ecosystem service presents the highest dependency across all services assessed, at 59 percent (Figure 6). Following in relevance, of every real that banks lend to corporates, 6 and 5 cents are either highly or very highly dependent on mass stabilization and erosion control, and water flow maintenance.

# _Biodiversity loss and banks’ loan quality_

Under a business-as-usual scenario, Brazil is projected to lose 6.5 million hectares of natural land between 2021 and 2030, the highest for a single country (World Bank, 2021).<sup>27</sup> Conversion to pastureland and cropland drives land use changes in Brazil. This loss of natural land-use causes detrimental impacts on the availability of ecosystem services (i.e., pollination, provision of timber, marine fisheries, and carbon sequestration), significantly affecting economic growth prospects. At the global level, real GDP could decline by US$ 90 billion by 2030, which could increase to US$ 225 billion if climate change damages linked to the loss of ecosystems are factored in.<sup>28</sup> Comparing the business-as-usual scenario with a scenario where key ecosystem services collapse, global real GDP growth from 2021 to 2030 could decrease by US$ 2.7 trillion (-2.4 percent). This is equivalent to a decline in global real GDP growth by 10 percent. Brazil is one of the countries with the largest projected decline in monetary terms at US$ 150 billion, equivalent to 20 percent lower GDP growth (or 5.5 percentage points) from 2021 to 2030 (Figure 8 and Figure 9). World Bank (2021) further highlights the adverse effect on Brazil’s oilseeds sector of pollination loss from ecosystem collapse, where its productivity would fall by 6 percent.

Macroeconomic conditions strongly influence the loan quality of banks in Brazil. Using dynamic panel econometric techniques covering the operations of 78 Brazilian banks, Vazquez, Tabak, and Souto (2012) show that a 2-percentage point drop in yearly GDP growth is associated with a longterm increase in NPLs of 3.3 percentage points. This parameter was estimated based on quarterly data between 2003q1 and 2009q1 and focused on lending granted with non-earmarked resources. The average NPL ratio during the authors’ 7-year window period (3.6 percent) is broadly similar to what was observed before the COVID-19 pandemic (3.2 percent). Additionally, both periods exclude crisis episodes, reducing comparability issues of the parameter. This is particularly relevant, as NPLs are usually lower and less volatile during normal times than during banking crises (Ari and others 2019).

Based on those estimated coefficients, we estimate that under a low probability, high impact scenario where ecosystem services collapse, the banking system could experience a long-term increase in corporate NPLs in the order of 9 percentage points. This exercise assumes that the full impact on GDP growth occurs by the end of the projection period, that is, in 2030. Assuming a less abrupt impact of biodiversity loss on GDP growth, where half of the GDP growth drop

> 27 This comparison covers 223 countries and territories, including Sub-Saharan Africa (44), Rest of South Asia (5), Rest of Southeast Asia (7), Central America (32), South America (11), Central Asia (21), Middle East and North Africa (17), Other Europe (4), Rest of East Asia (3), Oceania (24), and the EU (29).

> 28 As indicated in the methodology section, these estimates are a lower bound.

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