Going green after the COVID-19 pandemic: opportunities and challenges for Brazil
By Mario Mesquita, chief economist at Itaú Unibanco, Brazil’s largest private sector bank
Brazil ended 2019 with virtually the same level of GDP that it had in 2012 and now the COVID-19 pandemic is likely to exert further downward pressure. Leveraging green finance may be the best way to tap more resources from domestic and foreign institutional investors now that sustainable investment is a growing necessity. In fact, the time is ripe for a green decade, argues Mario Mesquita in this post for the Sustainable Finance Leadership series.
There is much debate about the ways in which the COVID-19 crisis might trigger a faster adoption of sustainable finance practices once the world eventually enters the aftermath of the pandemic. The crisis has underscored the need to take better care of the planet. The forced shutdown of economic activity means global greenhouse gas emissions are set to drop by roughly 8 per cent in 2020, according to estimates by the International Energy Agency. While a large amount, this temporary fall is far from enough to make a real change to the warming trajectory and brings to light how distant we were, in the normal course of business, from achieving more sustainable patterns of emissions.
The pandemic has also exposed our vulnerabilities. COVID-19 may have served as a very costly wake-up call over the reality of environmental risks with human-related causes. Furthermore, in their effort to engineer an economic comeback, policymakers are becoming increasingly aware of the opportunities provided by a green-recovery scenario of demand-boosting, climate-friendly infrastructure investment. Not only must sustainable development be a central economic pillar, it might itself be the very way forward.
Low-hanging fruit: power, energy efficiency, transport and sewerage
This growth avenue looks especially appealing for Brazil, where inadequate infrastructure investment poses a significant obstacle to economic development. With public accounts in a delicate situation, leveraging green finance may be the best way to tap more resources from domestic and foreign institutional investors.
Opportunities for sustainable investing in Brazilian infrastructure are abundant, chiefly in the areas of power generation – in wind and solar farms, to reduce dependence on hydropower, which is more damaging environmentally; in energy efficiency – e.g. in better transmission lines, LED public lighting; in transport – the Brazilian government recently structured the first green bond certification programme for transport infrastructure projects in Latin America, initially focused on railways; and in sewerage – the Brazilian Senate recently passed important legislation to organise the sector and enable large-scale private sanitation projects.
Brazil’s green vocation: agribusiness and forestry
The horizon, however, is much broader than that. Fostering sustainable finance is a way of simultaneously protecting and employing the country’s natural resources, and agribusiness and forestry should be at the core of this movement. But this cannot be at the cost of endangering the environment, neither in the Amazon nor in other areas of this vast country. These sectors are highly relevant for the local economy and perfectly suited to green financing instruments; but also, given that approximately 70 per cent of the country’s total greenhouse gas emissions come from agriculture and changes in land use, without their participation Brazil cannot hope to achieve its nationally-determined contribution to the Paris Agreement.
As identified in a report by the Brazil Green Finance Initiative, some of the main opportunities in Brazilian agribusiness – which accounts for around 20 per cent of GDP – are low-emission agriculture, restoration of degraded pasturelands and integrated sustainable cropland-livestock-forestry systems that work against deforestation. These are initiatives the country could pursue to reduce – or stop – the carbon emissions of its most polluting activities.
In addition, Brazil could create considerable value from forestry by providing the world with solutions to reverse climate change through carbon capture and storage in the form of native or planted forests. This would become particularly attractive if a better framework for carbon credits were to be developed, which would ultimately allow for the issuance of green bonds with the sole, critical, purpose of protecting the country’s forests.
How to harvest the low-hanging fruit?
Despite Brazil having a high potential for green projects, only a minor fraction of its corporate debt instruments are issued under a sustainable investment framework. What, other than the market’s incipient nature, is to blame for this?
Poor regulation is one of the key barriers here, but might just be on the verge of substantial improvement, provided appropriate incentives are put in place. There are global investors who have stressed how important it is for Brazil to step up its efforts to curb deforestation; a recent example is a letter addressed to the Brazilian government, signed by 29 global investment firms, that expresses their concern about environmental protection in the country. Warnings of this nature may be an incentive to nudge regulation in a more sustainable direction. This would help the Brazilian green finance market to develop, opening the door not only for such instruments to be used as tools to reduce deforestation, but also to apply them with broader scope, as previously discussed.
Building on the findings of a joint report by GIZ, SEB and CEBDS, it is crucial that any future legislation in this area clearly defines what is meant by ‘green’ and establishes precise rules for green bond information disclosure, reporting, external review and auditing – preferably mirroring international standards to reduce informational barriers for international investors. Other initiatives to foster this market, such as credit-enhancing guarantees from Brazil’s development bank or possible tax incentives (similar to existing ones for infrastructure bonds) may be worth discussing, but will be poised to fail unless there is a clearer regulatory environment.
After a lost decade, the time is ripe for a green one
Paving the way for green investment is not just an attractive possibility, it is a growing necessity. By making full use of its natural advantages, Brazil could very well become the foremost destination for sustainable funding sources. However, if, myopically, it turns a blind eye to the global ESG trend, Brazil could gradually see investment flows dry up as it would fail to comply with new standards.
Brazil ended 2019 at virtually the same GDP level of 2012, due to a series of wrong choices, and the 2020 pandemic is likely to push the country further back in time, to early-2011 levels. After a (second) lost decade, the time is ripe for a green one.