Capital Flows, Policy and Regulation

The financial reality of deforestation

More than 100 world leaders have committed to halt and reverse deforestation at COP26, but signatory and Brazilian president Jair Bolsonaro's pledge to only stop "illegal" deforestation by 2030 has been criticised as lax. Here are the numbers behind the dangerous degradation of the world's largest rainforest and the financial sector initiatives combating its decline

It is not just deforestation policy that needs to change, says Paulo Barreto, a researcher at Imazon, a Brazilian research organisation that promotes conservation and sustainable development in the Amazon forest.

Barreto points to the rising rates of deforestation in the world’s largest rainforest. “Discourse has an effect. Because we have weak institutions, if [president Jair] Bolsonaro says ‘go’, all these guys in the field, they go — no matter what the deforestation policy is.”

Bolsonaro took office in 2019, declaring the Amazon open for business. He responded to international criticism over his comments by stating that “the Amazon is ours”.

In 2020, the world’s largest rainforest lost 11,088 km squared of forest — the largest volume in 12 years — according to Brazil’s National Institute for Space Research. This is 182% of the annual deforestation target prescribed by Brazilian laws, and it shows a trend going the opposite direction. A total of 10,129 km2 of forest was lost in 2019, increasing from 7536 km2 in 2018.

Globally, deforestation and forest degradation are responsible for about 11% of carbon emissions, according to the UN. This is more than what transportation generates globally and it is second only to the energy sector. The Amazon accounts for more than half of the world’s rainforest area and acts as a sink for carbon. But rather than a net absorber, it is now at risk of becoming a net emitter of carbon dioxide, as a result of the polluting activities taking place once trees and vegetation are wiped out, or burned down to clear the space. Some suggest this is already the case.

Banks need to do better

While the Brazilian government may have softened the tone and introduced words such as “sustainable” when discussing investment opportunities in the Amazon, international and local concerns remain. How are banks tackling this issue?

International voices have called on Brazil to do better. Norway’s Storebrand Asset Management whipped up support among peers, which led to an open letter to the Brazilian government last June, warning that the “escalating deforestation in recent years, combined with reports of a dismantling of environmental and human rights policies and enforcement agencies, are creating widespread uncertainty about the conditions for investing in or providing financial services to Brazil”. The group now counts on 34 financial firms that manage a total of $4.6tn, which, Storebrand said, has already led to positive engagement with the government. Some Brazilian companies have publicly expressed concerns too.

Activities that lead to deforestation are largely financed by Brazil’s lenders. Forests and Finance, a research initiative by seven environmental organisations including the Rainforest Action Network and BankTrack, found that between 2015 and 2020, Brazilian banks provided $58.5bn in loans and investment to the beef, soy and timber sectors, along with others at risk of causing deforestation. US banks and investors are the second biggest investment group, with $11.6bn.

While Nordea Asset Management divested $45m from Brazil’s JBS, the world’s largest meat packer, because of concerns that farms in its supply chain were linked to deforestation, commitments remained in place from local investors and financiers. Based on Forests and Finance analysis, between August 2019 and July 2020, JBS received $2.1bn in investment from local development bank BNDES in relation to activities at risk of causing deforestation.

Overall, state lender Banco do Brasil has the largest exposure to forest-risk activities, with a total $32.75bn lent or invested between 2015 and 2020.

In written statements to The Banker, BNDES says that it is unable to comment on the environmental initiative’s data as it does not know its inclusion criteria, despite Forests and Finance’s research methodology being clearly available on its website.

In comments attributed to its deputy managing director of public management and sustainability, Júlio Costa Leite, the development bank says: “With regards to the livestock sector, since 2009, BNDES has established sustainability criteria and guidelines to support cattle-slaughtering companies.” It adds that the bank has “started to make social and environmental demands” on slaughterhouses, as well as their supply chains, and that these requirements resulted in the bank closing the taps on some companies.

BNDES also manages the Amazon Fund, set up by the government in 2008 to attract donations to projects that would prevent, monitor and fight deforestation. In 2019, Norway, the fund’s biggest donor which had committed a total of $1.2bn, suspended support over environmental and social considerations — as did Germany. BNDES says that “the Amazon Fund currently has sufficient funds to continue supporting new projects for a reasonable period of time, regardless of the immediate need for new donations.” It says there are 102 projects in the fund’s portfolio, for a total of 1.8bn reais ($320m), of which more than two-thirds have already been disbursed. Imazon’s Barreto says the Amazon Fund has done little so far.

Also in written comments, Banco do Brasil says that it could not reconcile the figures published by Forests and Finance with what is in its portfolio. It notes that it is indeed the largest financier of Brazil’s agribusiness sector and that it has a number of social and environmental policies in place, including adherence to the Soy Moratorium Workgroup, under which the bank commits not to financing soy production in deforested areas of the Amazon.

Leading by example

Private sector banks have been more forthcoming. The country’s largest three lenders, Itaú Unibanco, Bradesco and Santander Brasil, have come together to address the issue with a joint initiative.

Santander Brasil’s head of sustainability, Karine Bueno, says that the three lenders have started working on four of the initiative’s 10 points, which were announced last July. These are: the impact of cattle farming on deforestation; how to ensure that the cultivation of coffee, açai and other products is sustainable; issues around land titling and regularisation; and biodiversity.

Since 2015, Santander, Bradesco and Itaú have had a combined exposure to forest-risk activities worth about $15bn — significant, but less than half that of Banco do Brasil’s. Forests and Finance categorises Santander’s involvement as coming out of Spain, based on the location of its parent group.

The question, however, is whether the initiative can be truly meaningful without Brazil’s larger players. As a senior banker within one of the three private sector banks says: “You can have all the best eco-friendly policies you want; if the rest of the banks don’t [commit in the same way], it’s not going to help.”

The comment made to praise the initiative rings even truer considering the more significant role played by public sector lenders. Bueno, however, says: “First, we need to start work on this initiative, and then as we move forward we can bring in other partners. If there is a need for a public bank or any other bank [to join], of course we’d [invite them].”

Environmentalist groups remain sceptical about lenders’ ability or willingness to make a real impact. Barreto notes that while “the two largest meat packers [JSB and Marfrig] promised to adopt traceability of indirect suppliers by 2025, BNDES and the finance sector [in general] haven’t pushed enough to have an earlier transition”.

Getting everyone involved

Meanwhile, even European banks that have well-established environmental policies have been caught in controversy. In a report released last August, and Amazon Watch criticised European lenders for providing trade financing to companies exporting oil from the Ecuadorian side of the Amazon Sacred Headwaters region to US refineries.

The oil industry has a dire track record both in environmental and social terms, with oil spills polluting fresh water and leading to food shortages for indigenous people, note the environmental groups. The largest six financiers — ING, Credit Suisse, UBS, BNP Paribas, Natixis and Rabobank — were responsible for 85% of the market, “despite having policies on advancing human rights, sustainability and climate change”, the report notes.’s forest programme director, Tyson Miller, and investigative researcher Angeline Robertson note that since the report, BNP Paribas, Credit Suisse and ING have told the organisation they will be phasing out their financing to the industry.’s new bank scorecard will be released in the second half of 2021.

Others are working to support indigenous people, including foreign investors. Amazonia Impact Ventures, for example, has reached out to Peruvian indigenous co-operatives to provide finance, and help market them as sustainable businesses and investments with international players. The idea is simple, explains co-founder Pajani Singah. The firm provides trade finance loans that have sustainability covenants; the loans are extended at what are considered market rates, but that are still below what local banks would offer. Once certain targets are met, there is a rebate on the interest paid.

“[Interest rates] are still half what [the co-operatives would] be paying locally, which would be 20% or 25%. We are offering the loans at a 10-12% interest rate.” He says that a loan that started with a 15% interest rate, for example, could get a 3% rebate on respecting sustainability covenants.

Recently set up, Amazonia Impact Ventures made its first loan against five containers of coffee sold to a German broker. It is working with Peruvian co-operatives because of co-founder Aldo Soto’s local knowledge, but plans are to expand operations to Ecuador and Brazil. Indigenous lands cover 35% of the Amazon and deforestation rates decline by two-thirds when land is managed by the Amazon’s indigenous people, notes Singah.

“These indigenous communities normally group 100 to 200 families, and could have about 600 hectares (6km2) under their jurisdiction,” says Singah. “If we combine 10 co-operatives together, we could even help them join a carbon credit project offset in the future, like the UN’s REDD+.”

Reducing emissions from deforestation and forest degradation (REDD+) is a mechanism created under the UN Framework Convention on Climate Change to assign a financial value to the carbon stored in forests so that there is an incentive in investing in low-carbon activities and in a more sustainable economic development. A certain size is necessary to make dealing with reporting cost efficient, says Singah. “We believe that if you empower indigenous people, they will themselves stop illegal logging; they will stop deforestation on their land because they can now sustain themselves,” he adds.

If there is a positive correlation between improving the economic prospects of indigenous peoples and the reduction in deforestation, there is also a direct connection between deforestation and the abuse of indigenous peoples’ rights. A report by the Missionary Council for Indigenous Peoples warns of an increase in expropriations of indigenous lands. In 2019, there was a worsening in 16 of the 19 categories of types of aggression against indigenous peoples monitored by the council. In particular, it says that cases of ‘possessory invasions, illegal exploitation of resources and damage to property’, one of the categories, more than doubled from 109 cases in 2018 to 256 the year after.

Barreto is frustrated by the complexities of tackling deforestation. “Brazil had a successful set of policies that brought [annual volumes of] deforestation down by about 83% between 2005 and 2012,” he says. “There was a combination of better investment credit restrictions to landholders [and] the creation of protected areas, including indigenous lands.” After that, the introduction of a new forest code aimed at ensuring that a portion of private land in the Amazon remained forest proved ineffective in its implementation, Barreto adds.

While some, including the World Wildlife Fund, praised its intent, Barreto says that this in effect led to a series of “pardons to some of the people that had previously deforested”. That was before the election of Bolsonaro. Again, notes Barreto, what needs to change is not only policy, but also the debate around the Amazon and its importance to the future of the country. This is true for business, investors as well as banks.

This article first appeared in The Banker's April 2021 edition.

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