surfaced publicly about the references to the parties involved — for example, the document cites “Silava”, even though it has been reported that the Forest Science Institute itself denies taking part in drafting content of this kind. That adds even more uncertainty about how the document was prepared.

Without that kind of balance, the result is predictable: the document can look neat from the standpoint of environmental theory, yet be skewed from the standpoint of practical land management.

The certification question is especially odd.

The guidelines cite FSC Controlled Wood certification as a nature-favourable criterion in forestry. PEFC isn't mentioned at all. **That's hard to understand.**

PEFC is not a marginal or local system. In terms of certified forest area, PEFC is roughly 70% larger than FSC worldwide, and PEFC is also listed for forest biomass and wood residues among the voluntary schemes recognised by the European Commission under RED. FSC itself states that it has not currently applied for RED recognition.

So the question is simple: why does Latvijas Banka's document include FSC but not PEFC?

If a banking supervisor's document names one certification system as a favourable criterion while the other — a very significant international system — isn't mentioned at all, that raises legitimate doubts about the document's balance.

In my view, this document needs to be reworked.

Not because biodiversity doesn't matter. It does. But the criteria need to be grounded not only in environmental theory, but also in the actual practice of Latvian forestry and agriculture, in EU regulation, in science, and in a genuine assessment of economic impact.

The main question is simple: how does a given economic activity increase a bank's credit risk?

If that chain is missing — activity → environmental impact → financial risk → credit risk — then this isn't a banking risk document, it's a policy document, just written in banking language.

In a democratic state, land-use policy shouldn't be introduced through a credit filter.