agreement with the Brazilian authorities, the company agreed to pay at least BRL 20 billion for environmental, social, and economic damages over a 15-year period. More recently, the Brazilian government fined another company with BRL 24 million for allegedly sourcing cattle raised in illegally deforested land. This case is cataloged as severe in our analysis (see Table 2).

# **4. Concluding remarks**

Biodiversity loss can have significant consequences for the economy and the financial sector in Brazil. The results presented in this paper, to the best of our knowledge, the first to attempt to quantify bank exposures to biodiversity loss in an emerging market, suggest that Brazilian banks have material exposures to risks resulting from biodiversity loss.

Brazilian banks lend to firms that are at least partly dependent on ecosystem services for the production of their goods and services. Loss and degradation of ecosystem services can lead to substantial disruption of business processes and financial losses. We find that, as of March 2021, Brazilian banks had an outstanding domestic credit exposure of BRL 811 billion to non-financial corporates that operate in sectors highly or very highly dependent on one or more ecosystem services. This accounted for 46 percent of the total corporate loan portfolio and 20 percent of the total credit portfolio, and is slightly tilted to firms that receive government-subsidized resources through financial institutions. By comparison, the total worldwide exposure to physical risks of Dutch financial institutions at the end of 2019 was 36 percent of their total portfolio (DNB 2020). The highest dependence of Brazilian firms is on the ecosystems that provide climate regulation, ground water and surface water. Based on historical sensitivity of Brazilian banks’ credit quality to macroeconomic conditions (see Vazquez, Tabak, and Souto 2012) and macroeconomic modeling of ecosystem services (World Bank, 2021), we estimate that the GDP losses associated with the collapse in ecosystem services could translate into a cumulative longterm increase in corporate NPLs in the order of 9 percentage points, other things being equal.

Brazilian banks also lend to firms that can have an adverse impact on biodiversity because they operate in protected areas and priority areas for biodiversity conservation and/or are involved in environmentally controversial activities. The adoption of biodiversity-related regulation and policy, technological progress, shifts in market sentiment and preferences, litigation and reputational damage can generate losses for companies and ultimately for banks. We find that at end-March 2021 Brazilian banks had an outstanding loan exposure of BRL 254 billion or 15 percent of their corporate portfolio to firms potentially operating in protected areas. By comparison, Dutch banks’ global exposure to firms operating in protected areas was 7 percent at end-2019 (DNB 2020). Brazilian banks’ exposure to transition risks could increase to BRL 437 billion (25 percent of the corporate credit portfolio) should conservation gaps close, and to BRL 664 billion (38 percent of the portfolio) should all priority areas become protected. We also find that, as of December 31, 2019, Brazilian banks had an outstanding loan exposure of BRL 109 billion to the 11 of the 143 Brazilian listed firms for which environmental controversies have been recorded. By contrast, Dutch financial institutions’ worldwide exposure to firms involved in incidents was € 96 billion at end-2019 (DNB 2020) or about BRL 608 billion at current exchange rates.

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