Natural Capital & Finance in Brazil
The Brazilian financial system is significantly exposed to natural capital risk as many sectors which banks and pension funds finance are heavily reliant on Brazil’s natural capital base. To provide Brazilian financial institutions with an understanding of the relevance and magnitude of the natural capital risks they are exposed to and to support them in integrating such risks into their lending and investment decision-making, we engaged, jointly with our partners, both in research and capacity building activities.
In the study Natural Capital Risk Exposure of the Financial Sector in Brazil, commissioned by the Sustainable Finance Working Group of the Conselho Empresarial Brasileiro para o Desenvolvimento Sustentável (CEBDS) and GIZ, our partner Trucost developed a model that quantifies the natural capital costs across 45 key sectors in Brazil. The study finds that the annual natural capital costs caused by companies which Brazilian banks are financing are 2.25 times the value of credit provided to these companies. Cattle ranching, agriculture, fishing, and food and beverage were identified as the sectors with the highest financial risk for Brazilian banks. Against the background of the often insufficient availability of data and methodologies, a key objective of the study was to help financial institutions incorporate such risks into their lending and investment activities by showing how potential exposure at the level of the portfolio, sector and investment can be quantified using natural capital accounting techniques in combination with a natural capital risk driver framework and traditional financial analysis.
Following up on this study, our second study – Leveraging a Water Efficient Economy – Opportunities for Companies and Financial Institutions in Brazil – focused on identifying and aligning business and investment opportunities in water-saving technologies for both Brazilian companies and financial institutions. The study revealed that the estimated share of water annualy conserved through the adaptation of the scrutinized 14 technologies amounts to 19% of the water consumed by the industry and 3% of water consumed by agriculture. These estimates correspond to an annual saving of R$ 11.6bn (EUR 3.2bn). In order to exploit the full potential of these technologies, investments of approximately R$ 49bn (EUR 13.5bn) are required. R$ 25bn of these investments effectively represent attractive investment opportunities for financial institutions, based on an analysis of average capital expenditure, water break even costs and the investment gap for each technology.
The supplementary workshop series Natural Capital Risks and Opportunities for the Financial Sector in Brazil is designed to give financial institutions an in-depth understanding of the relevance of natural capital risks and opportunities for their lending and investment activities. Financial institutions learn about the nature and extent of their exposure to natural capital risks as well as potential business opportunities with regards to both product development and investments in new, eco-friendly technology markets. They are provided with an overview of methodologies and tools found below to quantify natural capital risks and integrate them into investment decisions and risk management.
Publications & Tools
The Workshop Series
- Workshop III: Seizing Business Opportunities – Investing in Eco-friendly Markets and Sustainable Business Practices (14 June 2016, São Paulo). The workshop served to launch the Portuguese version of the study Leveraging a Water Efficient Economy – Opportunities for Companies and Financial Institutions in Brazil. Jointly with our partners, we presented key findings and discussed with financial institutions, companies, government representatives, and experts, the financial viability of different water management technologies and related investment opportunities in Brazil.
- Second Workshop: Understanding, Quantifying and Managing Natural Capital Risks (15 December 2014, São Paulo): The workshop served to launch the study Natural Capital Risk Exposure of Financial Institutions in Brazil.
- First Workshop: Introduction to Natural Capital – Understanding Risks and Opportunities (23 September 2014, São Paulo): The workshop introduced the concept of natural capital, its relevance for financial institutions and the rationale behind integrating natural capital considerations into corporate credit valuation and risk management.