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Throughout its G20 presidency, Brazil has pushed for global progress on greening the financial system. But is Latin America’s leading economy, which is expected to keep beating the green finance drum as hosts of next year’s Cop30, practising what it preaches at home?
When it comes to Brazil’s central bank, the Banco Central do Brasil (BCB) can present a relatively strong track record of environment-focused reforms, having achieved the highest score of any non-European country in the recently-released Green Central Banking Scorecard.
Noting that Brazil managed to rank fifth in the G20 despite the disadvantages the global monetary system deals to non-Western countries, the report praised the BCB for “a diverse range of medium impact actions”, including a commitment to facilitating the fiscal space for green investments.
A consultation on the BCB’s climate risk disclosure rules, which the central bank is seeking to bring in line with international standards, wrapped up in June, and in February the BCB was announced as the facilitator of a multi-billion dollar currency exchange hedge programme for sustainable investments in Brazil.
That scheme aims to tackle a major obstacle to scaling foreign investment in climate financing: the volatility of the Brazilian real. “It’s an experiment – the first attempt to actually develop something to reduce the cost of hedging foreign currency loans into Brazil,” Gustavo Pinheiro, a senior associate at independent climate change thinktank E3G, told Green Central Banking. “It’s not operational yet, so it’s a bit uncertain if it will work.”
Pinheiro noted it was somewhat ironic how much the BCB had been able to achieve in terms of environmental policy during the presidency of far-right climate denier Jair Bolsonaro from 2019 to 2022. This, Pinheiro said, was not least because the BCB was granted formal independence in 2021.
The government of Bolsonaro’s successor Luiz Inácio Lula da Silva, who is back in power for a second stint, has vowed to prioritise climate action following dramatic deforestation in the Amazon during Bolsonaro’s tenure. PInheiro stressed however that Lula’s coalition is one of “mixed signals”, emphasising the need for climate action while continuing to pour cash into fossil fuel subsidies.
Nonetheless, the pressure on Lula to deliver on the climate helps explain Brazil’s efforts to set up a new G20 taskforce, TF-Clima, to push forward global discussions on the transition to net zero into the South African presidency, which starts on 1 December.
“I think it was relatively successful – not so much in delivering, but in getting the conversation going in between different tracks, by bringing the ministries of finance, the central bank governors, the ministries of environment, climate change and foreign affairs all together for the first time,” Pinheiro said.
There was also, he added, plenty of friction between these many players, as well as occasions on which some argued that issues being discussed by the taskforce should have fallen under the G20’s sustainable finance working group. Nevertheless, Pinheiro’s assessment is that Brazil’s G20 presidency “did send the right signals in terms of setting agendas”.
Good ideas for financial reform – with weak spots
In terms of domestic initiatives, Brazil has won praise for successfully debuting a US$2bn sovereign sustainable bond in 2023, with a follow-up last June. However, Pinheiro pointed out that the scheme’s labelling could hardly be described as strict. “It’s very broad, and can be used to fund almost anything – even to fund policies that have nothing to do with climate change,” he said.
On the regulation front, Luciane Moessa, executive and technical director at Brazilian thinktank Sustainable Inclusive Solutions, said that while the country’s regulators could be considered to be Latin American leaders in terms of their environmental efforts, there are plenty of loopholes that need closing.
In banking, for instance, rural loans – a key category in a country where agribusinesses account for some 25% of GDP – carry much more stringent environmental conditions, which should be extended to other loans.
While other types of loans do carry risk management requirements, rural loans have “a very important peculiarity that should be present in every sort of environmental, social and climate risk management: the exact location of the financed activity must be considered. That’s the only way to properly assess risks and impacts on biodiversity, local communities and climate physical risks,” Moessa explained.
“In terms of capital markets financial products, there are no ESG due diligence requirements for investments in risky industries or activities at all,” she added. “This is not only a Brazilian problem, it’s a misalignment that is present everywhere, but Brazil is a very good example because farmers involved with illegal deforestation, modern slavery or similar serious situations are migrating from rural lending to capital markets in order to escape from the diligences that banks are required to do.”
Pinheiro considers the BCB’s risk frameworks for the financial sector to be “actually more aggressive than even the European or Canadian regulations” in that the assessment of the risks faced by a financial institution “directly impacts the calculations of their capital requirements”. Given that banks are responsible for weighting their own risks, however, the idea falls somewhat flat.
As for Brazil’s taxonomy, expected to come into force in 2026, Moessa said there were likely to be numerous shortcomings. “There will not be a clear classification of which activities need to start to be phased out and, except for agriculture, I am also afraid that new green technologies that need to receive more funding to be scaled are not going to be the main focus,” she said.
“Location considerations, which are needed for climate adaptation, are not planned to be included thus far – a problem that is also present in other taxonomies – and the opportunity to consider synergies between climate, environmental and social issues is being missed, because the focus is only climate in the first moment.”
Asked what Brazil’s top priority should be in the near-term future, Pinheiro said fiscal reforms were badly needed in order to better align the tax system with the ecological transition.
“I do think there are good things being done – not at the speed that we need, but at the speed that is possible; not at the ambition that we need, but the ambition that is possible,” he said. “But it’s going to fall very, very short of what science indicates should be done.”
This page was last updated November 7, 2024
Written by
Katy Lee has been a writer for Green Central Banking since early 2024, focused on our Asia coverage. A Paris-based journalist who has written for major international titles for more than a decade, she is the co-host of The Europeans, an award-winning podcast about Europe which often covers environmental issues.
