The study explores the critical relationship between financial systems and ecosystem degradation in the Brazilian Amazon and Indonesian peatlands, highlighting systemic risks due to the loss of ecosystem services such as carbon sequestration. This paper expands upon previous research that mainly focuses on equity holdings within ecosystems by analysing debt-financed financial flows to companies causing significant land use changes in these regions.

Methodology and data

Combining supply chain and financial data, the study identifies 39 companies significantly impacting land use in these ecosystems, with a dataset covering a decade of financial activities, providing deep insights into the scale and patterns of financial flows that could destabilise these ecological zones.

Results

The report delineates a pronounced concentration of financial flows originating from prominent global and regional financial hubs towards the companies implicated in land use changes in the Brazilian Amazon and Indonesian peatlands. Specifically, the Brazilian Amazon witnessed transactions totaling 320,155 million in syndicated loans and 135,379 million through capital markets issuance, heavily mediated by North American and European banks, indicating the globalised nature of financial practices impacting these regions. Remarkably, the Brazilian sector saw a significant proportion, approximately 90.3% of the financial flows, channelled towards soy production, and the remainder towards beef production.

In contrast, the Indonesian peatlands demonstrated a more regionally focused financial interaction, with Asian financial institutions playing a dominant role. Here, all identified financial flows, totalling 60,247 million (2014 US dollars), were directed towards palm oil production, underscoring the critical impact of regional markets and financial practices on local ecosystems. Furthermore, the study found that capital markets activity, where financial institutions facilitate the issuance of securities that likely remain off their balance sheets, constituted a substantial portion of the financial interactions, comprising 29.7% and 36.8% of the flows to the Brazilian Amazon and Indonesian peatlands, respectively.

Additionally, the research highlighted that most of these financial flows, specifically 73.7% in the Brazilian Amazon and 66.9% in Indonesian peatlands, were designated for general corporate purposes rather than being tied to specific environmental or sustainable projects. This broad allocation raises concerns about the potential for these funds to support activities that may further degrade these critical ecosystems. The data suggests a significant need for targeted financial governance and stricter monitoring to ensure that these substantial financial flows support sustainable practices rather than contribute to ecological tipping points.

Discussion

The analysis highlights the significant role of financial institutions in influencing ecological outcomes through their financing activities. It suggests that while financial flows are concentrated, the global nature of these transactions complicates efforts to mitigate associated environmental impacts. The study stresses the need for financial institutions to adopt enhanced due diligence processes that consider environmental risks and the development of innovative financial products that support sustainable land use practices.

Conclusion and policy implications

The findings emphasise the urgent need for a cohesive approach involving financial regulation, fiscal policies, and environmental safeguards to address the adverse effects of investment practices on critical ecosystems. Enhanced international cooperation and policy coherence are essential to ensure financial flows support rather than undermine ecosystem resilience.

Recommendations

The report recommends the implementation of stricter regulatory frameworks to control financial flows into high-impact sectors and enhance transparency and accountability within financial institutions. It calls for the development of international guidelines to manage and redirect financial flows to support the objectives of global environmental agreements, such as the Paris Agreement and the Convention on Biological Diversity. Additionally, the integration of ecosystem risk assessments into financial decision-making processes is advocated to ensure long-term sustainability and stability of financial investments.