Halting Deforestation through Finance: Regulatory Mapping of the Central Bank of Brazil
Introduction
Addressing climate change and nature loss requires a significant shift in allocating financial resources. Central banks and financial regulators can play a crucial role in guiding banks and investors towards a transition to a low-carbon and nature positive economy. To ensure that investments align with social, environmental and climatic goals, these financial authorities must leverage a range of tools that include strategic measures and policies, innovative financial instruments, policy frameworks, and incentives designed to channel financial flows into sustainable projects. Simultaneously, they need to update their risk assessment methodologies to comprehensively integrate the diverse risks and impacts of climate change and nature loss on the financial system.
Endowed with vast and biodiverse ecosystems, Brazil faces a pressing challenge in mitigating emissions and halting nature loss. Historically, the country has witnessed rapid land use changes associated with deforestation, particularly in the Amazon rainforest, and conversion of other non-forest natural ecosystems, including savannah formations and grasslands, notably in the Cerrado biome. Over the years, the federal and state governments have implemented various initiatives to address this issue, including environmental legislation and regulations, policy interventions, and international collaborations.
The Central Bank of Brazil (Banco Central do Brasil – BCB) has joined these efforts, recently playing a crucial role in leading the financial sector towards sustainable financing. In 2020, the BCB included a Sustainability dimension in their BC# Agenda. The initiative aligns with the global trend of regulatory interest in climate change, recognizing it not only as a social and environmental concern but also as a risk to financial stability. Under this agenda, the BCB has forged important partnerships, by joining the Network for Greening the Financial System (NGFS) and supporting the Task Force on Climate-related Financial Disclosures (TCFD). Furthermore, the BCB has made significant strides in assessing and managing social, environmental, and climate risks. Besides that, the BCB has adopted a sector-specific strategy, with an emphasis on rural credit. This is relevant considering that emissions in Brazil are predominantly associated with land use change and the agricultural sector. The measures involve regulations to align agricultural financing to sustainability goals by restricting access to rural credit for farmers who do not comply with environmental criteria. The BCB’s approach is committed to fostering a low-carbon economy and combating deforestation on multiple fronts, strengthening its position as a pioneer at the intersection of finance and environmental conservation.
To understand the BCB’s efforts in addressing deforestation and conversion, researchers from the Climate Policy Initiative/Pontifical Catholic University of Rio de Janeiro (CPI/PUC-RIO) conducted a comprehensive study delving into the bank’s sustainability initiatives. This work explores the challenges, regulatory framework, and potential impacts of these measures on Brazil’s environmental landscape. As such, this study offers a nuanced understanding of the BCB’s pivotal role in the fight against deforestation, providing insights that resonate not only within the country but also in the broader global conversation on sustainable finance. Moreover, it identifies strategic recommendations aimed at advancing the sustainability agenda while acknowledging gaps that still need to be filled.
The remainder of this report follows this structure: Section 2 outlines the research methodology. Section 3 provides a historical context of deforestation and conversion in Brazil, exploring its determinants and tackling strategies, and presents the institutional, legal, and national political context. Section 4 details BCB’s actions and regulatory measures towards the national financial system, with a special focus on rural credit. The study concludes with Section 5, consolidating insights on the nexus between finance and environmental conservation and Section 6 suggesting remaining gaps and future steps.
On Deforestation and Conversion
In Portuguese, it is common to use the term “desmatamento” (deforestation) to refer to both deforestation and ecosystem conversion. However, when it comes to the conversion of non-forest ecosystems, the term “desmatamento” is not the most appropriate. For this case study, we are employing the following definitions:
Deforestation: Permanent reduction of the tree canopy cover below the minimum 10% threshold. Includes areas of forest converted to agriculture, pasture, water reservoirs, mining and urban areas. Excludes areas where the trees have been removed as a result of harvesting, and where the forest is expected to regenerate naturally or with the aid of silvicultural measures.
For the case of Brazil, it is relevant to mention that approximately 95% of all deforestation in the Amazon and conversion in the Cerrado, considering the MATOPIBA[1] region (including the state of Tocantins and parts of the states of Maranhão, Piauí and Bahia) is illegal (Valdiones et al. 2021). These two biomes account for 82% of Brazil’s total deforestation (TerraBrasilis 2023a).
Conversion: Ecosystem conversion refers to the process of transforming one type of ecosystem into another, often with significant changes in its structure, composition, and ecological functions. This conversion can result from human activities, natural processes, or a combination of both. Ecosystem conversion is often associated with human activities such as agriculture, urbanization, industrial development, and infrastructure construction. Ecosystem conversion can also occur naturally over time due to environmental changes, such as climatic shifts or geological events. For example, as a region transitions from a humid climate to arid conditions, the ecosystem may naturally convert from a forested area to a desert.
Methodology
This report examines the initiatives of the BCB to address deforestation and conversion. The approach is designed to ensure a thorough understanding of the evolving regulatory landscape of BCB’s actions, as well as its gaps and challenges.
This study involves an extensive literature review, examining academic publications, policy documents, and reports related to the BCB’s policies and resolutions concerning deforestation and conversion. This review provides a historical context, charting the evolution of regulatory measures and their impact on deforestation and conversion-free practices.
Additionally, this research provides empirical evidence regarding the effectiveness of policies and BCB’s measures. This includes a focus on outcomes and analyses available in the public domain, contributing to a data-driven evaluation of the impact of the policies and actions.
Direct engagement with key departments within the BCB was instrumental in gaining firsthand insights. Discussions with the BCB officials offer a qualitative dimension to the study, providing perspectives on the practical implementation, challenges faced, and the outcomes of the regulatory initiatives.
Furthermore, the analysis incorporated a review of official documents. This included examining BCB and National Monetary Council (Conselho Monetário Nacional – CMN) resolutions, as well as public consultations, normative instructions, circulars, and reports, such as the BCB’s Social, Environmental, and Climate Risks and Opportunities Reports. This analysis helps to understand the formalized structures, regulatory frameworks, and the outcomes of the BCB’s initiatives.
This multifaceted methodology aims to provide a comprehensive understanding of the BCB’s initiatives on deforestation and conversion. The integration of empirical evidence enhances the study’s depth and contributes to the analysis of the role played by the BCB in the intersection of finance and environmental conservation.
This case study is co-produced and funded by the WWF Greening Financial Regulation Initiative.
The authors would like to thank Wagner Oliveira, Natalie Hoover El Rashidy, and the Central Bank of Brazil for the helpful comments and suggestions, Rogério Reis for research assistance, Maud Abdelli, Pablo Pacheco, Verónica Robledo Vallejo, Maxime Garde, Fabricio Campos, Rariany Monteiro and, Carolin Carella for editing and revising the text, and Meyrele Nascimento for formatting and graphic design.
[1] MATOPIBA is an acronym for the states of Maranhão (MA), Tocantins (TO), Piauí (PI), and Bahia (BA).
