Amid what is normally considered the rainy season, Brazil, the home of the Amazon River, is suffering from a historic, punishing drought.

In a country accustomed to ample water supplies, neighbors are turning against neighbors and hoarding water as taps run dry while businesses close and protesters take to the streets. Some have even speculated that São Paulo, one of the world’s largest cities, is failing.

The costs of a drought are many – water rationing, fines for consumption and constraints on agriculture and industrial production. But for Brazil, a water shortage also leads to another problem: more than 75% of Brazil’s power comes from hydroelectric sources, making it second only to China in reliance on hydroelectric power.

The water crisis is pushing Brazil to take extreme measures to save water even as low water levels are decimating its hydropower supplies, leading to rolling power cuts across the country.

With its rainforest, favelas and megacities, Brazil is a huge piece of the puzzle for many of the world’s biggest sustainability goals, and the country has loomed large in environmental discussions since it held the Rio+20 climate talks in 2012.

Water courses through many of Brazil’s biggest sustainability challenges. Not only does water rationing exacerbate the divide between rich and poor in the highly stratified country, but water pollution and water quality issues are threatening the country’s next turn on the world stage: the 2016 Olympics in Rio de Janeiro, which arrive just two years after the 2014 FIFA World Cup.

Pollution in Guanabara Bay, where Olympic sailing and windsurfing contests are scheduled to be held, is so bad that competitors have described it as an “open sewer”. More than 40 tons of dead fish have been removed from a lake slated to host the rowing contests.

Preparations for the Olympics are suffering from widespread dissatisfaction after last year’s FIFA World Cup. The massive investments to build stadiums and host as many as a million football tourists for the soccer blowout sparked large protests from city residents left out of the economic boom, who complain they are paying higher costs of living without seeing increased services.

Brazil is in many ways an island nation unto itself – it’s practically its own Portuguese-speaking continent amid the sea of Spanish Latin America. But it also faces challenges that are familiar across the BRIC (Brazil, Russia, India and China) countries: social inequality, human rights, energy, water, and climate change are all taking a toll on the country’s present and future.

Add to these the importance of caring for the Amazon rainforest – the “lungs of the planet”, which stores more carbon dioxide than anywhere else on Earth – and it becomes clear why social and environmental progress in Brazil is at least as important as its economic growth.

Deforestation in the Amazon Basin has long been a thorn in Brazil’s side. Not only do numerous human rights and indigenous peoples’ rights threats arise from deforestation, but researchers recently directly connected Amazonian deforestation to the horrific drought in southern Brazil.

Fortunately, there is some good news. Over the past decade, Brazil has lowered its carbon dioxide output more than any other country through a historic effort to slow forest loss: it reduced deforestation 18% last year. Now, other countries are trying to follow Brazil’s lead in the war on tropical deforestation.

During Cop 20, the UN climate change conference in Lima last year, Brazilian authorities announced a plan to develop a monitoring system in partnership with the Amazon Cooperation Treat Organization. Around $8m will be spent in satellite data analysis, training, and equipment to be used for monitoring deforestation in all seven countries that are part of the group.

Brazil’s megacities also have become home to many of the innovations and disruptions taking root in the US and Europe. Startups working under the banner of the sharing economy such as Uber and Airbnb have found a home in Rio and São Paulo. The B Corporation social and environmental business certification launched in Brazil in 2012 as Sistema B, and just two years later became the home of the world’s first publicly traded B Corp as cosmetics maker Natura earned Sistema B certification.

While environmental stewardship is a less-than-common commitment among large Brazilian companies or multinationals doing business in Brazil, the country is host to a thriving social entrepreneurship sector. A number of social entrepreneurship funds operate across Brazil, bankrolling small operations to fight poverty, inequality, and expand educational and economic opportunities among the poor and disadvantaged.

Brazil casts a big shadow across South America, despite its continental size and generally inward focus. As Brazil’s development bank invests in more projects across its borders, it brings the promise of more economic opportunity to its less-wealthy neighbors – but also the risk of stepping on toes and stirring anti-Brazilian anger. Road-building projects in Guyana and Bolivia, a mining project in Argentina, and Brazilian emigration into Paraguay for agricultural projects have all recently incited opposition from neighboring governments and citizens.

Just as Brazil weighs heavily across Latin America, it too lives in the shadow of China. Economically, the mid-2000s were Brazil’s golden years. The nation averaged a healthy 4% growth, propelled by high exports – particularly to China – as well as a spike in domestic consumption. During these boom times, Brazilians saw a bright future just over the horizon. Then came the 2008 global market crash.

As their export partners slowed their demand, Brazil’s economy followed suit: in 2009, the economy shrank for the first time since 1992, sending shockwaves throughout the country.

The rise and fall and rise again of Brazil’s economy is taking place during what may turn out to be the pivotal moment in the global environmental movement. As Brazil responds to extreme drought, high-stakes deforestation, and pollution and human rights challenges, and as the country steps up to the world stage for the Olympics, its decisions will ripple not only to neighboring countries and the BRICs, but throughout the world.

One example of this economic muscle-flexing is the recently proposed development of a new BRICs-led global development bank. Offered as an alternative to the World Bank and IMF, the New Development Bank proposed by China, Russia, India, Brazil and South Africa would emphasize sustainable development around the world without the punishing restrictions required by World Bank loans. While the aim of the NDB is to free BRICs and other developing economies from the status quo, observers caution that if the bank truly wants to change the course of sustainable development it must put human rights and the environment at the center of its charter.

Government, business, environmental and civil leaders will be watching closely to find out whether the country will end up being a model for sustainable development or a cautionary tale.