outubro, 01 2024

By WWF-Brazil 
 
A new Guide, published by WWF's Green Financial Regulation Initiative, sheds light on how the financial sector contributes to deforestation and the conversion of ecosystems other than forests, calling on central banks, financial regulators, and supervisors to implement appropriate monetary, regulatory, and supervisory measures to deal with the resulting financial risks and impacts. 
 
One of the most important factors in climate change and nature loss is land use change, 48% of which consists of deforestation and the conversion of other ecosystems. Deforestation and conversion are the sources of physical and transition risks that affect the financial system and can lead to the collapse of the entire financial system. 
 
Deforestation and conversion are a major cause of nature- and climate-related risks that can lead to the collapse of entire financial systems. However, global banks continue to invest in harmful economic activities. Global banks have invested more than $2.6 trillion in activities that harm nature, while global subsidies are estimated at $1.8 trillion a year. 
 
Funding continues to flow to the main driver of deforestation: agricultural expansion. According to Global Canopy, in October 2022, 150 financial institutions provided US$6.1 trillion to 350 companies exposed to the risk of deforestation. 
 
The financial institutions responsible for allocating resources to sectors at risk of deforestation do not fully recognize deforestation and conversion as a source of risk. This is reflected in the general lack of efforts to eliminate commodity-driven deforestation. Central banks, financial regulators, and supervisors need to do their part to combat deforestation and conversion, a fundamental requirement for tackling the global problem of climate change and the risks related to the loss of nature. 
 
Pablo Pacheco, Lead Scientist for WWF's Forest Practice, said: “The global economy depends on nature and is therefore exposed to the financial risk of losing nature in the short and long term. That is why central banks and regulatory and supervisory authorities must incorporate the risks associated with the loss of nature into monetary policies and operations.” 
 
Maud Abdelli, leader of WWF's Green Financial Regulation Initiative, said: “Central banks, regulators, and financial supervisors should not replace any government action, but should collaborate with policymakers and do their part. The less the financial system is prepared to adapt to regulations and preferences aimed at stopping deforestation and conversion, the more difficult it will be to avoid instability.” 

How does the Central Bank of Brazil fit into this agenda? 

The Central Bank of Brazil (BCB) plays a crucial role in steering the financial sector towards sustainable financing. As part of its sustainability agenda, it has implemented initiatives aimed at promoting sustainable financing and reducing social, environmental, and climate risks for the economy and the financial system. To understand Banco do Brasil's efforts to combat deforestation and conversion, researchers from the Climate Policy Initiative/Pontifical Catholic University of Rio de Janeiro (CPI/PUC-Rio) carried out a comprehensive study of the bank's sustainability initiatives. To see the analysis, click here. 
 
The analysis states that in recent years, the BCB has approved a series of standards to improve the rules for financial institutions to identify, measure, evaluate, monitor, control, and mitigate the social, environmental and climate risks of financial institutions, including deforestation. In addition, financial institutions are obliged to implement and disclose their actions in the Social, Environmental and Climate Responsibility Policy, which includes social, environmental and climate principles and guidelines that must be observed when carrying out their activities. 
 
The BCB has also adopted a specific strategy for rural credit, a fundamental component considering the profile of emissions and losses in nature in the country, predominantly associated with changes in land use and the agricultural sector, aligning agricultural financing with sustainability objectives and restricting access to credit for farmers who do not meet environmental criteria. 
 
It also promoted the development of robust mechanisms for monitoring progress. The creation of the Rural Credit Bureau and the improvement of the credit operations registration system (Sicor) are essential tools for verifying rural credit impediments at the time of contracting, as well as for monitoring. The institution also actively participates in international discussion forums, such as the NGFS (Network of Central Banks and Supervisors for Greening the Financial System), the FSB (Financial Stability Board), the BCBS (Basel Committee on Banking Supervision), and the G20, which has been fundamental in promoting knowledge sharing. 

Recommendations 

In order to significantly reduce the risks posed by climate change and nature loss in the financial market and ensure long-term financial stability, WWF calls on central bank, regulatory and supervisory authorities to: 

Tackle the factors that cause the loss of nature and climate change as part of its mandates to guarantee and maintain the stability of the financial market and prices. 

Take measures that directly address financial flows destined for economic activities responsible for deforestation and conversion and ensure that financial portfolios do not contribute to activities that are worsening climate change and nature loss. 

Evaluate deforestation and conversion in monetary and non-monetary policy portfolios to mitigate the financial risks linked to deforestation and conversion. 

Maud Abdelli, leader of WWF's Green Financial Regulation Initiative, said: “There are tools to understand the exposure of deforestation and conversion. Integrating deforestation and conversion into financial regulation and monetary policy can help to modulate financial flows towards environmentally damaging activities, mitigate future financial risks, and ensure a resilient financial system.”