Manaus, the capital of and largest city in the state of Amazonas, Brazil.
If clients won't go to the branches, then the branches must go to the clients.
In 2010, Banco Bradesco SA embarked on an innovative financial inclusion endeavor. It launched a floating bank branch into the Amazon basin so Brazilians in remote areas of the rainforest could open accounts, make deposits or take out loans. A second boat-branch was later added.
Brazil's North region, home to more than half of the world's remaining rainforests, is still far from financially developed. But mounting pressure on the public and private sectors around environmental, social and governance issues has prompted banks to adopt a more active and integral approach.
Amid renewed interest in ESG stemming from the impact of COVID-19, the top three private banks in the country launched the "Amazon Plan," a multi-layered program by Bradesco, Banco Santander Brasil SA and Itaú Unibanco Holding SA that seeks to foster growth and advance inclusion among people who live in the remote areas.
"We want to be in the front line," said Leandro Miranda, Bradesco's head of investor relations. "We are going deeper into the forest."
The plan, which combines infrastructure project funding and lending, entails the creation of an expert council to assist lenders in seeing projects through. "We decided to step in the Amazon and help so that we can be instrumental to the cause," Miranda told S&P Global Market Intelligence. "Private initiatives should help governments that do not have all the means."
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In recent months, the international community has stepped up pressure on the Brazilian government over its environmental policies. U.S. Democratic presidential candidate Joe Biden proposed sending aid to Brazil to help curb deforestation while at the same time arguing that the country should "suffer significant economic consequences" if it fails to do so. Brazilian President Jair Bolsonaro flatly rejected the aid and called Biden's comments "disastrous and gratuitous."
Brazil's North region is only slightly smaller than the European Union and accounts for roughly 45.25% of the country's landmass. Despite its size, it contributes barely 6% to Brazil's GDP and accounts for just 2% to 4% of lending at major banks.
Banks are now looking to change that. Part of their plan is to finance infrastructure such as sewage, water and electricity. "If we financed the economy alone, we would wind up having the same problem afterward, which is guys working for nothing because they do not have the basics," Bradesco's Miranda said.
"I cannot put my whole portfolio in there because there is simply no economy to sustain that yet," Miranda added. "What we need is to develop the region so that it can expand its weight in the GDP. That way we can improve our share [of lending]."
But as they look to expand their business in the region, banks are also looking to mitigate their ESG risk by putting sectors with greater exposure under additional scrutiny. "Large clients in sectors considered sensitive such as mining, meatpacking and timber undergo an individualized socio-economic risk analysis," Luciana Nicola, head of sustainability at Itaú, told Market Intelligence.
In August, an area nearly half the size of Rhode Island was lost to loggers, raising alarms about the difficulties in slowing the pace of illegal deforestation.
The meatpacking industry has been sharply criticized as poachers continue to clear forested areas to provide grazing ground for cattle. Banks have promised to cease financing to companies involved in such activities; they also will now hold companies accountable for illicit practices along their supply chains.
"Companies are aware that any link between their supply chain and illegal deforestation has significant negative impacts in financial and reputational terms," Nicola said. "We want to make sure that other links do not stock up on meat from herds raised in illegally deforested areas."
In some cases, banks have terminated client relationships. Miranda said the bank had scaled back loan deals with companies that clash with the purpose of sustainability, in some cases involving child labor and serious environmental concerns, though the bank did not provide details.
"We have been severe," Miranda said. "We have prohibited some clients and industries from borrowing money and having a checking account. There are some existing loans that we are not able to circumvent but that have committed not to refinance. We are letting some clients go, but we understand that our risk is much better now. No transaction can compensate a scratch on our reputation."
ESG improvement drives better valuations
Rating agency Moody's noted that the Amazon Plan was credit positive for banks as it would significantly reduce ESG risk and provide an opportunity to attract investment capital.
"Countries that are not closely aligned to ESG and enterprises that do not incorporate that into their strategies might be left on the sidelines of international financial flows," Nicola said.
"[The Amazon Plan] was a very good sign toward investors," Miranda said. Almost half of stockholders have inquired about the bank's ESG agenda and a growing number of them are informing their investment decisions based on these strategies, Miranda said. The executive is confident that improving ESG profiles also pays in the form of stock appreciations. Companies with an "excellent" ESG score tend to reach a valuation three times higher than their peers, Miranda said.
All told, bankers reckon it will take a huge effort for that initiative to translate into achievable, sustainable development of the Amazon region. "We need the rest of the private sector to entrepreneur and build roads and railways. We are not in the railway business. We can provide the money, but someone else has to do it," Miranda said. "It does not need to be a miracle."