Emerging Green Finance and Brasilian Agriculture
Brasil is the second largest producer of beef after the US. But its beef, leather and soy are primary commodities leading to land conversion, deforestation, and huge emissions that drive climate change in the region, leading to floods and droughts that disrupt supply chains and human lives alike. Not far behind comes demand for timber which is likely to increase as wood becomes an alternative to high carbon construction materials and demand for wood pellets goes up to feed large scale energy facilities, such as Drax Power in the UK. How can these industries get into equilibrium with the natural capital they depend on? One route is to change the incentives behind the financial capital currently servicing these lines of production.
Currently Brasilian banks are mandated to spend 35% of their deposits on rural agriculture. The problem is, there are few sustainability strings attached to the vast amount of finance available. Currently these banks offer about 100 times more credit for business-as-usual agriculture, than credit for low carbon, sustainable agriculture. The puny resources of environmental law enforcement agencies or conservation bodies are no match against this scale of funding that is pushing in the opposite direction to the protection of forests and delivery of sustainable low carbon agriculture.
Also, much of the green credit available is not take up by farmers, precisely because there are strings attached and because loan officers are not incentivised to go through the extra hoops necessary to process green loans. Could a different approach could be to put the onus on 'normal' loans to prove they are not destroying natural capital and make sustainable loans the simpler default route?
200 million head of cattle in Brasil occupy 170 million hectares of expansive pasture - mostly without any other crop. Organic matter retention is a major concern and grass stocks die back without inputs or improved management. Research by the Brasilian Agency for Agricultural Research, indicates it is possible to increase carbon fixed in soils by 0.9 tons of carbon equivalent per hectare each year, by implementing Integrated Crop-Livestock-Forest (ICLF) techniques, including new crops, woodlands and rotational grazing schemes. That would significantly combat the 1.5 tonnes of CO2e per hectare per year that BAU livestock practices currently emit.
Rabobank, a giant Dutch agricultural bank, lends to some 19 million hectares of arable land in Brasil, so it alone carries immense power to finance change. In 2017 it entered into a partnership with UN Environment to create a US$1 billion fund to provide de-risked green loans at lower rates than BAU loans for agriculture. These loans and guarantees have the aim of accelerating this transition towards agriculture with forest protection and reforestation, sustainable production, and improved rural livelihoods at its heart. The fund will offer a combination of technical assistance, soft loans, and de-risking instruments.
Because less than 10% of Brasilian cattle farms currently practice this form of agriculture, the opportunity for finance is immense. It is no surprise then that the Brasilian Green Finance Initiative was launched recently and its Committee, a partnership between Sociedade Rural Brasiliera (SRB) and UK based Climate Bonds Initiative, held its first meeting in 2018 to set priorities for attracting financial capital at scale to fund this new sustainable pathway for Brasilian agriculture.
Marina Grossi, Brasilian President of the World Business Council for Sustainable Development said at the meeting: “What we should do now, and this is a challenge, is to accelerate these sophisticated initiatives, bringing together investors and companies and stimulate their conversation on the benefits of the low carbon market. We’ve heard a lot about green bonds and international partnerships and initiatives today and this is only the beginning.”
Their next meeting is in August 2018 when pension funds, insurance companies, banks, major industry sectors and investors will meet to chart the conditions for catalysing a local green finance market in one of the world’s biggest agricultural powerhouses. If Ag. Is your interest, be there or be square.