27 November 2023

Brazil: Investors must seize NBS and climate-smart tech opportunities now

The seeds of a new climate investment revolution are being planted in Brazil, say Niamh McCarthy and Kyle Saukas of Climate Advisors

Brazil's historic accomplishment in reducing Amazon rainforest deforestation rates to their lowest levels since 2018 within the first year of President Luiz Inácio "Lula" da Silva's administration signals a paradigm shift in climate action. After years of rapidly increasing deforestation, the Lula administration has shown that course-correction shifts at the scale needed to meet Paris Agreement goals are possible.

Niamh McCarthyBrazil's rapid ability to corral deforestation is a sign that the nation will be fertile ground for a climate-driven agricultural revolution as it 
works to mitigate ecosystem collapse in the rainforest responsible for irrigating the vast majority of its production.

Brazil's growing role in climate leadership and mounting climate transitions provide a unique opportunity for the Brazilian agriculture sector to mobilise unprecedented investment in climate-smart technology and nature-based solutions (NBS).

The world stage is set for Brazil to lead on global climate action, especially for agricultural and nature conservation, with a level of influence that we may not have seen before. Investors should see this as a ripe opportunity to capitalise on the growing economic benefits of investing in a variety of natural and agricultural climate solutions. Climate transitions are creating a new operating environment with Brazil in a strong position to mobilise significant financing to both mitigate risks and accelerate solutions.

Brazilian climate aims

Historically, Brazil has been under scrutiny for its role in contributing to deforestation, primarily due to activities related to agriculture.This sector has played an enormous role in Brazil's economic development contributing to 21% of its GDP in 2021. It also serves as the bedrock for thousands of companies' supply chains for critical commodities like beef and soy.

Starting with a new national climate plan set by President Lula released in September, Brazil plans to cut emissions by 53% by 2030. With agriculture and land use contributing nearly 36% of Brazil's emissions in 2020, this will likely spur accelerating climate transitions. Climate transitions, the government, civil society, and private sector responses to climate change, present both risks and opportunities for Brazil's agricultural sector, and the numerous downstream stakeholders that rely upon it.

From an opportunity perspective, conserving Brazil's natural landscapes holds 15% of the world's natural climate solution potential. Brazil has been actively seeking new investments for supporting nature conservation and transitioning its agricultural production to be deforestation-free, in part, to increase access to economic opportunities. Besides being vital for meeting its climate change goals, ending deforestation and restoring natural carbon stores could be a $15 billion opportunity by 2030. For the next few years, the moment is just right

COP28: Financing Net Zero Niamh McCarthy for Brazil to capitalise on these opportunities and investors should take notice.

Brazil's global leadership role

Kyle SaukasOn the eve of COP28, Brazil will likely play a leading role in negotiations as a developing nation that is showcasing meaningful climate action results and as a growing economy influential amongst other middle-income countries. The United Arab Emirates as President of COP28 has explicitly pushed for nature conservation and food systems to be priorities for this year's COP. As a linchpin in the global food system, Brazil will hold sway over these issues and can advocate to unlock further investments.

In 2024, Brazil will serve as the President of the G20, providing it the opportunity to set the agenda for the world's fastest-growing economies on climate action. Brazil will look to unite these countries to demand more finance for nature-based solutions and climate finance for agriculture. Additionally, Brazil can also advance talks around new trade policies that will reward deforestation-free agricultural production.

Brazil is poised to play a leadership role in global climate action in the run up to COP30

At the end of 2024, Brazil will begin preparations to host COP30 in the Amazonian city of Belem. COP30 will be unique as the next milestone in the Paris Agreement where nations will have to submit new national plans to meet their commitments. This year's Global Stocktake at COP28 will show the world is far off course from meeting climate goals. With Brazil in charge of COP30, it will have the ability to set the focus of negotiations when new national emissions-cutting targets are being set to drive increased finance for nature and support producers' agricultural transitions.

Risks and opportunities for investors

Brazil sits on the edge of driving the world's major economic and climate efforts. Lula and his administration will be at the helm for the next few years and will seek to drive more action on nature and agricultural finance, trade policies and global climate action.

Accelerating climate transitions indicates that the future will be very different from the past. Utilising forward-looking climate scenario analysis and stress testing will be pivotal to understanding how risk exposure changes at different levels of climate ambition and resilience to a changing world.This analysis can also help investors identify where investments to finance the transition to net-zero emission agricultural production will have the greatest payoffs. Investors have the chance to reap the benefits of Brazil's climate ambitions if they act now to incorporate climate transitions in their investment strategies for the future. Orbitas has been developing new models of analysing these transitions to aid investors in mitigating risks and identifying new opportunities for investment in a climate-constrained world.

The Brazilian government's efforts will change the entire dynamic of Brazil's agricultural sector. The climate transitions Brazil has set in motion, and continues to drive, will change policies, market dynamics, technology adoption and impact the reputational value of involved stakeholders. Importantly, Brazil's efforts could catalyse an agricultural revolution across the world as major commodity-producing nations like Indonesia, Colombia, Malaysia, and others could also benefit by capitalising on increased finance for nature, deforestation-free production and sustainable technology improvements.

For investors who continue to bet on business-as-usual practices and systems dependent on continued deforestation, material financial risks already exist today, and a wave of new risks is on the horizon. We're already seeing these risks materialise in Brazil with the European Union's Deforestation Regulation that will bar imports of goods tied to deforestation. Investors may already be able to see these risks sprouting within company financial statements if they know where to look.

Orbitas is translating land sector climate transitions into financial statement impacts

On the other hand, Brazil's ascendance to climate leadership opens new attractive opportunities for investment in climate solutions for investors.

The Lula administration has voiced support for a new Amazon Bioeconomy valued at $284 billion per year by 2050. Efforts like the Innovative Finance for the Amazon, Cerrado and Chaco Initiative have committed to mobilise $10 billion in commitments and disbursements of funds for sustainable agricultural transition across South America by 2030, a potential $30 billion opportunity for investors. Capital for Climate's platform of bankable nature-based solutions investment opportunities is also helping investors overcome historical challenges to invest in these emerging assets.

For investors, it is clear with Brazil's recent climate efforts that there is no more business as usual. Climate transitions have created a new operating environment today and will increase their impact in the years to come. Investors have a choice to make on whether they'll passively wait for these climate transitions to occur and react after the fact, or proactively mitigate risks and seize opportunities available to them today.

Niamh McCarthy is director of climate-related risk and Kyle Saukas is deputy director of communications at Climate Advisers.

Subscribe for Orbitas' Upcoming Brazil Climate Transition Reports