Deforestation and climate change pose a huge financial risk to exposed investors – both in Brazil and around the world. A new report by Planet Tracker reveals the danger posed to the Brazilian economy from deforestation-driven regional climate change, and outlines what the financial services industry can and should be doing about it.
LONDON, 27 October 2022: Brazil must act now to prevent a deforestation “tipping point” that could turn the Amazon rainforest into a “carbon-emitting Savannah”, causing significant harm to the Brazilian economy and the soft commodity supply chains linked to it, finds financial think tank Planet Tracker.
Their new report, titled Destroying Brazil’s AirCon – a reference to the role played by Brazil’s forests in moderating temperatures, likened to a giant air-conditioning unit – is the successor to No Rain on the Plain (2021). It expands impact analysis to look at the effects of deforestation on the Brazilian economy and society at large, with a focus on agriculture, energy, productivity, health and transport.
The research has found that regional climate change driven by deforestation could put more than 39% of Brazil’s exports at risk, with the country’s single largest export product – soybeans – anticipated to experience yield declines of 66% in a moderate climate warming scenario.
At the same time, droughts are set to significantly curtail the supply of hydropower – on which Brazil is dependent for 66% of its electricity – further driving up energy prices and making it difficult to meet concurrent growth in demand.
Workforce capacity will also be reduced by more frequent and persistent periods of extreme heat, in particular for outdoor work, which provides employment to 18% of Brazil’s workforce. By the year 2100, Extreme Heat Days could exceed the ‘risk of death’ threshold in every month in the Amazon region, rendering it largely uninhabitable, shutting down industries and producing large swathes of climate refugees.
Peter Elwin, Director of Fixed Income and Head of Food & Land Use Programme at Planet Tracker, commented: “Brazil needs to tackle its deforestation problem to preserve its own economy and ensure the wellbeing of its population. The Amazon could be very close to a tipping point, beyond which there will be no going back and that would have dire consequences for Brazil’s economy and way of life. But this is a global problem too – stopping deforestation in Brazil and elsewhere is essential if we are to have any chance of meeting our climate goals, which is why we’re calling on investors to help drive us away from the tipping point of no return.
“Way too many have yet to realise exactly how critical this is for their own bottom lines. Sovereign bond investors exposed to Brazilian bonds, and equity and credit investors and banks exposed to domestic Brazilian companies, not to mention all their stakeholders, will soon suffer the direct effects of Brazil’s climate becoming more hostile. Even investors and banks exposed to the food system companies dependent upon Brazil’s soft commodity exports, such as soy, maize, rice, coffee and beef, are about to feel the sting, as we’ve seen happen to many following the effects on global supply chains since conflict in Ukraine began”.
In its Nationally Determined Contribution (NDC) under the Paris Agreement, published in 2015, Brazil committed to achieving zero deforestation by 2030. Efforts must be accelerated as soon as possible to ensure success, argues Planet Tracker, suggesting a range of actions financially exposed entities can take to help, including:
- Measuring the deforestation risk embedded in their portfolios;
- Ensuring the companies they invest in are engaging effectively with their direct and indirect suppliers to tackle deforestation in Brazil;
- Formulating and publishing zero deforestation policies and commitments, and monitoring and reporting progress;
- Urging the Brazilian government to fund measures to prevent deforestation, and to bring forward their NDC commitment to 2025;
- Engaging with the Brazilian Central Bank to support its efforts to green the Brazilian financial system;
- Joining multi-stakeholder initiatives, such as Investors Policy Dialogue Deforestation (IPDD), to enable cross-sector collaboration; and
- Supporting initiatives focused on funding sustainable agribusiness practices.
Download the full report here for more information.
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ABOUT PLANET TRACKER
Planet Tracker is a non-profit financial think tank producing analytics and reports to align capital markets with planetary boundaries. Our mission is to create significant and irreversible transformation of global financial activities by 2030. By informing, enabling and mobilising the transformative power of capital markets we aim to deliver a financial system that is fully aligned with a net-zero, nature-positive economy. Planet Tracker proactively engages with financial institutions to drive change in their investment strategies. We ensure they know exactly what risk is built into their investments and identify opportunities from funding the systems transformations we advocate.
ABOUT FOOD & LAND USE PROGRAMME
Our Food & Land Use programme examines the relationship between food and agriculture companies, environmental risks and financial return, thereby exploring the materiality of embedded nature.
Planet Tracker analyses the macroeconomic mechanisms through which natural capital can affect the ability of a country to pay its sovereign debt and examines the exposure of funds to sustainability shocks, notably through the transition to sustainable production, regional agricultural declines, or novel global policy affecting the trade of nature-dependent goods. Our aim is to align capital markets with the sustainable management of agriculture resources.
This report is the second in a series examining the problems faced by the Amazon due to extensive deforestation. The first, No Rain on the Plain, was named winner of the Environmental Finance Sustainable Investment Awards 2022.
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