As the country’s principal financial authority, the role of Banco Central do Brasil (BCB) is to regulate, license and supervise the domestic financial system. So what does that have to do with trees? Quite a lot, as it turns out. BCB’s priorities are to ensure the stability of the currency and its purchasing power, to foster a competitive financial system, and to promote the economic wellbeing of society. But the changes to Brazil’s climate – brought about by, among other things, deforestation –are being increasingly considered by BCB in their monitoring of the country’s financial stability.
For example, the drought experienced by Brazil in 2021 led to roughly R$45 billion (US$ 8.5 billion) of crop losses, which in turn led to record insurance reimbursements in agribusiness, as well as damages to the uninsured. Low water levels reduced the operating capacity of the country’s hydroelectric power stations, which normally contribute 60% of the nation’s energy. This triggered the activation of thermoelectric power plants with higher running costs, which in turn contributed 0.67 percentage points to the deviation from Brazil’s inflation target in 2021. And, as learned from our interview of Brazil’s environmental scientist Carlos Nobre – featured in this edition of Perspectives – the recycling of water by the Amazon Forest explains about 30-40% of the Amazon region’s rainfall. For well over a decade, the central bank has been aware of the potential risks posed to the economy by environmental destruction. In 2008, the first rule requiring environmental compliance for any agriculture project seeking financing in the Amazon biome was published. In 2014, a more effective environmental and social regulation required all regulated financial institutions to develop their own social and environmental responsibility policy. In 2014, it was established that financial institutions should create and commit to their own social and environmental responsibility program. In 2016, the central bank created a social and environmental risk assessment matrix for financial institutions. A year later, there were regulation improvements that integrated social and environmental risks into the risk management framework. In 2020, BCB joined the global Network for Greening the Financial System (NGFS) and included sustainability as the fifth dimension of its strategic agenda.
Peruvian Amazon. © Marco Simola/CIFOR ►
Under a high emissions scenario, the costs of climate change could reach 7.35% of Brazil’s GDP, or 88 billion Euros, by the end of the century.
Then in 2021, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the central bank issued regulations that require all financial institutions (except the smaller ones) to make qualitative disclosures on the management of social, climate and environmental risks. Quantitative disclosures, so far optional, are scheduled to be required as well. In doing so, Brazil became one of the first economies to make climate-related disclosures mandatory. Brazil was ahead of the game – by early 2023, 35 nations and regions had begun to roll out similar mandates. Also in 2021, the central bank issued a set of enhancements in the risk assessment regulation, inserting climate-related financial risk into a financial institution’s integrated management framework, embracing both physical and transitional drivers. All the requirements already in place to traditional financial risks, like stress testing, risk appetite statement, board involvement and so on, should also be applied to climate-related risks. The latest data from the G20 Climate Risk Atlas on the impacts of a warming planet on Brazil confirms the wisdom of the central bank’s early moves on environmental and climate issues. Under a high emissions scenario, the costs of climate change could reach 7.35% of Brazil’s GDP, or 88 billion Euros, by the end of the century. No sector would be left untouched. Under a similar scenario, agriculture, which comprises nearly a quarter of GDP and 38% of exports, could see its productivity plummet by 18% from 2030-2049. With 20% of the population living in coastal areas, sea-level rise and flooding could cause 21 billion Euros of damage a year by mid-century. And under even a medium emissions scenario, labour supply and productivity are predicted to decline 23% by 2080.
▲ Agribusiness, Brazil © Fernanda Ligabue/ Greenpeace
The central bank’s latest initiative may prove to be the first of its kind for any central bank worldwide. BCB has embarked on a partnership with the country’s space research agency (INPE) to implement a satellite surveillance programme across huge swathes of livestock pasture and cropland. The programme is partially funded by GIZ, the German Cooperation Agency. Over the next 2-3 years, the initiative will scan the farming activities of around the 2 million agricultural operations covering 51 million hectares that received rural credit.
While the environmental risk to the forests from agriculture is clear, there is also a growing economic risk to commercial and state-owned banks that extend rural credit. In the agricultural year from July 2021 to June 2022, such loans to Brazilian farmers amounted to R$275 billion (US$52 billion) – roughly two-thirds to support agriculture and one third for livestock. As the government and central bank tighten their environmental criteria, the satellite surveillance programme will be a useful tool to confirm whether producers are complying with the strict environmental conditions of their credit.
The bank’s satellite surveillance initiative is part of a broader drive to improve transparency in the agriculture sector – a vital priority, given the rate of commodity-driven deforestation in the Amazon and the Cerrado biomes. With the EU’s new directive outlawing the import of commodities that cannot prove their deforestation-free origin, Brazilian exporters now have a financial as well as an environmental imperative to prove their clean and green credentials. So, to enable surveillance from space – as well as other functionalities –, the central bank has made it a requirement of every farmer in receipt of rural credit to report the geographic coordinates of each corner of cropland or pasture he or she is farming. “If the farmer declares the geodetic coordinates for a polygon of soy that he’s growing, we can tell if a producer is or is not invading Indigenous lands, preservation units or other protected areas”, says Silvio Carlos Arduini, an advisor to the bank’s department of regulation, supervision and control of rural credit operations. BCB first proposed the idea of geodetic coordinates as far back as 2013 – but today, any farmer requesting a loan must provide geodetic data. It’s part of the work of the bank’s new Sustainable Rural Credit Bureau, which aims at de-risking the blended finance needed by producers to make deforestation-free agriculture a reality. Transparency has two roles to play, explains Arduini. One is the compliance role, to ensure that farmers supported by subsidized rural credit play by the environmental rules – and are seen to do so by banks and the wider public, who can go online to view everything from a farm’s location to its productivity. The other role of transparency is about casting the borrower in an attractive light for creditors. In May 2022, the BCB launched a platform that enables producers to voluntarily share additional details of their operations with the market. Farmers can use this platform to showcase their sustainability credentials to prospective lenders.
Rural credit plays a key part in Brazil’s transition to a greener future. Research shows that if Brazilian farmers focused on converting livestock pasture to cropland and increasing productivity, then the nation’s total crop production could nearly double without any further deforestation. But realizing this potential requires considerable investment in modernizing operations with expensive new equipment and fertilizers. Rural credit – provided by Brazil’s commercial banks – offers a vital lifeline in helping farmers make these investments, especially as the interest rates are on average 10% cheaper than regular commercial loans. For its part, the central bank is expanding the parameters of its transparency platform to register more innovative and sustainable approaches to farming, from investments in on-farm renewable energy, to traceability systems, no-till agriculture, and organic fertilizers. For the BCB, sustainability means addressing social as well as environmental concerns. “The bank recognizes the importance of reducing social disparities”, says Viviane Torinelli, from the sustainability and international portfolio investors unit at BCB. And it’s walking the talk: as part of its rural credit programme, BCB has already blocked loans to some farming operations found to be non-compliant with social or environmental rules. The central bank now issues an annual Report on Social, Environmental and Climate-related Risks and Opportunities along the lines recommended by the TCFD – leading by example since similar requirements are applicable to Brazilian financial institutions. This report highlights a range of sustainability initiatives being pursued by BCB. And it’s important to focus on not only the risks but also the opportunities. “In Brazil, we are privileged to have vast, rich biomes and cutting-edge technology in our agriculture and livestock sectors,” says Torinelli. She adds: “If we can support our financial system to properly manage the risks arising from the climate change, enabling it to provide swift funds to this sector, then the transition to a low-carbon economy can be genuinely beneficial to Brazil’s development.”
In Brazil, we are privileged to have vast, rich biomes and cutting edge technology in our agriculture and livestock sectors
▲ Smallholder in Brazil. © Miguel Pinheiro/CIFOR
