In our previous blog post, we detailed the impact that the new Brazilian government’s policies have had on deforestation and could have on Brazil’s Indigenous Peoples. In this second article, we will explore how material recent developments in Brazil could be for the companies, communities and financial institutions involved. We will also take a closer look at Brazilian meat processing company JBS SA (JBS) and the consequences it may face due to international concern over deforestation.
Growing public pressure, reputational and financial risks
Companies engaged in deforestation, along with their financiers and customers, are being scrutinized over the social and environmental costs to communities from forest loss. Reputational risks connected to deforestation, especially of high conservation value or high carbon stock areas, are growing. Potential material risks facing agricultural companies include losing corporate contracts and consumer boycotts.
Companies’ corporate customers continuously audit their supply chains and may sever business relationships if suppliers fail to meet their policies and standards. Companies found to be involved in deforestation and land grabs risk becoming targets of consumer criticism, affecting companies throughout the entire chain, from agriculture to retail. National governments and supra-national trading blocs such as the European Union may also apply trade restrictions to companies or imported goods that are associated with deforestation and land grabs, putting further pressure on all companies along the supply chain.
A poor reputation and diminishing shareholder value could lead companies involved in deforestation to face greater pressure from investors through shareholder resolutions or divestment. Findings from NGO Chain Reaction Research state that consumer goods companies with a positive reputation can add as much as 30 per cent of outperformance to share price. A company with a “good reputation” can outperform one with a “bad reputation” by 70 percent.[i]
Company example: JBS SA
Brazil-based JBS is the world’s largest meat processing company, exporting animal protein to more than 130 countries. In 2017, the Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) accused JBS of sourcing cattle from illegally deforested areas in the Amazon which had been embargoed. Following a three-year investigation, IBAMA found JBS had sourced cattle between 2013 and 2016 from government blacklisted pastures and from farmers that concealed illegal sources. According to IBAMA, 84 per cent of cattle detected from embargoed areas had been bought by JBS. As a result, the governmental agency fined JBS 24 million reais (USD 7.7 million)[ii] and suspended two of its meat packaging plants. Two of JBS’ suppliers were also fined for operating on protected land. Agropecuaria Santa Barbara Xinguara (Agro SB) was fined USD 20 million although this was later reversed, while Agropecuaria Rio da Areia was fined five times between 2017 and 2018 totaling USD 1.2 million.[iii]
Since Bolsonaro came to power in January 2019, the Ministry of Environment has issued far fewer penalties and inspections are down 70 per cent from the previous year. While this reduces regulatory risk, international scrutiny over Brazil’s escalated rate of deforestation has significantly increased. In May 2019, several UK food retailers were named and shamed in the media for continuing to purchase JBS products despite the environmental fines levied in 2017. [iv] [v] An investigation by The Guardian accused JBS of continuing to source beef throughout 2018 from deforested areas embargoed by IBAMA.
Investigative journalism and continued NGO scrutiny increases the likelihood that JBS will lose further business contracts. In 2012, Greenpeace published a report that tracked meat products from illegal farming operations in Brazilian rainforests to slaughterhouses and production facilities used by JBS. Following the publication JBS lost an important business contract with Tesco, one of the world’s largest multinational supermarkets.[vi]
Those who invest in JBS face similar pressures to that of its corporate consumers. Recently, the Norwegian Government Pension Fund Global (GPFG), which has USD 1 trillion assets under management, was heavily criticized for continuing to invest in JBS. The investment is seen as contradictory to the fund’s responsible investment commitment to exclude companies that cause severe environmental damage.[vii] However, GPFG publishes an exclusion list and has blacklisted companies for links to deforestation. [viii] Where it does invest, the fund actively engages on the topic of deforestation.[ix] The fund is renowned for its active investment approach when it comes to social and environmental issues. In 2015 the company disinvested approximately USD 8 billion from the coal industry based on climate issues. Therefore, there is the risk of exclusion if engagement with JBS proves unsuccessful and violations continue.
Financial sector analysis
As Bolsonaro’s government moves to weaken environmental and Indigenous peoples’ protections, banks’ exposure to geographic risks associated with ESG Integration – Financials have risen.[x] Thus, banks involved in financing agricultural activities may be exposed to increased public scrutiny and reputational risks. As 98 per cent of Brazilian demarcated Indigenous lands are located in the Amazon, there is a high probability that firms taking advantage of relaxed regulations may be doing so on these territories, thus jeopardizing their social license to operate.
We looked at the credit portfolios of a sample of 13 banks operating in Brazil (10 domestic, 3 foreign) and found the percentage of the banks’ loan portfolios invested in “agriculture” ranged from 0.93 per cent to 10.7 per cent. Banco Nacional de Desenvolvimento Econômico e Social (BNDES), with 10.7 per cent of its loan portfolio placed in “agriculture and cattle-raising” has environmental guidelines on cattle-raising.[xi] The guidelines include a requirement for livestock and slaughterhouse suppliers to prove that their suppliers are not operating on lands embargoed by the Ministry of the Environment.[xii] However, it is unclear whether this policy is signed by BNDES’ board or executives. Given BNDES’ board is composed mostly of government ministers, there may be a conflict of interest.
Boycotts of Brazilian beef and byproducts overseas could lead to longer loan payback terms and negatively impact banks’ credit portfolios. Similarly, if improvements to environmental standards take priority in EU-Mercosur trade negotiations, banks operating within Brazil will be under increased exposure to ESG Integration – Financials risks. Domestic and foreign banks operating within Brazil can manage these risks by establishing or improving social and environmental lending policies for sensitive sectors like agriculture and soft commodities. They could also introduce or bolster requirements for consultation with Indigenous Peoples.
According to the World Bank’s Changing Wealth of Nations database, a country’s total wealth includes its natural capital – the stock of renewable and non-renewable resources that provide benefits to people, including economical.[xiii] [xiv] The database shows the value of Brazil’s natural capital has doubled from USD 3.8 trillion in 1995 to USD 7.6 trillion in 2014. The categories of Forests, Protected Areas, Cropland, and Pastureland account for 76.17 per cent of the 2014 value.[xv] Irresponsible environmental and social practices have long-term consequences for Brazil’s economy, which is reliant on its natural capital. Thus, financing firms involved with such practices may undermine the lender’s and borrower’s sustainable development objectives.
Despite an erosion of environmental and social protections in Brazil in recent months, there is space for investors and corporate customers to leverage their influence as responsible stewards. Moreover, there is a responsibility to uphold commitments, whether it be a responsible investment mandate or a company policy pledge. For Brazil to reverse course, much will depend on the willingness of the actors involved, be they cattle farmers, multinationals, consumers, banks, or investors, to recognize the power they hold and to act on it.
[vii] Norwegian Government Pension Fund Global
[viii] Norges Bank Investment Management
[ix] Norges Bank Investment Management 2
[x] ESG Integration – Financial is a material ESG issue for banks under Sustainalytics’ ESG Risk Ratings methodology.
[xiv] Natural Capital Coalition
[xv] World Bank 2 (Excel spreadsheet download)
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