How is climate change impacting business and politics in Brazil?

Climate change poses operational risks and political challenges for businesses in Brazil, writes Lucas Zupolini, ESG Consultant at Control Risks in São Paulo...

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According to the National Meteorological Institute (Inmet), the El Niño weather phenomenon, which caused significant impacts across Brazil, has recently ended. Extreme weather events heavily affected agriculture, energy, transport, and financial sectors, leading to resource shortages and disruptions.

These disruptions posed political challenges, with coordination issues among government levels undermining crisis management and threatening fiscal stability. Despite the milder effects of the La Niña phenomenon, limited government climate preparedness continues to leave businesses vulnerable to weather events.

El Niño out 

El Niño has caused considerable climate disruption in the country since October 2023. The phenomenon drove record-high temperatures across all regions, occasionally straining electricity supply. In addition, it caused severe droughts in northern states that halted transport systems and compromised agricultural output in the centre-west and the south of the country.

More recently, in late April, Rio Grande do Sul state (also in the south), experienced unprecedented rainfall and floods that affected most of its territory and significantly disrupted its economy.  

Lucas Zupolini, ESG Consultant at Control Risks, in São Paulo, Brazil.

In the aftermath of these events, the agriculture, energy, transport and, increasingly, financial sectors remain the most exposed to such climate-disruptive phenomena in Brazil. This will likely remain the case in the next several years amid increases in the frequency and magnitude of extreme weather events anticipated by forecast models and insufficient adaptation measures, especially from governments. 

Energy availability  

The Inmet forecasts La Niña to bring increased rainfall to the north and more intense droughts to the south of the country. However, it sometimes also disrupts raining patterns and decrease precipitation in central and south-eastern states. In 2021, the previous La Niña – compounded by the lack of rainfall during the months preceding it – led to reduced hydroelectric production and the need to resort to the more costly thermoelectric generation. 

Rainfall in 2024 was insufficient to compensate for the drier-than-average rainy season between October and April, according to the National Electricity System Operator (ONS). However, water reservoir levels in the main hydropower producing systems in the south-east and centre-west are significantly higher than in 2021. These regions account for approximately 70% of hydropower storage and generation in the country.

Additionally, the share of solar and wind power has consistently increased since that year, reducing the reliance on hydropower. Therefore, significantly higher energy prices and power outages due to restricted energy generation are unlikely in the coming months. As reported by news outlet CanalEnergia, the ONS also anticipates a weak-to-mild La Niña in 2024.

Political challenges 

Government efforts to counter the adverse effects of El Niño and La Niña encompass various political challenges. The response to extreme weather events has been hindered by co-ordination difficulties among the municipal, state and federal governments. The dispute for political protagonism and control over emergency aid and financial resources have also prompted political rivalries.

In the case of the Rio Grande do Sul floods, for example, President Luiz Inácio Lula da Silva has appointed Paulo Pimenta – a left-wing ally and local political opponent of centre-right Governor Eduardo Leite – to lead the response. Lula’s move is likely part of a strategy to position Pimenta as a competitive candidate in the 2026 state elections.  

The government’s preparedness and response to climate events, however, will remain sluggish and limited due to the lack of fiscal manoeuvrability and challenges to co-ordinate actions across the national, state and local levels.

From the government’s standpoint, the spending required to assist victims and rebuild infrastructure is a major challenge. Congress (legislature) on 13 May exempted Rio Grande do Sul from paying its debt to the federal government for three years due to the massive floods. This will impact the country’s fiscal balance, as Rio Grande do Sul is one of the most indebted states in the country (BLR 98bn or USD 18.7bn).

Massive financial aid to the state will also undermine efforts to reach fiscal balance in 2024, affecting the markets’ trust in the Lula administration and its economic policy. Inflationary pressure is also a concern, as the floods severely impacted the national production of rice – Lula on 28 May lifted import tariffs levied on rice and authorised import quotas to prevent prices from escalating.  

Business implications 

The milder effects of La Niña in 2024 will likely alleviate some of the financial pressure due to the effects of a strong El Niño and extreme weather events in the previous months. Businesses in the agriculture sector will likely be able to restructure debts from climate-related losses, with limited impacts like disrupted calendars for significant crops such as maize and soja.

Businesses’ performance is unlikely to be impacted by shortages in either energy or water supplies across most of the country in the coming months. 

The government’s preparedness and response to climate events, however, will remain sluggish and limited due to the lack of fiscal manoeuvrability and challenges to co-ordinate actions across the national, state and local levels. Governability will likely continue to gradually deteriorate in the coming several months.