Brazil, long-hailed as a rising star and future global economic leader, has seen a series of setbacks and crises over the last twenty years that have prevented it from realizing its huge potential. Still viewed as a developing country, with many social and economic challenges to overcome, it is nonetheless characterised by its development in financial markets and is in particular a pioneer in sustainable finance. What is the situation today and what remains to be done? Professor Annelise Vendramini-Felsberg, FGV-EAESP explains.

Sustainable Finance in Brazil, by Professor Annelise Vendramini-Felsberg from an interview by Professor Adrián Zicari, ESSEC Business School and Council on Business & Society.  

      

Adrián Zicari: What is specific about Brazil in terms of financial markets?

Annelise Vendramini-Felsberg: Brazil is a country that still has some very important challenges in terms of development – for instance, around 50% of the Brazilian population still lacks access to sanitation. Although we can find things like that in other developing countries, on the other hand, Brazil is characterised by having very developed financial markets. The banking sector in particular is very developed.

Enabling finance to boost development

We still need to find ways to channel financial resources towards social needs and the development needs of the country. And for that to happen, we need to work on certain institutional arrangements. These institutional arrangements include, but are not limited to, regulation – for instance, certain aspects that facilitate the investment culture and investment activities in Brazil, such as macroeconomic stability, contracts, and legislation enforcement.

These institutional aspects are essential to make the financial markets work. In a place like Brazil, as mentioned, although we have a somewhat developed financial market, in particular the banking sector, we still lack some of the conditions that make investment activity possible, especially for foreign investors and for the long term.

If we look at the financial sector in Western European countries or the US, there are financial mechanisms/enablers in place, and these markets can accordingly function with less friction. The market works, laws work, and as a result the entire institutional system is working. However, in places like Brazil, some of these dimensions are still lacking.

In the case of Brazil, the financial sector remains quite small, compared to the economy as a whole. The Brazilian financial markets, the banking sector, and capital markets, account for nearly 50% of GDP in Brazil, and in places like the US or UK, for instance, or France, it could be over 100% of GDP. In places like South Africa, it could be around 200% of GDP. That gives an idea of the room that we have in Brazil to grow in terms of financial markets and in helping finance the economy.

Sustainable finance in Brazil: Improving the economy, people’s lives, and the planet

Financing the economy means financing projects that can help develop the economy and improve lives – productive projects, like mining, steel, paper and sanitation, education, sustainability and conservation, and forestry, for example. We have gone a long way, with progress in the last few decades in growing financial markets and making it more efficient, particularly the banking sector. But we still have a lot to develop and to improve.

Adrián Zicari: In this context, how has sustainable finance entered the Brazilian landscape?

Annelise Vendramini-Felsberg: Sustainability is important for Brazil in general. Environmental legislation has been advancing for so many years now, particularly after the re-drafting of the constitution of 1988. There was a very strong focus on social and environmental aspects in the constitution and we subsequently have a strong environmental legislation in Brazil. However, the problem is not the existence of legislation, but the enforcement of legislation.

It is the same case with the financial sector, which can be split between the banking sector and capital markets, because they have different maturities regarding the incorporation of social and environmental aspects, both in terms of legislation and self-regulation.

The Brazilian banking sector has been incorporating certain environmental and social concerns, since the ’90s and in some ways is quite mature. The Brazilian Central Bank and the monetary council have been regulating environmental concerns in the banking sector.

So, in terms of sustainable finance in Brazil, the banking sector leads the way. Moreover, both in terms of regulation and self-regulation, the banking sector in Brazil is very much advanced. We can also see lots of progress in capital markets, particularly recently over the two last years. Other sectors that compose the financial world – for example, the insurance sector and pension funds – still have lower levels of maturity compared to the banking sector regarding sustainability, but are also making progress.

Sustainability is a central theme in Brazilian finance

That progress looks set to continue in the future, with the Central Bank considering sustainability very seriously in mainstream legislation – for instance, in norms regarding capital allocation. The Brazilian Securities and Exchange Commission – CVM in Portuguese – is in the same vein.

Recently, for example, the CVM has published norms regarding the industry denomination of “sustainable funds”, while much remains to be done in capital markets, particularly in bringing those capital markets to support real sector activities for the long run. To some extent, this is to be expected as developing nations generally tend to rely more on banks than on capital markets.

Brazil still needs to build and expand its infrastructure, and this can only be done with long-term capital, which is the specialty of capital markets. A key issue for the future is to loosen our strong dependency on banks – particularly development banks – and increase access to capital markets.   

Adrián Zicari: What can other emerging markets learn from the Brazilian experience?  

I would say there are two interesting aspects of sustainable finance in Brazil that may be useful elsewhere. First, the Central Bank and the CVM were very attentive to stakeholders when setting up rules about environmental and social issues.

In the case of the Central Bank, we can say that some of those rules were indeed co-built with the financial sector in a cooperative manner. By doing this, the Central Bank prevented the emergence of certain unforeseen issues or problems. The Brazilian Securities and Exchange Commission adopted a similar stance, having consultations with many stakeholders before changing or adapting rules.  Second, there was a conscious effort to keep consistency between these rules in the financial world and the bigger picture of the legal system in Brazil. This harmonization is highly important as it reduces risks for investors.   

Useful links:

• Link up with Annelise Vendramini-Felsberg on LinkedIn
• Read a related article: Sustainable Development: How can the world of finance help?
• Read Prof. Vendrami-Felsberg’s contributions in the forthcoming Routledge-CoBS book Responsible Finance & Accounting
• Discover FGV-EAESP and apply for the Master in International Management (MPGI) and OneMBA programs.

Learn more about the Council on Business & Society

The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

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Member schools are all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.

• ESSEC Business School, France-Singapore-Morocco
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• School of Management Fudan University, China
• IE Business School, Spain
• Keio Business School, Japan
• Stellenbosch Business School, South Africa
• Trinity Business School, Trinity College Dublin, Ireland
• Warwick Business School, United Kingdom.