Priority areas for biodiversity conservation that do not overlap with currently protected areas cover 28 percent of the Brazilian territory. The Brazilian government pipeline for implementing measures for the conservation, recovery, and sustainable use of ecosystems includes Mato Grosso as the state with the larger surface of priority areas (40 percent). The states of Tocantins and Bahia also have a significant priority area share, at 36 and 34 percent, respectively. Nonetheless, our definition of conservation gaps, a more conservative measure that considers the more stringent priority area level (extremely high), depicts a different picture. Conservation gaps are more relevant in Espiritu Santo, Rio Grande do Sul, and Rio de Janeiro, at around 10 percent in the three states.

About one-third of banks’ loan portfolio to corporates is allocated to firms in 10 municipalities out of the more than 5,600 country-wide (Figure 11). The Herfindahl-Hirschman Index (HHI), a quantitative measure of concentration in a certain market, shows a low concentration level at 233.<sup>31</sup> Aggregating at the state level, the concentration is still relatively low, with an HHI of 1,299. The geographical concentration of banks’ loan portfolios in Brazil is the lowest in the Latin America and the Caribbean region (Calice and Miguel 2021). The Southeast region concentrates 51 percent of the banking system assets, being the states of São Paulo and Rio de Janeiro the most relevant, with 30 and 11 percent of the system’s assets, respectively. In contrast, while the North Region is the most geographically extensive, encompassing 45 percent of the Brazilian territory, its 7 states receive 4 percent of the banking assets only.

We find that as of March 31, 2020, Brazilian banks had BRL 254 billion in credit exposure to establishments that could be operating in protected areas. This amount is equivalent to 15 percent of the corporates’ credit portfolio. The exposure could increase to BRL 437 billion (25 percent of the corporates credit portfolio) should conservation gaps close, and to BRL 664 billion (38 percent of the corporates credit portfolio) should all priority areas become protected. Figure 10, Panel B, provides more details.

# _Environmental controversies_

Brazilian firms for which environmental controversies have been recorded and balance sheet data is available held BRL 109 billion in financial debt with credit institutions as of December 31, 2019. Out of 143 Brazilian firms, environmental incidents were recorded for 11 of them. Firms involved in severe or very severe controversies had debt liabilities of BRL 65 billion, while firms with moderate controversies were exposed for BRL 44 billion.

A well-known example of a very severe environmental controversy was the flooding and widespread environmental damage due to the Fundao tailings dam collapse, which caused flooding and widespread environmental damage in the state of Minas Gerais in 2015. In an

> 31 The HHI is calculated as a sum of the squared market shares (measured as a share of total corporate credit of the banking sector) of each bank in a market. An HHI of less than 1,500 typically identifies low concentration, an HHI between 1,500 to 2,500 identifies a moderately concentrated marketplace, while an HHI of above 2,500 suggests a highly concentrated marketplace.

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