Taking climate impacts into account at BNDES
In this year’s Spring meeting of the Berne Union in Istanbul, the ECA committee on climate change organised two panels – one on climate change risk assessment and the other on the evolving business models of ECAs to consider climate impacts. Here, Sergio Novis, Institutional Relations – Export Credit Division, elaborates on the elements addressed by the Brazilian Development Bank (BNDES) in those discussions and gives a perspective on the impacts of the ESG agenda on the activities of BNDES.
Sustainable development is an urgent commitment to promote a new economic model. Ultimately, it is a dimension that unites fundamental objectives for the preservation of life. The active participation of organised society is the only way to change development patterns, investment decisions and the consumption of natural resources. The world still lacks high economic growth rates and income distribution to promote the reduction of inequalities. Enabling this growth in a sustainable way is imperative to balance the interests of those affected by development, or by the lack of it.
In 2022, BNDES marks 70 years of existence. It remains a relevant agent for the long term financing of projects and investments in Brazil. The expansion of the bank's scope of support in the past seven decades is intertwined with the country's own economic development.
Concern with the sustainability agenda had already emerged at BNDES in the 1980s, when the impacts of urban, industrial and infrastructure growth were consolidated in the Brazilian economy. In 1982, the ‘S’ for Social was added to the name of the bank. In translation, the National Bank for Economic and Social Development – BNDE became BNDES[1].
In principle, the objective was to expand access to long term financing for social projects in sanitation, education and other urban infrastructure. In 1989, the first environmental management unit was created to study the environmental impact of projects supported by the bank.
Since 1975, BNDES Group has operated in the form of taking equity in companies in Brazil. Since then, incentives for enhanced corporate governance practices have guided the targets and commitments of the investees, as well as promoting greater dynamism in national capital markets.
In its most recent strategic plans, three sustainability objectives were defined to permeate the entire bank's activities. These are:
- To promote sustainable development in Brazil, supporting the achievement of UN sustainable development goals (SDGs)
- To promote a just transition to a carbon-neutral economy
- To expand ESG practices in our organisation and stimulate its adoption in the country.
It should be noted that, as a development bank, BNDES' performance in export credits is complementary to its role as a financer of infrastructure and value chains in the country. Export credits started at the bank in 1991 and by 2022 Q1 had reached $100 billion. In the same period, financial support granted by BNDES as a whole added up to around $906 billion.
The bank already incorporates the socio-environmental categorisation of supported projects, whether they be in the domestic market or in export credits among other guidelines of its Social, Environmental and Climate Responsibility Policy. We are also identifying supported projects connected to the UN's 17 SDGs. On our website, an interactive map allows the user to see the amounts of support for each of the objectives in the 26 Brazilian states and the Federal District. The effort to promote an ESG mindset has also been directed to five key stakeholders supported by BNDES: society, surrounding communities, customers, suppliers and employees.
How to encourage the adoption of ESG best practices in financed transactions is a challenge that mobilises the financial community around the world. BNDES promoted a recent event of the International Development Finance Club (IDFC) with several other development banks’ senior representatives in the city of Manaus, capital of the Amazon region. A number of topics were discussed, such as Nature-Based Solutions (NBS), bioeconomy and the climate emergency. A set of terms highlights the challenges to be deepened and disseminated by development banks: green taxonomy, ESG commitments, methodologies and standards, new business models, partnerships, awareness and leadership.
As a contribution and experimentation to deal with this great challenge, BNDES has launched differentiated credit products to encourage its customers' preference for projects and products aligned with the ESG agenda. Of note is the credit line for Social Investments in Surrounding Communities, Low-carbon Machinery and Equipment acquisition, ESG Credit and ESG Working Capital for exporting efficient sectors and products. In these financial products, part of the bank's profit margin is reduced, without, however, differentiating the setting of risk spreads.
When dealing with climate impacts on credit activities, it is important to remember that this is a coin with two opposite sides. The Task Force on Climate-Related Financial Disclosures (TCFD) points to an eventual increase in regulatory minimum capital requests to support systemic risks related to unexpected climate-related losses. On the other side, creditors and investors evaluate reductions in rates of return or in the cost of credit risk as an incentive for transactions that mitigate climate risks and promote more efficient technologies and solutions. The impacts of ESG benefits may be captured in the debtor's risk rating or directly in risk spreads or premiums, by adjusting the Probability of Default (PD) and/or Loss Given Default (LGD) rates. This is an ongoing technical discussion.
Finally, as a development bank, BNDES is conscious of its leadership role and purpose towards society, evolving its way of doing business and is open to learning and collaborating with the best practices and international public policies on the subject. As an ECA, closely following the meetings of the OECD Export Credits Group, the bank also recognises the urgency of the ESG agenda and is attentive to initiatives that enable the efficient promotion of sustainability combined with fair and equitable trade.
- The bank's corporate name was changed from Banco Nacional do Desenvolvimento Econômico (BNDE) to Banco Nacional de Desenvolvimento Econômico e Social (BNDES) in May 1982. ↑
