“What we need from banks for the Amazon” Sergio Leitão publishes article in the newspaper Correio Braziliense

Check out below the article by Sergio Leitão, Executive Director of Escolhas, in the newspaper Correio Braziliense.

Article: What we need from banks for the Amazon

”Without measures to render effective the repression of illegal activities in the Amazon, certain protection rules will remain limited to the mere checking of documents, which is not always reliable.

Sérgio Leitão*

The recent expression of support for the sustainable development of the Amazon that Brazil’s three largest private banks delivered to the government leaves no doubt: those who are responsible for financing investments and consumption are fully aware of the danger that environmental degradation brings to business.

In Brazil, since 1995, financial institutions have adhered to a series of “letters of principle” for socio-environmental responsibility. This time, the commitment is to favor the financing of sustainable chains, such as cacao, açaí berry, and Brazil nuts, and to support credit and investments so as to benefit local vocations following the criteria known as ESG (Environmental,  Social and Governance) factors.

These banks have already adopted ESG in evaluating projects.  This is a positive yet insufficient step, as shown by the rapid deterioration of the country’s environmental indicators. There is a need for greater boldness in occupying, through practical measures, a space that is now full of propaganda and good intentions.

With 3.4% of global emissions, Brazil is the world’s sixth largest carbon emitter, and deforestation is responsible for 44% of the total emitted by the country. After a period of reduction, in 2018 the deforestation index began rising once again.  In 2019, according to the National Space Research Institute (Instituto Nacional de Pesquisas Espaciais – Inpe), the deforestation index rose 34% in comparison to the previous year. The disaster is led by activities such as gold digging, extensive rattle raising, and agriculture that is driven primarily by the expansion of irregularly planted soybeans.

Nonetheless, there are signs that monitoring mechanisms are being dismantled, with forest inspectors suffering intimidation and being replaced in key positions.  Within the first 100 days of 2020, the inspection orders of the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) were cut by a third, from 511 to 396, in comparison to 2019. Last year, the mandatory destruction of machines and equipment used in criminal activities and seized in flagrante decreased to 72 cases–well below the annual average of 190 between 2014 and 2018.

Without measures to render effective the repression of illegal activities in the Amazon, certain protection rules remain limited to the mere checking of documents, which is not always reliable. According to data from the Institute of Amazon Environmental Research Institute (IPAM), nearly one fourth (23%) of public forests without official use designation (in Portuguese, sem destinação) were irregularly registered as private property in the Rural Environmental Registry (Cadastro Ambiental Rural – CAR), which is required for the issuing of bank loans.

Reports of cattle ranching in areas that have been illegally deforested, which stain the images of those who export nationally produced beef, also deserve more efficient responses, including the tracking of cattle since the birth, with cross-checks of official data sources, such as Sisbov and the Animal Transport Document (guia de transporte animal – GTA), which are not publicly disclosed.

The most recent survey of resources that are channeled to the green economy, undertaken by the Brazilian Federation of Banks (Febraban), shows that, among a sample of 15 banks–including the five largest ones–45% (R$ 680 billion) of resources allocated to the financing of companies are found in sectors considered to present high environmental risks, from mining to agriculture.  The financial sector has significant impact, and its contribution–in this case, beyond the support provided to green economy activities–would be key in the decision to identify and exclude certain risky sectors, activities, and companies from its loan or investment portfolios.

Brazil’s large banking institutions are already represented within a global initiative, the Task Force on Climate-related Financial Disclosures (TCFD), which was created within the context of recent financial crises in order to provide transparency to risks generated by climate change in the future of business. This group has formulated clear guidelines for investors, consumers, and policymakers, so as to facilitate the transition to the so-called green economy.

Although Brazilian banks have made progress in this discussion, they have not set deadlines for the adoption of urgent measures, such as a more precise disclosure of the environmental risks associated with their business, and the effective incorporation of those risks as a factor for decisions about loans and investments. Without this, they remain subject to the accusation that they support attacks on the environment.

This is a challenge.  It imposes costs and technical difficulties, and it will not be overcome through the sector’s self-regulation: if some institutions refuse to adhere, betting on immediate profits without measuring their consequences, other actors will feel unmotivated to take on the necessary urgency in the complex task of pricing the ESG risks and their incorporation into business models.

This is a clear case in which society, through the Central Bank, should intervene and create regulation, following international standards, that allows everyone–including banks and investors–to benefit from coordinated actions for the well-being of future generations.  After all, it is the children and youth of today that will pay the bill.

 

* Executive Director of Instituto Escolhas