Could Lula’s presidency accelerate BCB climate action?

The return of Luiz Inácio Lula de Silva’s as Brazil’s president has raised hopes the country may implement a stronger green agenda, after environmental protections were scaled back under the previous incumbent Jair Bolsonaro. A leading finance policy expert has told Green Central Banking that the new administration’s pro-climate stance could create a favourable political context for the Banco Central do Brasil (BCB) to take further action in this area.

The BCB won praise, even under Bolsonaro, for being among the first G20 central banks to publish a sustainability plan. This included a pledge to establish a green liquidity facility and a green rural credit bureau, although these instruments have not yet been put into practice according to the latest Green Central Banking scorecard.

Natalie Unterstell, president of the Talanoa Institute climate thinktank, said there are certain instances in which the new government’s approach may help the BCB with delivering its programme.

“As an independent institution, BCB is likely to continue its green agenda, including implementation of regulations and further alignment with best international practice,” she said.

“In terms of the domestic context, the fact that the government elected for 2023 to 2026 is more rational when it comes to combating deforestation will certainly help the BCB with the implementation of rural credit regulation,” she predicted.

The BCB is applying new rules to ensure that rural financing does not flow towards projects that contravene regulations on deforestation. The measures also include a labelling system for projects which can be identified as “sustainable”.

While Bolsonaro had scaled back enforcement of deforestation laws, leading to a surge in the destruction of the Amazon, Lula has promised to reverse deforestation in Brazil. The BCB’s rural credit rules are linked with data collected by Brazil’s environment ministry.

Despite her optimism regarding the BCB’s implementation of sustainable rural credit, Unterstell also pointed out that Lula has not yet given concrete signals about how his government will integrate climate into its financial policies, suggesting he has focused on climate issues primarily through the lenses of environmental and foreign affairs.

“Thus, although the overall context is positive for green policies, it is soon to be said that there will be a favourable environment for the [BCB] to increase its regulatory ambition,” Unterstell said.

Nevertheless, Unterstell also said that the BCB is in “good shape” with respect to its climate agenda. She highlighted the fact that its most recent Report on Financial Stability, published in November 2022, includes an analysis of physical and transition climate risks for the first time.

The report found that 8% of the credit portfolio of Brazil’s financial system is sensitive to transition risk, with beef, cargo transportation and soy accounting for more than 70% of that exposure. It also revealed that 16% of loans are associated with activities linked to intensive water usage and drought risks.

“This signals that Brazilian actors are starting to understand that, without a strong environmental risk framework, the Brazilian market is less attractive to foreign investors and the cost of capital rises,” said Unterstell.

“The BCB has one of the most comprehensive climate risk regulations in the world and should keep the implementation pace, particularly in relation to rural credit as Brazil is the third largest agricultural producer in the world,” she argued.