Brazil can be a hub for climate transition investments

If Brazil implements significant changes in key sectors, such as agribusiness, while advancing its reform and pro-environmental regulatory agendas, it could lead the global climate transition. Businesspeople and investors championed this idea at the first Brazil Climate Summit Europe, a spin-off of New York’s homonymous event, held on Monday in Paris. 

They gathered at the Maison de L’Amérique Latine to forge partnerships capable of leveraging Brazil’s comparative advantages and turning the country’s bold climate ambitions to achieve net-zero carbon emissions by 2050 into business opportunities.

Brazil is already known for its energy matrix, which includes a significant share of renewable sources. The country’s extensive experience with bioethanol and hydroelectric power can be an asset, as highlighted by Luciana Costa, director of infrastructure, energy transition, and climate change at Brazil’s National Development Bank (BNDES).

Clarissa Lins, a partner at the consulting firm Catavento, sees substantial investment potential in renewables within Brazil. However, both Ms. Lins and Ms. Costa identified the “high cost of capital” as a major obstacle to investment in emerging economies. 

Ms. Lins noted that only USD 207 billion was invested in 2022 in clean energy in emerging countries, which represents just 16 percent of the global total. “This is a significant financial access gap,” she pondered. “Unfortunately, emerging economies are still not seen as stable or reliable,” she explained, noting that macroeconomic risks account for 70 to 80 percent of the capital cost. “We need to find ways to reduce these macroeconomic risks to show that we are worthy of investment,” she added.

In April, President Luiz Inácio Lula da Silva issued a provisional decree laying the foundations for Eco Invest Brasil, a foreign exchange hedge program to protect investors in sustainable projects from the risk of currency fluctuations. The idea, a practical answer to Ms. Lins’ and other investors’ concerns, was first announced in February during a G20 meeting of finance ministers in São Paulo. According to the government, the program aims to minimize the risks associated with exchange rate volatility — especially in long-term investments of more than ten years — allowing for more foreign direct investment in Brazil.

As with any provisional decree issued by the president in Brazil, the legislation has to pass Congress within the next four months to remain valid. Several details also still need to be disclosed by the Finance Ministry and the country’s Monetary Council (CMN). Still, the idea is that it would be able to protect investors to some extent from the country’s usual economic instability. 

Together with Eco Invest Brasil and the recently approved tax reform details, Congress is discussing several regulatory frameworks in which investors are especially interested, such as the future fuels program and the bill that creates the country’s regulated carbon market, to name a few. Moving on with this agenda is crucial for meeting international investors’ expectations.

The agribusiness issue

While Brazil’s energy sector benefits from its renewable sources, the stigmatized agricultural sector faces major challenges in terms of attractiveness, as 75 percent of Brazil’s emissions are linked to land use. The key issue here is deforestation.

Patricia Ellen, consultant and managing partner at Systemiq, noted that the new European Union rules on deforestation-free products — which aim to ensure that products sold in the EU do not contribute to global deforestation — pose a challenge for all major exporters, including Brazil. Despite this, she presented Brazilian agribusiness as a “great opportunity” and a “development factor” for the country’s economy.

There are short- and long-term efforts from governments and the private sector to comply with the EU requirements that will come into force at the end of 2024, starting with unifying existing databases that do not communicate with each other. 

The main goal of all these initiatives is to enhance traceability. Roberto Waack, a board member of Mafrig, the world’s second-largest beef producer, noted the heterogeneity of Brazilian agribusiness, acknowledging that livestock farming is heavily linked to deforestation. 

“But it’s a mistake to associate the entire agribusiness sector with this situation,” he argued, stating that much of the sector follows reliable practices. The company has recently announced plans to invest up to BRL 2 billion (USD 387 million) in acquiring new cattle to increase the proportion of livestock it raises, fattens, and slaughters. 

By increasing the vertical integration of its production, Marfrig wants to speed things up to ​​achieve its overall goal: to have 100 percent of its cattle tracked and deforestation-free in all Brazilian biomes by 2025.

Caroline Bouquet of the investment fund Mirova argued that Brazil plays a crucial role in the transition to agroecology, citing several advantages arising from the country’s natural resources. Although acknowledging that billions of hectares must transition to regenerative agriculture systems with diverse ecosystems, she highlighted that many well-established companies in Brazil are already well-integrated into the international scene. 

“I believe the opportunities in this country are massive. And this is crucial as international investors are not looking for small-scale, experimental projects; they want to invest on a large scale in companies with a proven track record,” she said.

Climate discussion: bringing in the right international players

Diplomacy was also highlighted as a tool to enhance Brazil’s attractiveness, especially this year as the country holds the G20 presidency. Brazilian leadership is generating high expectations, according to Laurance Tubiana, president and CEO of the European Climate Foundation, and Michel Frédeau, senior advisor at Boston Consulting Group.

“Brazil’s example can encourage other emerging and developing countries to do the same,” said Tubiana, a key architect of the Paris Agreement.

Izabela Teixeira, Brazil’s former environment minister, noted that the geopolitical context is no longer similar to what it was when the Paris Agreement was signed. “We need to change the way we explore solutions” and “bring in countries capable of producing solutions in the next five years,” she stated.

Tubiana agrees: “We cannot repeat what we saw in Glasgow and Dubai, where plans and investments did not progress.”

“Brazil has shown tremendous leadership in the G20 on finance. This idea of a wealth tax, although challenging, highlights that we cannot have collective action with such vast inequality,” Tubiana remarked, emphasizing that, in addition to overcoming the challenge of redesigning investments and improving attractiveness, Brazil needs to do this by facing its social issues.