Brazil: Deforestation in the Global Context

Posted on July 24, 2019

Jean-François Obregón
Jean-François Obregón
Senior Associate Financial & Real Estate Research
Jessica Grant
Jessica Grant
Senior Associate Consumer Goods Research
Thijs Huurdeman
Thijs Huurdeman
Senior Associate, Consumer Goods Research

On January 1, 2019, Jair Bolsonaro began his tenure as the president of Brazil. On his first day in office, he signed several decrees aimed at increasing power for the Ministry of Agriculture, at the expense of the Ministry of Environment. According to NGOs, this indicates a shift in government priorities away from environmental stewardship and protection of Indigenous rights towards bolstering the agricultural industry’s interests.

In this article, we aim to present a short overview of Brazilian president Bolsonaro’s first six months in office and the impact of his administration’s policies on Brazil’s forests and its Indigenous population. We will also discuss the international norms and standards related to these issues and explore the potential impact of influence from the European Union. Finally, we will look at the role and responsibility of the consumer goods and financial industries in addressing deforestation and human rights issues in Brazil.

Bolsonaro’s Policies

With less than a year in power, Bolsonaro’s impact on the environment and Indigenous peoples has been far-reaching. Preliminary reports suggested that deforestation in June 2019 was up 88 percent compared to June in 2018. In May, the increase was reported to be 34 percent compared to the previous year.[i] Furthermore, over 120 pesticides were authorized in 2019, some of which have been classified by the U.S. Environmental Protection Agency as “dangerous” or “extremely dangerous” for humans and the environment. All this occurred under the auspices of the Brazilian Ministry of Agriculture, whose powers increased at the expense of the Ministry of Environment. The Ministry of Environment and its anti-deforestation agency Ibama have suffered drastic budget cuts since Bolsonaro came into power, lessening their ability to identify and penalize instances of illegal deforestation. The new Minister of Environment, Ricardo Salles, dismissed environmental fines as ‘ideological’, leading civil servants in the Ministry to distance themselves from the minister in an open letter in April 2019.

Bolsonaro’s policies, which benefit agribusiness, pose a threat to Brazil’s Indigenous population. The administration has proposed transferring the responsibility of protecting Indigenous rights to the Ministry of Agriculture again after congress voted against the initial proposal.[ii] Because of his strong ties to Brazil’s agribusiness, many are concerned the Minister of Agriculture will further subordinate indigenous land rights to agricultural industry interests. During his campaign, Bolsonaro had sworn “to not demarcate another centimeter of Indigenous land” for protected status. Roughly 12 percent of Brazil’s lands are Indigenous lands, spread over 700 territories, of which about a third is waiting for official recognition. Therefore, chances are high that firms taking advantage of less rigorous regulations may be doing so on disputed or demarcated Indigenous territories. Exposure to reputational risks will rise for consumer goods and financial firms involved in such activities.

The UN Special Rapporteur on the rights of Indigenous peoples has urged Bolsonaro to comply with international norms and agreements on Indigenous rights, signed by Brazil. For banks, best practice to mitigate involvement may be to introduce and enforce stronger policies governing involvement in financing projects on territories with protected and/or disputed Indigenous claims. For investors, it is worth asking banks about their strategy for engaging with agricultural and forestry companies exposed to environmental and social risks in Brazil.

International Norms & Company Standards

Despite Brazil’s regulatory rollbacks, countries and companies importing from Brazil have their own commitments on deforestation and human rights to uphold. Given the misalignment of these commitments with Brazil’s policies and practices, continuing to procure commodities from Brazil could prove to be contentious and poses reputational risks.

Many of the world’s largest companies have joined initiatives aimed at combating deforestation through their operations and supply chains:

  • The 2014 The New York Declaration on Forests has 190 companies committing to halve deforestation by 2020 and zero deforestation by 2030. Over 50 of the world’s biggest companies have signed on to the declaration including Cargill, McDonalds, Walmart, and Lloyds Banking Group.
  • A 2010 alliance on deforestation driven by the Consumer Goods Forum (CGF) saw 400 international companies pledge to zero net deforestation supply chains for palm oil, soy, beef and pulp and paper by 2020.

In 2017, major brands partnered with the Farm Animal Investment Risk & Return (FAIRR) Initiative and CGF to halt deforestation and native vegetation loss in the Cerrado “the world’s most biodiverse savannah”.[iii]

Forest-related Commitments in Agricultural Supply Chains

Graph - forest-related commitments in agriculture supply chain
Climate Focus Analysis based on data presented on Supply-Change.org. https://climatefocus.com/sites/default/files/20180123%20Supply%20Chain%20Efforts%20-%20Are%20We%20On%20Track.pdf.pdf

Many major brands also have specific commitments on human rights, which are aligned with the interests of the UN’s Office of the High Commissioner for Human Rights (OHCHR). The 2007 UN Declaration on the Rights of Indigenous Peoples was seen as a landmark development for the OHCHR. The European parliament noted that “80 percent of the forests are the traditional lands and territories of Indigenous peoples and local communities”[iv] and so the act of deforestation raises concern over Indigenous Peoples Rights.

Call for a Regulatory Crackdown by Europe

While the EU has enforced legislation on illegal timber, illegal fishing and conflict minerals, there is no regulation on agricultural goods linked to deforestation. As a major trading bloc and a significant consumer of agricultural products associated with global deforestation, the EU holds some responsibility and has an opportunity to drive change and set best practice standards.

The European Commission has received numerous requests, from academics and stakeholder initiatives such as the Amsterdam Declaration, calling for regulations requiring proof that goods placed in the EU market do not contribute to either global deforestation or human rights abuses. A motion by the European Parliament called for regulation of the EU’s footprint on the world’s forests and highlighted the need for effective protection of Indigenous peoples rights and forest-dependent communities. Concerns over deforestation are also a point of contention in the discussions around implementing the Mercosur-EU free trade agreement.

In Parliament’s letter, the production and trade of agricultural and animal products were highlighted as the key drivers of deforestation, as was the role of the financial sector. The motion emphasized the need for assurance that “financial flows only support legal, sustainable and deforestation-free production and do not result in human rights violations.” In response, the European Commission released the Deforestation and Forest Degradation- stepping up EU action roadmap[v] in December 2018. The initiative aims to present an integrated EU approach to combat deforestation, protect forests and promote sustainable supply chains.

Role of the Financial Sector

Banks play a central role as an intermediary between the financial markets and the consumer goods sector, including food and agricultural companies. Discerning the sectors financed by institutions and their financing criteria can be challenging. Financial institutions are evaluated for these risks at Sustainalytics through the material ESG issue “ESG Integration – Financials”.

We assessed the environmental and social financing policies of 13 of the biggest domestic and foreign banks in Brazil by assets.[vi] Banks typically have policies on soft commodities that address forestry products and agriculture, including meat products. Five Brazilian banks from this sample have general environmental and social guidelines that address deforestation, Indigenous peoples, and cattle ranching practices. Notably, none of the banks in our research sample has a standalone policy addressing Indigenous peoples and rights. Interestingly, only the foreign banks had policies addressing deforestation or soft commodities (i.e., cattle ranching, timber products, soy, etc.).

In the absence of stronger environmental protections from the Brazilian government, banks’ financing policies can be influential in ensuring borrowers respect international norms and standards. Poor or non-existent policies can exacerbate deforestation practices. It is best practice for banks to publish and update investment and financing policies with social and environmental criteria. Doing so can allow lenders to manage their exposure to reputational and other ESG risks related to investing in sectors like agriculture and forestry.

For instance, BNP Paribas encourages its agricultural commodities producers to have their crops or plantations certified against Round Table Responsible Soy, Better Cotton Initiative, Bonsucro or UTZ principles and standards by 2020. It encourages cattle farmers to have their production systems certified by 2020 against the Standards for Sustainable Cattle Production Systems by the Sustainable Agriculture Network.[vii] [viii] Banks could also work with NGOs that monitor the environmental and social impacts of deforestation. Innovations may also include setting up ESG funds that exclude poor performers with respect to deforestation practices.

The financial sector can leverage its role and influence companies to reduce deforestation and improve relationships with Indigenous peoples. It is incumbent on the consumer goods industry to uphold its voluntary commitments in the face of weakened regulations and protections. In our second blog post, we will delve deeper into the material risks posed to companies by the Brazilian government’s policy actions.

Sources:

[i] The Guardian

[ii] Mongobay

[iii] FAIRR

[iv] European Parliament

[v] European Commission

[vi] Banks assessed: Banco do Brasil, Banco Bradesco, Caixa Econômica Federal, BTG Pactual Group S.A., Banco Nacional de Desenvolvimento Econômico e Social, Banco Pan S.A., Itau Unibanco Holding S.A., Banco Santander, S.A., Banco Santander (Brasil) S.A., Barclays Plc, Banco Safra S.A., BNP Paribas SA, and JP Morgan & Chase Co.

[vii] BNP Paribas SA, Agriculture Sector Policy, p.17

[viii] The Cattle Site