Public Banks and Financing the Climate Transition
Rafael Giovanelli is Research Manager at Instituto Escolhas, and Sergio Leitão is the Executive Director of Instituto Escolhas. This article was written for issue 145 of the WBO weekly bulletin, published on November 29, 2024. To update the bulletin and receive it for free, enter your email in the indicated field.
“If this is the case, shouldn’t we charge a higher price for capital from banks that do not have green investments?” This is the phrase by Roberto Campos Neto, president of the Central Bank in a lecture given on November 9, 2024, in Switzerland at an event of the Bank for International Settlements, which functions as a kind of central bank for central banks, including guiding regulatory practices. On that occasion, Campos Neto highlighted the importance of financing in the transition to a low-carbon economy, advocating the incorporation of climate issues into the mandates of national financial authorities, in addition to making criteria more expensive for banks that do not finance sustainable activities, requiring larger reserves to generate credit operations, as the above sentence indicates.
The direction indicated by the president of the Brazilian Central Bank for tackling the climate emergency is correct. In fact, it is necessary to improve the regulation of the financial system so that it is possible to transform financing portfolios and the resources that today drive businesses based on deforestation or fossil fuels are redirected to sustainable and profitable activities, such as renewable energy or biodiversity production chains. Brazil can show the world that this is possible by reforming national laws on public funds and development banks to unlock, with the money we already have, a low-carbon economy. In this cutting-edge strategy, we would return to society a new decarbonized production model.
For example, 3% of the revenue from income tax and industrialized products is annually directly allocated to the Constitutional Funds for Financing the North (FNO), Northeast (FNE) and Central-West (FCO), which are responsible for inducing the development of each of these regions. For 2024 alone, the programming of these Funds was expected to be more than R$60 billion. The Banco do Brasil administered R$11 billion, Banco da Amazônia (Basa), R$13 billion, and Banco do Nordeste (BNB), R$37 billion. However, most of these resources are not directed towards a low-carbon economy.
Between 2020 and 2024, when administering the FNE, Banco do Nordeste (BNB) allocated, on average, 15% of the resources to FNE Rural, a program that supports agricultural activities, including the suppression of native vegetation in the Caatinga and Cerrado. More than R$22.5 billion were earmarked for this program, while the amounts earmarked for bioeconomy, forestry activities, and agroecology did not reach, together, 0.1% of the Fund's annual budgets in that same period. The amounts earmarked for the recovery of degraded areas and the development of sustainable activities were below R$30 million per year, an amount insufficient for sustainable activities to compete with carbon-intensive businesses.
In addition, rural credit operations entail considerable risks for environmental conservation, requiring extra care from public banks. Between 2020 and 2023, deforestation in the Cerrado jumped from 7.9 thousand km² to 11 thousand km², an increase of 40%, making it the most devastated biome in the country. This increase was driven by the expansion of the soybean frontier in Matopiba, a region that occupies areas of agricultural expansion in the states of Maranhão, Tocantins, Bahia, and Piauí.
In 2022, the Banco da Amazônia (Basa) allocated R$9 billion from the FNO to agriculture, equivalent to 76% of its contracts. Pará and Rondônia received R$5.3 billion and together accounted for half of the deforestation in the Amazon rainforest that year. This scenario requires careful diligence from financial institutions in their credit operations, after all, it is necessary to ensure that public funds are not used in activities that advance the arc of deforestation and worsen the climate crisis.
But we need to go beyond concern for environmental risks to achieve the climate transition: we need a profound change in the portfolios of development banks. The assumption is that there are more resources driving sustainable businesses than resources driving carbon-intensive activities. In other words, we need definitions on amounts, timelines, and goals for redirecting public money. Granting small amounts is not enough. Meanwhile, most of the budget of hundreds of billions of reais of BNDES, Basa, and BNB remained dedicated to sources of greenhouse gas emissions, a transition that has not been completed.
But we need to go beyond just addressing environmental risks to achieve climate transition: we need a profound change in the portfolios of development banks. The assumption is that there will be more resources driving sustainable businesses than resources driving carbon-intensive activities. In other words, we need to define values, timelines and goals for redirecting public money. Granting small amounts is not enough. As long as most of the budget of hundreds of billions of reais of BNDES, BASA and BNB remains dedicated to sources that emit greenhouse gases, the transition will not happen.
A good proposal to correct these dysfunctions in public financing was presented in Complementary Bill No. 176/2024 by Federal Deputy Nilto Tatto (PT/SP). According to the project, by 2030, 60% of the financing portfolios of BNDES, Basa, BNB and BB should be allocated to sustainable activities, reaching 100% by 2045. Public financing should prioritize projects in renewable energy, forest restoration, agroecology, adding value to the exploitation of biodiversity, among other sustainable activities. Loans of public money to businesses that depend on new deforestation or that produce more fossil fuels would be prohibited.
Financing the climate transition was also a central theme at COP-29, held in Baku, Azerbaijan. Great expectations were created about a new global financing target, with consistent support from developed countries to developing countries in tackling climate change. Brazil, however, does not need to wait for international aid to do its part. We can move forward with national resources through development banks. Public money, whose function is to induce growth, is crucial to financing the climate transition and building a new economy. It takes courage and determination to redirect it. This is the promising path we need to follow from now on.
