Amid pressure from foreign funds over flaws in the Brazilian government's environmental policy that allowed, among other things, an increase in the pace of deforestation in the Amazon in 2020, one of the most respected universities by capitalists around the world, the English London School of Economics (LSE), warns: felling the forest can bring financial risks to Brazil.
In a study conducted by the LSE and Planet Tracker, a study center focused on climate issues. More than one third (34%) brazilian sovereign bonds are exposed to an intensification of climate and anti-deforestation policies.
According to the study, "credit rating agencies are deepening their focus on the link between sovereign bond performance and environmental, social and governance criteria (ESG)." Because they are the countries most dependent on natural capital for their exports, Brazil and Argentina have the most to lose from this change in the valuation of bonds.
"The value of sovereign bonds depends in part on the management of natural capital by the countries concerned. However, this dependence is still largely ignored or misunderstood in sovereign bond markets," the survey states.
Given this scenario, sovereign bond issuers are faced with two choices. The first is to follow the "high road" path, that is, alignment with the new environmental standards. In this case, countries "actively protect and enhance the benefits of natural capital, and reinforce the environmental foundations of sovereign bonds."
The second option is to follow the direction of the "low road", in which traditional models harm ecosystem service flows, increase vulnerability to natural disasters and intensify market risks. This scenario will potentially damage the country.
Sovereign bonds are one of the largest asset classes, with a global value of $66 trillion. The study warns that they are also one of the most systemic classes, as they "capture a variety of macroeconomic factors, influence capital market pricing and system stability, and are essential assets for financial institutions."
Yesterday, a group of former ministers and former presidents of the Central Bank released a letter warning of the risks of Brazil staying out of the low-carbon economy. Among them are former Finance Ministers Henrique Meirelles, Joaquim Levy, Maílson da Nóbrega, Luiz Carlos Bresser-Pereira and Zélia Cardoso de Melo; former President Fernando Henrique Cardoso; and former BC presidents Alexandre Tombini, Armínio Fraga, Gustavo Loyola and Ilan Goldfajn.
"We converge around an agenda that allows us to resume economic activities and, at the same time, build a more resilient economy when dealing with climate risks and their implications for Brazil. Depending on the climate scenario we will encounter, the costs of neglecting climate events with systemic repercussions may be much higher than those of the current pandemic," they wrote.
They listed four essential points for the country to insert the environment into its economic policy: achieving the low-carbon economy, zeroing deforestation in the Amazon and the Cerrado, increasing climate resilience, Boosting research and development of new technologies
The potentially calamitous effects that climate change can cause on financial stability, they point out, have already led central banks and financial markets to internalize climate risks in their macroeconomic analyses. The trend is increasingly rooted in the functioning of capital markets.
The appeal adds to that of entrepreneurs and investors who recently called for actions to stop deforestation in the Amazon.
Two weeks ago, 29 financial institutions that manage more than $3.7 trillion in assets sent a letter to nine Brazilian embassies saying Brazil needs to stop the fires, at risk of fueling "widespread uncertainty about the conditions for investing or providing financial services to Brazil."
"We need this foreign capital and it's gone," said Gustavo Pimentel, director of Sitawi, which specializes in impact investments. "At a time when the government is talking about an infrastructure investment plan in partnership with the private sector, it cannot send messages exchanged."
In reaction to the calls on Monday, Economy Minister Paulo Guedes said during an event of the Organization for Economic Cooperation and Development (OECD) that Brazil should move forward in initiatives to preserve the environment, but again criticized "false narratives"
"If there are excesses and there are mistakes, we will correct. We will not accept illegal deforestation, illegal exploitation of resources." Until then, Guedes had been avoiding admitting that there are improvements to be made in the environmental area, blaming internal criticism and protectionist interests.
Exame - 15/07/2020
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