The Brazilian Forest Code: what international financial institutions need to know

Image from the cover of Global Canopy’s briefing on the Forest Code.

Barbro Døvre & Sarah Rogerson

Degradation and the clearing of tropical forests and other native vegetation is largely driven by agriculture and forestry. This has led to several initiatives from a range of parties to promote sustainable operations in their supply chains. While many of these are voluntary efforts, Brazil’s Forest Code introduces a legal obligation towards more sustainable commodity production.

In order to meet their climate goals and control the clearance of native vegetation, the Brazilian government revised this flagship forest policy in 2012. The new version of the Forest Code regulates land use and environmental conservation on rural properties, and includes a requirement for all properties to be registered in the Rural Environmental Registry (CAR).

With this improved monitoring and updated requirements on legal clearance of native vegetation, the Forest Code presents direct legal and operational risks to the landowners it applies to. It also present risks to companies sourcing from landowners, and to the financial institutions funding them, whether they are based in Brazil or not.

A new Global Canopy briefing discusses the implications of the Forest Code for international financial institutions. It considers the risks that the Forest Code presents to businesses, how these impact on financial institutions and what financial institutions should be doing to mitigate this. Recommendations for minimum risk mitigation actions and for best practice are made.

How the Code can create risk

Banks in Brazil are legally required to check that landowners are registered in CAR and do not operate in embargoed areas before financing them. In 2016 Santander was fined for non-compliance with this part of the Forest Code, detected by a cross checking of satellite imagery, map of embargoed areas, and Rural Producer Certificates.

International financial institutions do not have the same obligations, but they still need to be aware of the Forest Code. By financing landowners or companies that source from Brazilian landowners they can be linked to Forest Code non-compliance and should be aware of the risks that that connection entails.

If companies and landowners are non-compliant with the Forest Code it can have significant impacts on their operations through either fines, embargoed areas, enforced stops in agricultural or forestry activities, obligatory restoration of land, or payments to offset deficits. These risks translate into operational risks for companies further down the supply chain, who risk unreliable commodity supplies. Furthermore, being linked to illegal clearing of vegetation can result in reputational risks, both for companies and the financial institutions financing them, and can result in reduced access to markets.

Going beyond the Code

The Forest Code has limitations when it comes to fully addressing the issue of clearing tropical forests and other native vegetation in Brazil. Properties that have not yet cleared any native vegetation on their land together own up 92 million hectares eligible for clearing.

This means that even though clearing might be legal in terms of the Forest Code, it still exposes financial institutions to risks linked to unsustainable practices, including reputational, market, and physical risks. To mitigate all risks associated with both illegal and unsustainable commodity production, financial institutions should push for best practice, going beyond legal compliance towards zero conversion of native vegetation.

To read the full briefing, visit the publication page here.