Opportunities for Climate Finance (Landscape of Climate Finance for Land Use in Brazil 2021–2023)
For climate finance to be expanded and improved in order to reach the scale needed to address the challenges of mitigation and adaptation in the land use sector in Brazil, a set of measures and actions must be taken by public and private actors in the different areas tracked in this publication.
Rural Credit Policy
Rural credit is the main source of climate finance for land use in Brazil, with an average of US$ 9.9 billion per year tracked. However, methods of verifying the sustainability of these resources are limited, mainly due to self-reported information without rigorous monitoring.
To encourage good sustainable practices in the Brazilian agricultural sector, it is important to define criteria that classify such practices and establish differentiated financing conditions, such as interest rate discounts or increased credit limits.
These criteria must be precise, technical, and harmonized with existing initiatives and the Brazilian Sustainable Taxonomy, currently under development by the Ministry of Finance. In addition, sustainable practices need to be reliably measured and aligned producers need to receive efficient incentives. It is essential that these criteria are applied and monitored beyond self-declaration, ensuring transparency and a real impact on the sector’s practices.
Given the high fiscal cost of the rural credit policy, which allocated R$ 13.6 billion(US$ 2.7 billion) in subsidies in the 2023/2024 Agricultural Plan, it is crucial that these resources generate effective returns that modernize the sector and promote the transition to low-carbon and sustainable agriculture.
Financial institutions should reinforce environmental requirements when granting rural credit, checking the property’s deforestation history, and requiring the presentation of an administrative instrument that authorizes deforestation in a given area, such as the Authorization for the Suppression of Vegetation (Autorização de Supressão de Vegetação – ASV) or equivalent documentation. In addition, it is essential to regularly monitor for new deforestation after the credit has been granted, with the operation being suspended if the producer fails to prove the legality of the deforestation. The BNDES has adopted this practice since February 2023.
Within the scope of RENOVAGRO, which finances practices for low-carbon agriculture, it is important to rigorously monitor the implementation of the projects financed, as well as better coordination with technical assistance and risk management instruments. This monitoring aims to ensure that the subsidized resources produce the expected sustainability results. RENOVAGRO credit lines, such as those aimed at recovering pastures, require constant monitoring to ensure that the projects are implemented correctly.
Finally, the Agricultural Plan should encourage environmental regularization among rural producers and compliance with the Forest Code, offering differentiated credit conditions for those in compliance with environmental legislation. Producers that are in compliance with the Forest Code, have surplus Legal Reserves, or have joined the Environmental Compliance Program (Programa de Regularização Ambiental – PRA) should be given priority. Incentives can include an increase in the credit limit, discounts on interest rates, or a longer period of finance for environmental restoration and adaptation projects. The Agricultural Plan has crucial instruments to encourage the implementation of the Forest Code, which is essential for balancing agricultural production and environmental conservation.
Agriculture Risk Management
Agriculture risk management instruments mobilized an average of US$ 2.6 billion per year, and were the main finance mechanism for climate adaptation and payments for loss and damages. The resources tracked for agriculture risk management grew by 123% compared to the 2015-2020 data. This increase has generated a significant impact on public accounts, with an annual cost of US$ 1.1 billion per year, which makes necessary a review of agriculture risk policies.
As the frequency and intensity of adverse weather events increases, demand for agriculture insurance tends to grow. However, the cost of policies also increases due to the higher volume of compensations. In fact, insurers may find it difficult to maintain the supply of insurance for certain products and regions. Given that the costs of climate change are already materializing, it is essential to implement public policy strategies that guarantee the resilience of agricultural production, one of the sectors most vulnerable to the effects of climate.
Subsidies from the Rural Insurance Premium Subsidy Program (Programa de Subvenção ao Prêmio do Seguro Rural – PSR) must follow the same social, environmental, and climate criteria already applied to rural credit. The new National Agricultural Risk Management Plan (Plano Nacional de Gestão de Risco Agropecuário) incorporates some of these criteria, such as the prohibition of resources for properties involved in slave labor, embargoed areas, indigenous lands, conservation units, archaeological sites and quilombola communities. Although this plan represents an important step forward, it is not yet fully harmonized with rural credit restrictions, which also include analysis of the status of the Rural Environmental Registry (Cadastro Ambiental Rural – CAR), especially in cases of CAR cancellation or suspension, as well as properties located in Type B Public Forest areas.
It is essential that the socio-environmental criteria for the PSR subsidy cover the entire area registered in the CAR, and not just the insured portion. In addition, PSR and PROAGRO resources should be directed as a priority to producers who are not involved in illegal deforestation and who adopt sustainable agriculture practices. Given the scarcity of PSR resources, the allocation of subsidies could be used as an incentive to promote better practices in the sector. It would also be strategic to direct the subsidy toward producers who take out credit lines aimed at sustainability, such as RENOVAGRO. Another proposal is to broaden the coverage of the PSR to include nurseries and activities related to environmental restoration.
PSR resources should, as a priority, favor small producers and regions with insufficient coverage. Small farmers face greater difficulties in accessing risk management instruments and currently rely mostly on PROAGRO, whose limit for coverage has been reduced this year, which could leave many producers destitute. In regions with a high climate risk, there is a tendency for insurance companies to raise prices, limit the supply of insurance or even decide not to enter the market, leaving producers even more vulnerable. Brazil has regions and profiles of producers with little or no access to insurance and other risk management tools.
Advancing the regulation and operationalization of a public-private fund is key to ensuring the expansion of the rural insurance market. This fund would help protect insurers against widespread losses, which make it difficult to pay claims, especially in the face of growing climate risk. Reinsurers also play a fundamental role in the functioning of this market, and are essential for guaranteeing the solvency of insurers in times of crisis.
Government Spending
Expenditure from the federal public budget on land use with climate mitigation and adaptation objectives amounted to an average of US$ 561 billion per year between 2021 and 2023, representing 3% of the total tracked for this period. These flows fell by 60% between 2016 and 2021 (from US$ 1.1 billion to US$ 453 million), a period of fiscal austerity and non-prioritization of the climate and forest agenda. The resumption over the period analyzed, with growth of 47%, reaching US$ 680 million in 2023, points to the resumption of prioritization of the agenda. However, the amount is still insufficient to guarantee an ambitious and effective environmental and climate policy.
The public budget is the main instrument channeling resources for policies in the native forest sector, which involves conservation, restoration and reforestation actions. The functioning of the MMA and agencies, such as IBAMA, ICMBIO and FUNAI, which are essential for environmental preservation, combating deforestation and protecting indigenous peoples, depends on these government expenditures. It is necessary to recover and expand the administrative budget to guarantee the capacity of these agencies to operate.
In addition, the National Fund for Climate Change—a state instrument with disruptive potential for financing a low-carbon economy—has had difficulty mobilizing its available resources. Facilitating access to credit and grants, together with the already announced contribution of resources, could unlock a major financier of the climate agenda in the country, though not exclusive to the land use sector.
In order to improve government spending on the environment and climate, it is essential to promote transparency and efficiency in the use of resources, maximizing the impact of public policies. The continuity and consistency of these policies are fundamental for government programs and actions to generate lasting and effective impacts.
For this to be possible, the planning and financing of initiatives must be anchored in long-term strategies, ensuring that climate policies are not vulnerable to political changes. Adopting stable budget forecasts and financial mechanisms can reduce volatility in finance, providing the stability needed for results to be achieved and impacts to be consolidated. Multi-year budgets, for example, allow for more consistent allocation, which is especially important for conservation and restoration projects, given that these often take years to show concrete results.
An accessible and comprehensive monitoring system that tracks spending on environmental and climate policies is equally essential. Regular reports on the execution of these budgets facilitate evaluation and enable strategic adjustments, promoting more effective use of resources.
In addition, it is crucial to integrate sustainability goals across all government ministries, inserting environmental and climate criteria into the budget guidelines for sectors such as crops and energy. This amplifies the positive impact of public investment and facilitates an inter-ministerial approach to achieving climate goals.
These improvements to public policy will help make the public budget more effective and sustainable, promoting concrete results for environmental preservation and the fight against climate change in Brazil.
Capital Markets and Other Financial Instruments
Thematic bonds mobilized an average of US$ 2.5 billion per year in climate finance for land use over the three-year period, representing 14% of the flows tracked. This amount, however, reflects a peak of US$ 4.2 billion in 2021, followed by an 88% drop until 2023, when it registered only US$ 0.5 billion. The high financial cost and the time needed to label a bond have kept the market away from this type of asset. It is, therefore, essential that other capital market instruments adapt to provide the transparency needed to measure climate impacts.
CBIOs have been important mechanisms for financing the biofuels sector in the country, generating US$ 0.6 billion per year. Established under RENOVABIO, CBIOs direct flows from polluting agents to emission-mitigating agents. However, CBIOs have been criticized for their governance, structure, and price volatility.
It is also important to highlight the role of the BNDES as a transversal actor in climate finance in Brazil, operating on several fronts tracked in this study and with significant potential to attract private flows, especially through blended finance mechanisms. The bank’s climate finance for land use totaled US$ 0.4 billion per year, with a focus on biofuels and planted forests. However, the current BNDES management is developing new fronts for native forests, which could diversify finance options and strengthen the forest sector.
The mobilization of private resources through the capital market still encounters barriers, especially the lack of transparency in operations and funds earmarked for sustainability. In order to guarantee the capital market’s commitment to building a low-carbon economy, it is necessary to establish solid mechanisms for evaluating and measuring the flows earmarked for the climate agenda.
It is essential to improve the transparency of data sources, establish guidelines for classifying flows, and increase the availability of detailed data at the project level, including specific project locations. Clearer disclosure regulations and standards will allow for more accurate estimates. It is also important to align with global climate disclosure and transparency standards, such as those established by the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), which are widely recognized and contribute to increasing investor confidence.
Mobilizing private resources at scale is crucial to financing the transition to a low-carbon economy, as public resources are insufficient to meet climate targets. Brazil has significant potential to leverage sustainable agriculture practices and promote forest conservation and restoration, generating opportunities for private investment. The development of innovative financial products is key to expanding the portfolio of instruments, such as impact bonds linked to conservation and sustainable land use.
In particular, the regulated carbon market and its connection to Brazil’s NDC can also be an important catalyst for leveraging investments in the climate transition. This market can offer regulatory certainty, create new business opportunities and establish a robust framework for measuring and reporting carbon emissions, fostering investor interest.
International Development and Cooperation
Sources of funds for international development and cooperation channeled, on average, US$ 542 million per year in climate finance for land use in Brazil between 2021 and 2023, representing 3% of climate-aligned financial flows. These resources came mostly from MDBs, responsible for 61% of the resources, and international governments, with 29% of what was tracked.
A significant part of international finance has been allocated to the forest sector, with the governments of Germany and Norway representing 15% of the flows to native forests tracked between 2021 and 2023.
The Amazon Fund, on the other hand, has a great potential impact in the region, contributing to combating deforestation, promoting conservation and strengthening a sustainable economy aligned with the forest. After a hiatus between 2019 and 2022, the fund resumed its activities in 2023, allocating US$ 26 million to five projects. The new announcement of R$ 3.8 billion (US$ 771 million) in grants signals a significant expansion of the fund’s operations, which could have a greater impact on protecting and enhancing the region. The re-establishment of the Amazon Fund’s governance structure was essential in attracting the trust of international donors, promoting a management model that inspires partnerships and new grants.
Despite the change of government and the adoption of a policy committed to the environment and climate, the figures show that international fundraising is still below potential. There are high expectations that Brazil will be able to attract large volumes of international finance for this agenda, but this ability is directly linked to the government’s commitment to ambitious and clear climate targets. This includes a commitment to zero deforestation, the transition to low-carbon agriculture, and the expansion of the use of clean energy. Establishing finance targets for specific sectors can facilitate the flow to strategic areas.
In this context, defining the Brazilian Sustainable Taxonomy in a robust and measurable way can leverage the attraction of resources for the climate agenda. The taxonomy should provide a classification structure that will allow for greater transparency and traceability of investments. By defining clear criteria on what constitutes a sustainable investment, Brazil can increase international confidence, attracting new flows and fostering the construction of a low-carbon and resilient economy.
Other initiatives have been adopted, using innovative concepts, with the potential to facilitate the attraction of long-term foreign private investment and make decarbonization projects in the Brazilian economy viable. In particular, it is worth highlighting the creation by the federal government in 2024 of the Foreign Private Capital Mobilization and Exchange Protection Program, better known as Eco Invest Brasil, within the scope of the FNMC. The initiative aims to facilitate the raising of funds abroad by Brazilian entities for sustainable finance and to encourage the development of long-term foreign currency hedging solutions, mitigating the risks associated with exchange rate volatility. [1]
[1] Learn more at: Tesouro Nacional. Eco Invest Brasil – Sobre o programa. nd. Access date: October 25, 2024. bit.ly/4elEv5Q.
