Banks must decarbonize their investments, says IFC manager in Brazil

“I think that it is precisely the financial system that will make the most important contribution so that countries and their economies can align themselves with the Paris Agreement.” This statement is made by Carlos Leiria Pinto, general manager of the IFC (International Finance Corporation) in Brazil, the development arm of the World Bank aimed at the private sector.

In an interview with sheet, he says banks need to commit to decarbonizing their portfolios. However, more important than simply restricting investment in polluting sectors, it is necessary to provide incentives for economic agents to act more sustainably.

“If there is, in fact, no regulatory framework, we are not going to get there. But just a regulatory framework is not enough,” he says.

In the fiscal year ending in July 2021, IFC broke a record of investments in Brazil: US$ 2.85 billion (R$ 15.9 billion) in projects in the country. In some of them, the institution linked the cost of credit to the achievement of environmental goals.

One of the financing went to Corsan, a sanitation company in Rio Grande do Sul. The sustainability metric that conditioned the price of credit was based on wasted water: if the company manages to reduce the loss from 44% to 35%, the spread –​difference between the funding rate and what it charges on loans– reduces.

“Our approach and our strategy are always based on positive incentives”, he says.

Banks play an important role in the development of a green economy. How do you see the performance of the financial sector today in relation to ESG principles [ambiental, social e governança, na sigla em inglês]?

I think that it is precisely the financial system that will make the most important contribution so that countries and their economies can align themselves with the Paris Agreement. It’s because? Because the banks are the ones who give credit.

They condition investments and, therefore, if banks are aligned with the ESG agenda as a result of the Paris Agreement, they will automatically be aligning the entire economy accordingly.

What needs to be explained —and not just to the financial system, but to the entire economic universe— is that this is a business opportunity. It is not a restriction, it is not a difficulty, it is not an obstacle. It’s a business opportunity.

We at IFC made a calculation of what the size of the green market in the world is up to 2030. It’s something around US$23 trillion [R$ 128,6 trilhões]. If we focus only on Brazil, it’s US$ 1.3 trillion [R$ 7,3 trilhões] that can be invested.

This will be invested in sustainable transport, renewable energies, better energy efficiency and, finally, in an area that is still very much ignored, very unknown, which is what we call sustainable buildings.

If we are just talking about sustainable urban infrastructure, this volume is US$ 760 billion [R$ 4,2 trilhões]. This is a market, it has to be seen as a huge business opportunity.

Recently the Central Bank announced a series of sustainability measures, changing, among other things, the rules of social, environmental and climate risk management. As mr. evaluated?

They look like very interesting measurements. Basically, these regulations intend to bring the concepts of social, environmental and climate risk into the Brazilian regulatory framework. This is very innovative and is far from behind in relation to more advanced countries. If we look at European regulation, there is not so much difference.

What is happening, for example, with the European Central Bank is, in a way, what the Central Bank of Brazil is also wanting to do. BC is following the best practices that are being implemented in the European Union.

The BC also did a curious thing: the creation of Bureau Verde, which has to do with the specificity of the country.

Brazil has unique natural biomes in the world, and this makes the Central Bank understand that credit to agribusiness is much more important here than in Germany, England or the United States. It requires special care.

This Bureau Verde intends to be an instrument, a platform that integrates all the registration and legal information to help banks when they have to analyze an agribusiness loan.

That way they will be able to access all the information to make a better decision. This is a unique product from Brazil and it seems to me an extremely interesting idea.

But much more is needed. Industry needs to integrate this, understand and buy-in [compra] of this whole story.

Given the gravity of the climate crisis, some people argue that it is necessary to stop investing in polluting sectors. Mr. Do you think banks should commit to decarbonizing their portfolios?

Yes of course. I have a position which is: more [importante] than to prohibit is to guide. Where will the bank get the most benefit? By funding a polluting industry or by encouraging that industry, eventually, to improve the way it works?

A paradigmatic example comes from what happened to Brumadinho. Do you think the banks behind this were okay? They looked bad, they lost money, the shareholders lost a lot of money.

Banks realize that it is a matter of sustainability, but because sustainability is what generates the best business.

I’ll give you an example. We developed a certification for sustainable buildings called Edge. In the most basic version, a building that can prove a 20% reduction in water and energy consumption is already entitled to certification.

We are working with a bank that is gaining competence in sustainable building risk management, it is promoting this with Brazilian developers.

What will happen? A developer who arrives at this bank with a project for a shopping mall, or a hotel, or a warehouse and does not have certification, is in the credit line. But if you have a queue, there will be a fast track [faixa rápida] and, probably, the bank will provide cheaper financing, because it wants to finance sustainable constructions…

Therefore, it is a positive incentive, which is not a ban. It’s saying: “Developer, you bring a sustainable project and I’ll give you a cheaper spread”. This is one way.

Would the decarbonization of investments through regulation, or prohibition, be less interesting than through a market system?

It’s both. If there is, in fact, no regulatory framework, we are not going to get there. But just a regulatory framework is not enough.

Brazil, despite everything, has very sophisticated environmental legislation, but the Amazon continues to burn and become deforested. In other words, it is not just legislation that is enough, it is necessary that economic agents are positively encouraged to change their attitudes.

If you think about the big Brazilian meat exporters, they are potentially big drivers of deforestation through the cattle they buy indirectly. They have already realized that this cannot go on.

The big buying markets want to make sure that this exporter is not involved in deforestation. so they themselves [agem], because they understand that their sustainability in the medium and long term will depend on their being able to demonstrate that they have traceability of all their livestock.

Do you think this decarbonization of the financial sector should take shape in the short term here in Brazil?

It is already happening. Last year, around 21% of credit granted in Brazil already had a climate component. It’s still not fabulous, but we can also see the side of the glass half full. Before there was nothing and today there is already 21%. What is the challenge? Make it grow bigger.

We also invest and are partners in this challenge. To give an example, we financed Corsan, a water and sanitation company in Rio Grande do Sul. We made a green product called sustainability-linked loan, which is a loan linked to a KPI [indicador de performance] of sustainability.

Today 44% of the water that Corsan treats and captures is not billed, it is lost in the distribution system. We took out a loan for the company to make investments in the renewal of the network, but we gave a KPI for reducing water loss. The goal is that, in the end, these losses will go from 44% to 35%.

It is still very high, but this difference alone is very big. If they manage to do that, our spread narrows. In other words, the financial cost for the company is reduced. Our approach, our strategy, is always based on positive incentives.

One of IFC’s focuses is on combating greenwashing [propaganda enganosa verde]. How is the institution facing this?

We have to be, all agents, extremely committed to avoiding greenwashing. We generate documents and intend to disseminate them to all countries. Greenwashing is fought with uniform, standard rules [padrões] and with credible audits. This is important. It is important to have audits that certify compliance with certain requirements.