EU-based companies will also have to ensure that their suppliers are not associated with abuses of indigenous peoples’ rights (or human rights more generally). Brazil is ranked the 26th worst performing country globally on our Indigenous Peoples’ Rights Index and sits within the highest risk category.
Notably, the bill extended the definition of ‘forest’ to other natural biomes, which would include Brazil’s south eastern cerrado (savannah) region, home to the country’s massive industrial agriculture sector; dominated by cattle, soy and other grains and cereals. Brazil lost 16,557km2 of native vegetation in its biomes in 2021, on Inpe data.
This illustrates the scale of the task Brazil faces to live up to the commitment it made alongside 130 other countries at last year’s COP26 to end deforestation by 2030.
The financial angle
A year ago, the NGO Global Witness reported that EU-based financial institutions were still implicated in deforestation via agri-business financing, claiming that EU-based banks had sunk USD31 billion into ‘forest-risk’ agribusiness companies since the 2015 Paris Agreement (a fifth of an estimated total of USD157 billion invested by banks and asset managers based in the EU, UK, US and China).
Shortly after COP26, 33 major financial institutions with more than USD8.7 trillion in AUM collectively committed to stop financing deforestation driven by agricultural commodities by 2025. The group said it would complete risk exposure assessments for sectors including beef, palm oil, soy, leather, pulp and paper by the end of 2022.
In the year since, however, the global financial sector has been tip-toeing away from these voluntary ESG pledges, prompting louder calls for tougher regulatory action on the part of governments and supra-national institutions.
It’s worth looking at the new October 2022 report from the Forests & Finance Coalition, which claims that credit to forest-risk commodity companies increased by over 60% between 2020 and 2021. On its calculations, from 2016 to September 2022, banks had pumped USD267 billion into some 300 forest-risk commodity companies operating in the world’s 3 largest tropical forest regions, with investors holding USD40 billion in bonds and shares in forest-risk commodities.
Forests & Finance also claimed that the majority of the largest banks and investors had no/or only minimal policies to prevent deforestation, peat degradation and fires, or to uphold human rights (including Free and Prior Informed Consent for indigenous peoples and local communities), or to prevent forced or child labour.
It called upon regulators to “wake up and stop outsourcing the pace and scale of climate action to financial institutions”, which, it claimed, continue profiting from harmful activities.
Seemingly taking this on board, the EP voted to include in its final regulation an obligation on EU-based banks to conduct due diligence (DD) to prevent loans and investments linked to deforestation - thereby placing a specific DD demand on the financial sector to focus on deforestation. That comes on top of DD requirements already contained in the EU taxonomy (of environmentally sustainable activities) and the Corporate Sustainability Reporting Directive (CSRD). The European Coalition for Corporate Justice argues that the Taxonomy and CSRD fail to impose sufficient due diligence obligations on investors and banks, and that they lack mechanisms to hold the financial sector accountable for funds going towards harmful activities.
A final version of the new deregulation regulation is expected by late 2022 or early 2023, after tripartite negotiations between the Parliament, Commission and Council. This would then require ratification by the 27 member states – with some expected to contest the stringency of the bill.
In our view, even if Bolsonaro continues as Brazil’s president for another 4 years, Brussels in its role as global regulator is bearing down with all its considerable weight across the supply chain, from suppliers to purchasers to financiers, all of which may soon have to start assessing potential risks right down the value chain (i.e. beyond tier 1- 2).
And along with regulators are European consumers, who in the wake of the pandemic and the Russia-Ukraine war are also scrutinising much more closely the provenance (as well as the price) of their supermarket purchases.
The larger fact remains, however, that slowing global warming is highly unlikely without a change of federal government in Brazil, as ultimate steward of the Amazon.