The report “Exposure of the Financial Sector to the Risk of Natural Capital in Brazil” was launched this week in São Paulo. Commissioned as part of “Emerging Markets Green Finance Dialogue”, by the Brazilian Business Council for Sustainable Development (CEBDS) and GIZ, the German Agency for International Cooperation. The research was conducted by Trucost, in partnership with a group of Brazilian financial institutions.
Brazilian pension funds and banks are exposed to billions of dollars in environmental costs due to the environmental impacts caused by the activities of the companies that these actors finance or invest in. The integration of environmental factors into/in financing decisions can help financial institutions reduce these environmental risks and at the same time promote capital flows towards resource- and environment-friendly processes and products.
The research quantifies, in financial terms, the impacts of natural capital in 45 business sectors in Brazil, including agriculture, cement, chemicals, energy, forestry and steel. Impacts include greenhouse gas emissions, water consumption, deforestation, waste, water and air pollution.
The study finds that the cost of total natural capital of companies financed by Brazilian banks and pension funds is R$ 1.646 billion. Sectors with the highest natural capital costs include livestock farming, soybean cultivation, and oil and gas extraction. For every million reais of revenue, the livestock sector, for example, generates R$ 22 million in environmental impacts, mainly through deforestation and greenhouse gas emissions. Likewise, in the case of soybean cultivation, for every R$ 1 M of revenue generated by the sector, total environmental impacts worth almost R$ 3 million.
Marina Grossi, president of CEBDS, said: “we know how challenging it is to include the topic of natural capital in the analyzes of banks and companies. It's a cutting-edge subject. This process necessarily involves better management of environmental risks and, for the management of these risks to be appropriate, it is necessary to work on identifying and measuring these risks, first of all. And we are precisely in this construction.”
The report recommends that financial institutions should quantify the costs of natural capital in relation to their investment portfolios and loan portfolios; assess the risks of these costs being internalized over time as a result of regulation or relating to climate volatility; and incorporate natural capital considerations into their analyses, decision-making processes and investment strategies.
To enable this, it is critical that banks and pension funds use their position to demand better data on the impacts of companies' natural capital. They should also encourage companies to reduce their environmental impacts and resource use by adopting environmentally sustainable production methods such as renewable energy, efficient irrigation and waste recycling.
Richard Mattison, chief executive of Trucost, said: “Natural capital appreciation offers banks and pension funds a new framework for understanding the risks and opportunities of their investment and financing activities. Financial institutions that integrate natural capital considerations into their asset valuation and corporate lending decisions can benefit by reducing risks and identifying more profitable business opportunities.”
The full report “Exposure of the Financial Sector to Natural Capital Risk in Brazil” is available for download on our website.
See the presentations:
Marcia Micheli – Real Grandeza
Tatiana Grecco – Itaú Asset Management
