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The future of finance in LatAm & the Caribbean

O futuro das finanças na América Latina e no Caribe



The carbon opportunity Banco do Brasil wants to capture

Aug 14, 2023

By Roberta Prescott

In one of the world's largest carbon markets, Brazil’s second-largest bank sees big potential in originating and trading carbon credits.

As countries and companies double down on efforts to limit their emissions of carbon dioxide and and meet sustainability targets, the market for carbon credits is growing and Brazil is playing a key role. In that context, Banco do Brasil (BB), the country’s second-largest lender, is working to expand its carbon credit business to take advantage of what it sees as a huge opportunity.

Brazil is an important global source of carbon credits, which are permits that allow companies to emit a specific amount of carbon dioxide or other greenhouse gases. The credits are generated by organizations whose projects contribute to the capture or reduction of CO² emissions, such as through reforestation, the protection of delicate ecosystems or the promotion of sustainable agriculture.

It’s a booming market and Latin American banks and fintechs are using technology to expand supply and simplify access to these instruments while meeting their own sustainability agendas.

Banco do Brasil (BB) operates in three areas of this. Firstly, it issues carbon credits, in conjunction with the owners of forested or farmed areas. It uses geo-referenced data to evaluate these areas and determine their investment potential, with the aid of an organization that certifies the land’s potentiality and its CO² equivalence.

The bank is currently involved in a dozen projects equivalent to 2.5 million tons of CO² (one carbon credit is equal to a ton of carbon dioxide or other gas). In 30 years, BB expects that figure to be near 3,7 billion tons.

"For Banco do Brasil, the carbon credit market is important because we are the main financing agent for agriculture in Brazil and also a main financing agent for public bodies, such as prefectures and states," José Ricardo Sasseron, the bank’s vice president of governance and business sustainability, tells iupana.

Given its interest in growing the business, BB is tapping into its knowledge of the huge Brazilian agricultural industry to identify potential projects. For example, if a bank client with sugar cane or soybean crops wants to preserve a forest area within their property, they can request a certification and subsequent titling through the bank. BB employs standards developed by US-based Verra, which are widely used in voluntary carbon markets to quantify the tons of carbon dioxide a piece of land represents.

Another area where BB operates is in offering the instruments in local and international markets. The proceeds from the sale are divided between the bank, the owner of the land and the certification body. Its third area of activity is advising companies that want to measure their emissions and meet environmental, social and governance (ESG) objectives.

The interest of other banks in the market is evident. In February, Itaú Unibanco received central bank approval for its acquisition of a stake in a carbon credit trading network made up exclusively of banks. The platform, Carbonplace, raised US$45 million in an investment round backed by the nine banks that founded the fintech: BBVA, BNP Paribas, CIBC, Itaú Unibanco, National Australia Bank, NatWest, Standard Chartered, SMBC and UBS.

“Brazil is one of the largest producers of carbon credits in the world, while demand is concentrated in the countries of the northern hemisphere,” María Belén Losada, new business development director for markets at Itaú Unibanco, said in a statement. She added that “the platform will offer our clients a network of international connections, with access to buyers and sellers worldwide.”

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Banks and fintechs zoom in on carbon

It’s also clear what’s fueling banks’ interest in this market. Prices for carbon credits hit a record last year, while the global turnover of the carbon market (the number of transactions multiplied by its price) increased by about 14% compared to 2021, according to Refinity, a financial analysis platform.

In this context, Brazil has positioned itself as a natural leader and focus of opportunities for decarbonization, due to its vast reserves of natural resources.

According to the second edition of the "Opportunities for Brazil in Carbon Credits" study published in October 2022 by the International Chamber of Commerce in association with WayCarbon, trading in the credits could hit US$120 billion in 2030, up from US$100 billion forecast in 2021.

The report also highlighted that Brazil increased its share in the global supply of credits to 12% in 2021 from 3% just two years earlier.

This trend is supported by the United Nations Framework Convention on Climate Change’s "Race to Zero" initiative, which seeks to encourage countries, businesses, investors and other organizations to achieve net zero carbon emissions in 2050. And in the meantime, polluters are increasingly turning to carbon credits to offset their impact on the planet.

The market has also caught the eye of fintechs such as Moss, which was founded in 2020. According to its chief product officer, Cláudia Backes, one of the challenges is democratizing access to the instruments, be it for companies or individuals. “Brazil is the largest market for the supply of carbon credits. There’s a gigantic market operating today due to pressure from stakeholders,” she tells iupana.

Moss is active on several fronts. It conducts inventories for companies to calculate their carbon emissions and offsetting. The startup also allows the public to buy options to offset the impact of their flights with the Brazilian airline Gol, for example. Additionally, it has tokenized carbon credits using blockchain technology.

The fintech uses the revenue to support projects for conservation of the Amazon forest. “We have positioned ourselves as a climatech, which are startups that use technology to combat the climate crisis. But, in the end, we are all fintechs, because we want to bring financial logic to the forest so that it’s worth more standing than deforested,” Backes says.

Moss sees avoiding deforestation as the big challenge. "More than 60% of the emission factors in Brazil are from deforestation," says the executive.

However, Backes acknowledges that people are not yet turning to carbon footprint initiatives en masse. At a recent event, executives from Gol and Azul airlines —two of the country’s largest— said most passengers are still unwilling to pay to offset the emissions from their flights.

Gol partnered with Moss in 2021, while Azul announced a similar partnership this year with climate tech company CHOOOSE.


The issue of regulation

There are two sorts of carbon credit markets: regulated and voluntary. The basic difference is that the regulated market has rules defined by governments or international bodies to, for example, establish how many emissions a specific sector can produce. Europe is the best example of this model.

In Brazil, there’s only a voluntary market, despite the consensus that regulated trading provides greater legal certainty for all participants. In this sense, one of the the ICC report’s recommendations for the Brazilian government is to lay the groundwork for a transition away from the current model.

“Legislation and regulation are needed in order to have a regulated market,” said Sasseron, the Banco do Brasil executive. “Right now, that's on the federal government’s agenda and we’re waiting. The expectation is that there will be regulation by the end of this government, perhaps presenting it at COP-30,” he said, referring to the UN climate summit that will be held in 2025 in the Brazilian Amazon.

There is movement in this area. Bill PL No. 412, which was approved in November 2022 by the congressional economic affairs committee, proposes regulating the Brazilian emissions reduction market. Various presidential decrees signed in June also seek to combat climate change.

At the same time, the law 14,590/23, which was approved in May, seeks to create rules for managing forests in order to allow, among other things, sustainable activities other than logging and their inclusion in the carbon credit business.

The law also enables local development bank BNDES to authorize banks and fintechs, public and private, to provide financing using resources from the National Climate Change Fund, provided the lenders assume the risks involved. Previously, BNDES, which manages the fund, was only able to grant Banco do Brasil, Caixa and other state-owned banks permission to access to the fund.

“If we have a regulated market, it will expand a lot, because we have one of the world’s largest growing areas and conservation areas. So, it would have a big impact on the carbon market and also on the clean energy matrix," says Sasseron.

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