Tatiana Cneio Alves l Palladium - Apr 29 2022
Breaking the Cycle of Deforestation in the Amazon: Is Finance the Answer?

Historically, a number of economic and increasingly illegal activities have put pressure on the Brazilian Amazon, depleting its critical ecosystems to what scientists have warned is near a tipping point – a point in which the forest will lose its ability to maintain itself in its current state or bounce back from disturbances like drought or other extreme weather events. This would drastically affect the region’s water cycle and eventually the rainforest could become a dryland, savannah, or shrubland.

This is all in addition to the 90 billion tonnes of CO2 that would be released into the atmosphere in the process.

However, the livelihoods of many communities in the region are linked to value chains and production processes that not only degrade the surrounding environment but deplete natural forests. And while these processes are, at the end of the day, providing livelihoods for rural and forest-based communities, they aren’t sustainable for the people or the environment. In the short term, many of these economic activities are secure to the extent that they’re there and provide an income, but it doesn’t mean that they’ll remain that way in the long term.

Without the tools and resources to invest in and properly maintain the soil so that it continues to be productive, many smallholders are left with non-arable, degraded land, that is ultimately converted to cattle grazing. Once the cattle have grazed and the pasture is gone, farmers cut down and burn more forest, which allows the pasture to regrow for some time, but eventually the soil is ruined.

Thus, the vicious cycle is born.

Most smallholders are simply unable to access finance or get a credit line to invest in an activity that respects the forest and maintains land productivity. Without the finance to hold them over while they wait for a crop to harvest, they’re left looking for something that will make money in the short term, and often extensive livestock is the answer.

And while livestock can be a viable option when done properly, it too requires investments and technical assistance to ensure its sustainability and viability that the smallholders simply don’t have access to.

Until recently, buyers and the larger market didn’t care where products were coming from and whether they were sustainably sourced. Now, there’s an explosion of interest in goods that are traceable, sustainable, and deforestation-free. Meatpackers are under pressure to monitor their supply chains, soy trading companies are demanding traceability, and customers are seeking out sustainably sourced products or products that are associated with standing forests. There is even a growing market for so-called “superfoods”, many of which, such as Açai, are native to the Amazon.

All of this is culminating in a massive opportunity for smallholders, forest-based communities and small and medium-sized enterprises operating in these value chains in the Amazon. But just because there’s an increased demand for such products, doesn’t mean that the economies in the Amazon aren’t ready or able to meet it.

So, what’s the solution?

It’s not enough to simply provide smallholders, their suppliers, or rural and forest communities with lines of credit or access to finance. It must go hand-in-hand with technical assistance to support and teach smallholders how to implement sustainable practices, put agroforestry systems in place that integrate trees into crop and livestock practices, and combine different crops to provide revenues over time and across different growing stages.

"If we don’t address the market failures surrounding the smallholder, channelling finance into the region is doomed to fail."

In addition, it is also a matter of supporting the ecosystem that surrounds them. From the cooperatives working with smallholders to sustainably gather, to the logistics and transportation of goods to market, and putting the infrastructure in place to refrigerate items or trace them through the value chain, the journey only begins with supporting smallholders and forest-based communities.

If we don’t address the market failures surrounding the smallholder, channelling finance into the region is doomed to fail. We must provide and support alternative livelihoods that the community is proud to be a part of and comfortable working with to earn a sustainable living.

From creating investment vehicles that allow private finance to bridge the gap for enterprises and cooperatives that aggregate and/or buy produce from smallholder farmers and providing technical support for the implementation of better practices increased sustainability stipulations from the corporations buying goods, and better governance in the region, the solution on the demand side is multi-pronged as well.

It’s certainly not simple, but it’s possible, and we’ve seen that it’s already begun.

Many commodities-based companies are now working with different players across their value chains to improve their structure by building closer connections with farmers and supporting the implementation of sustainable practices through technical assistance and finance.

Commercial banks also have a role to play in providing finance for the region and supporting governments in efforts to promote sustainable practices in the Amazon. There’s an opportunity here for banks to work alongside impact funds and de-risk investments by providing credit lines to players in these value chains reaching rural communities so that they can deliver traceable deforestation-free products to the market.

The forest isn’t deforesting itself; there’s incentive for people to make it happen. But if we can address the perverse incentives there now, we have the opportunity to not just save our forests but improve the current conditions so that rural and forest-based communities around them reap the benefits of being linked to sustainable and profitable value chains.

Only then, will we break the cycle.

The Sustainable Finance Director and Selva Fund Manager at Palladium, Tatiana Cneio Alves boasts 25 years of experience working with finance and environmental markets, designing financial mechanisms and programs to channel investments into climate mitigation and adaptation in Latin America, with a focus on land-use. She has a Bachelor’s degree in Economics, a Master’s degree in Economics and Finance from the University of Sao Paolo, Brazil; and a Master’s in International Affairs focusing on Environmental Finance and Policy from Columbia University. 

For more information, contact info@thepalladiumgroup.com.