{"id":81410,"date":"2024-11-07T14:59:22","date_gmt":"2024-11-07T14:59:22","guid":{"rendered":"https:\/\/www.climatepolicyinitiative.org\/landscape-of-climate-finance-for-land-use-in-brazil-2021-2023-capital-markets-and-other-financial-instruments\/"},"modified":"2024-11-12T11:21:50","modified_gmt":"2024-11-12T11:21:50","slug":"capital-markets-and-other-financial-instruments-landscape-of-climate-finance-for-land-use-in-brazil-2021-2023","status":"publish","type":"page","link":"https:\/\/www.climatepolicyinitiative.org\/id\/capital-markets-and-other-financial-instruments-landscape-of-climate-finance-for-land-use-in-brazil-2021-2023\/","title":{"rendered":"Capital Markets and Other Financial Instruments (Landscape of Climate Finance for Land Use in Brazil 2021\u20132023)"},"content":{"rendered":"\n

Main Page<\/span><\/a> interactive Sankey<\/span><\/a> Full Report (pdf)<\/span><\/a><\/p>\n\n\n\n

\n
\n

What Are Capital Markets and Other Financial Instruments?<\/strong> <\/h2>\n\n\n\n

This section is dedicated to tracking existing financial instruments, beyond rural credit, that are capable of attracting private investment and mobilizing the capital market for climate objectives in the land use sector. To this end and considering the scarcity of consistent and standardized data in this area, three relevant instruments were analyzed: thematic bonds, CBIOs, and the BNDES\u2019 direct and indirect operations. As a result, the flows tracked in this section are likely to be underestimated.<\/p>\n<\/div>\n<\/div>\n\n\n\n

Mobilizing private resources at scale is key to financing the transition to a low-carbon and resilient economy. Public resources will not be sufficient to achieve climate goals, and it is necessary to design a financial model that works with a diversity of sources\u2014including public, private, and mixed-finance\u2014and instruments.<\/p>\n\n\n\n

This report explored the relevance of private flows directed by the Agricultural Plan in the section on rural credit. However, the climate transition depends on structuring private investments beyond rural credit, and on catalyzing them through innovative financial instruments.<\/p>\n\n\n\n

There is great expectation placed upon the capital market\u2019s potential to mobilize climate finance in the land use sector, but a lack of transparency surrounding some of the instruments used restricts the ability to map these flows. One example is the limited visibility of the climate criteria used in mechanisms such as sustainable investment funds, which prevents them from being measured and accounted for.<\/p>\n\n\n\n

Thematic bonds, on the other hand, are financial assets for capital market funding aimed at projects with measurable environmental and\/or social benefits, which receive external evaluations and therefore have explicit evaluation indicators and criteria, generally in line with international standards. However, these bonds represent a small portion of climate finance via the capital market, and it is necessary to expand such transparency to other sustainability financing tools<\/p>\n\n\n\n

New initiatives offer greater transparency about the climate impact of financial assets. One example is the launch of B3\u2019s[1]<\/a> <\/sup>Green Bonds, announced in 2024, based on the Green Equity Principles of the World Federation of Exchanges (B3 2024), which establish a certification by evaluation entities for companies listed on this stock exchange or in the process of Initial Public Offering to give credibility and guarantee that they are aligned with environmental commitments. As of October 2024, only two companies have obtained such certification, but this is a promising model for proving that a company is committed to promoting sustainability.<\/p>\n\n\n\n

This section explores three mechanisms that are channeling private climate finance to Brazil\u2019s land use sector: thematic bonds, CBIOs and BNDES finance. Of tracked finance from these instruments, the bioenergy and biofuels sector received 54% (US$ 1.9 billion per year). This sector is characterized by technological and economic maturity due to robust and long-lasting public policies starting from the 1970s and involving investments in research and development, as well as considerable government subsidies, which were gradually reduced to allow the progressive entry private actors (Chiavari and Tam 2011).<\/p>\n\n\n\n

Figure 11.<\/strong> Capital Markets and Other Financial Instruments Flows by Instrument, 2015-2023<\/p>\n\n\n\n

\"\"<\/p>\n\n\n\n

Source:<\/strong> CPI\/PUC-RIO with data from BNDES (2023), B3 (2023) and NINT (2023), 2024<\/em><\/p>\n\n\n\n

Thematic Bonds<\/strong><\/h2>\n\n\n\n

Thematic bonds[2]<\/sup><\/a> mobilized US$ 2.5 billion per year in climate finance for land use over the period, concentrated in the biofuels and planted forest sectors. This figure represents 14% of the flows tracked\u2014making thematic bonds the third-largest tracked instrument, behind rural credit and risk management instruments\u2014and demonstrates the potential of the capital market for climate finance for the land use sector, despite being an insufficient instrument.<\/p>\n\n\n\n

Figure 12.<\/strong> Climate Thematic Bonds for Land Use by Sector, 2021-2023<\/p>\n\n\n\n

\"\"<\/p>\n\n\n\n

Source:<\/strong> CPI\/PUC-RIO with data from NINT (2023), 2024<\/em><\/p>\n\n\n\n

Between 2021 and 2023, thematic bonds mobilized US$ 1.1 billion per year for the bioenergy and biofuels sector, accounting for 44% of the finance tracked from thematic bonds. This amount was distributed across the biofuel production chain, from sugarcane cultivation to the construction of plants.<\/p>\n\n\n\n

The forest sector mobilized US$ 0.9 billion per year, 37% of the tracked bonds, of which planted forests received 94%. The Suzano company[3]<\/a><\/sup> concentrated 86% of the forest bonds with three operations between 2021 and 2022, making commitments to reduce GHG emissions and the intensity of water use in its operations.<\/p>\n\n\n\n

However, the land use share among thematic bonds issued in the country fell between 2021 and 2023. In 2021, US$ 4.2 billion were issued in bonds tracked by this report, 22% of the ESG bonds issued in the country according to the NINT database. In 2023, only US$ 0.5 billion were issued, 4% of the thematic bonds issued in the year and a drop of 89% in two years.<\/p>\n\n\n\n

CBIOs<\/strong><\/h2>\n\n\n\n

CBIOs, the main instrument of the RENOVABIO, mobilized US$ 600 million per year between 2021 and 2023. Each CBIO corresponds to one ton of carbon equivalent avoided, emitted by biofuel producers. These bonds are bought by fuel distributors, following compulsory annual individual GHG emission reduction targets determined by the Brazilian National Agency for Petroleum, Natural Gas and Biofuel (Ag\u00eancia Nacional de Petr\u00f3leo, G\u00e1s Natural e Biocombust\u00edvel<\/em> – ANP) (MME 2024).<\/p>\n\n\n\n

The negotiated value of CBIOs is determined by the demand established by the ANP and rose from US$ 8\/CBIO on average in 2021 to US$ 22\/CBIO in 2023. This increase has had a disproportionate impact on the growth in CBIO emissions, which between 2020 and 2023 financed 109 million tons of CO2 equivalent not emitted by the use of biofuels.<\/p>\n\n\n\n

CBIOs represent an innovative public policy model for mobilizing resources for climate goals, using the polluter-pays and protector-recipient model to finance less polluting fuels. However, the effectiveness of this instrument has been questioned, and it was the subject of TCU Judgment no. 251\/2023<\/span>[4]<\/sup><\/a> that criticized its governance model, structure, and the effect of price instability on the market.<\/p>\n\n\n\n

BNDES<\/strong><\/h2>\n\n\n\n

Development banks, including both the BNDES and regional development banks, have great potential to attract private resources to the Brazilian climate agenda.<\/p>\n\n\n\n

Figure 13.<\/strong> BNDES Climate Finance for Land Use (Direct and Indirect Operations), 2021-2023<\/p>\n\n\n\n

\"\"<\/p>\n\n\n\n

Source:<\/strong> CPI\/PUC-RIO with data from BNDES (2023), 2024<\/em><\/p>\n\n\n\n

The BNDES operates across different areas tracked in this report, including the Climate Fund, the Amazon Fund and on Rural Credit (see Box below). In this section, we explore the bank\u2019s direct and indirect finances, operated respectively by the institution itself and by partner financial institutions<\/p>\n\n\n\n

The BNDES\u2019 direct and indirect finance operations mobilized an average of US$ 422 million in low-cost credit aligned with climate goals for the land use sector. Support for the biofuel production chain[5]<\/sup><\/a> was the bank\u2019s main area of climate finance for land use in this period, accounting for 67% of its tracked resources, with a highlight being US$ 100 million per year through the BNDES RENOVABIO credit line.[6]<\/sup><\/a> Another 30% of the flows were directed to the planted forest sector, with eucalyptus cultivation totaling US$ 126 million per year. Added to the low-cost credit financed by the BNDES, US$ 17 million per year went to grants through the bank\u2019s Socio-Environmental Fund, which dedicated 98% of this amount to the Brazilian Biodiversity Fund (Fundo Brasileiro para a Biodiversidade<\/em> – FUNBIO).<\/p>\n\n\n\n

\n
\n

The BNDES\u2019 Crosscutting Role in the Climate Agenda for Land Use<\/strong><\/h2>\n\n\n\n

BNDES is a key player in the Brazilian climate transaction and operates in the land use sector in several areas explored in this report, in addition to that described in this section:<\/p>\n\n\n\n