It started last month as a highly unusual act of engagement: an investor letter writing campaign to Brazilian embassies calling for an end to deforestation.
It quickly snowballed into a meeting between an investor coalition, representing over $4.6trn, with the government and the Central Bank of Brazil – which resulted in a commitment to tackle the issue. This has the potential to be a significant success and a blueprint for further sovereign engagement. However, challenges lay ahead, most notably: how do investors stop this disappearing into thin air?
Leading the public policy dialogue is Norway’s Storebrand. Jan Erik Saugestad, CEO of Storebrand Asset Management, told RI: “Not only did we reach out to corporates on this initiative, we actually approached the government. When you have these three forces of investors, corporations, and governments feeding on each other, or moving in the same direction, you get something done.”
Thus far, the government has announced it plans to ban setting fires in the Amazon for 120 days.
The other investors who spoke with the government were: BlueBay Asset Management, NN Investment Partners, Robeco, KLP, SEB Investment Management, AP2 Second Swedish National Pension Fund, Legal & General Investment Management, Nordea Asset Management, and Sumitomo Mitsui Trust Asset Management.
Why has this occurred now?
As Saugestad explained, deforestation is not a new issue. However, in recent years, investors have become increasingly involved to address it; many in the coalition have been engaging with meat and soy producers/traders, others have divested from companies breaching investment guidelines.
Nordea Asset Management went further in 2019 and halted purchases of Brazilian sovereign bonds due to a lack of action on deforestation; some have joined initiatives, for example, the PRI and Ceres working group, Investor Initiative For Sustainable Forests.
At the same time, Saugestad said: “Even though there has been a long positive track record in Brazil, over the past couple of years, it's definitely gone in the wrong direction.”
President Bolsonaro’s government has been criticised for prioritising development over the environment; indeed, according to Brazil’s National Institute for Space Research, deforestation in the Amazon soared by 55% in the first four months of 2020, in comparison to the same time last year. This followed an 11-year high in 2019, in which fires ravaged the forest, leading to international outcry that not enough was being done.
Faryda Lindeman, Senior Responsible Investment Specialist at NN Investment Partners, said: “I think it's a combined element. There's a lot of publicity on the topic, governments are stepping up, investors are stepping up, so I think that could be a reason to drive the government to make such a commitment.”
Another, wider, trend is the growing momentum in the sustainability camp on climate change. Arguably, this was accelerated by Covid-19; for many in the responsible investor sector the pandemic is a dress rehearsal for what’s to come without action on the climate crisis. Eric Pedersen, Head of Responsible Investments at Nordea Asset Management, said: “I think you will see the negative premium on high ESG risk investments increase and those companies and even nations that don't take that into account, they might regret it, when it comes to the cost of their access to capital. To be clear, this should not be read as a threat, but rather an observation of fact.”
“We are keeping the momentum going and starting to look for concrete action” – Storebrand
Already on the heels of their engagement, Brazilian banks, ministers, and corporations, big and small, have followed with similar statements that the issue needs to be combatted.
Maria De Filippo, PRI’s Senior Specialist in Environmental Issues, and Marcelo Seraphim, PRI’s Head of Brazil, said:“This is an investor campaign led by PRI signatories and we applaud them for starting a dialogue with the Brazilian government to reduce ESG-related risks to their portfolios. We are hopeful to see a clear mitigation of these risks, and deforestation risk in particular, as this dialogue deepens. PRI will continue to support the signatories to effectively engage on the topic.”
And yet, despite the coalition agreeing this is a positive step in the right direction, as Lindeman said: “This doesn't mean this is where our responsibility stops.”
All the organisations spoken to agreed that the aim is to be long term investors in Brazil; to do that means that engagement is the preferred course. However, they also stressed they must be diligent in terms of risk and their fiduciary duty.
As to the ability of Brazilian companies and the government to mitigate risk sufficiently, Jeanett Bergan, Head of Responsible Investments at KLP, explained: “With the current status in Brazil that could be difficult, because what seems to be insufficient monitoring on the ground and the enforcement of the laws are weakened.
“Personally, I'm really concerned about the long-term financial implications in the country, because of certain tipping points and changes in natural water falls. Brazil has up to three times higher yield of their agriculture business than many other parts of the world today. This is at risk if they're not managing this (Amazon, rainforest, climate and environment) issues in a sustainable manner.”
This is a complex issue, over a vast country, so change and management of it won’t happen overnight.
The need for data
Members of the coalition spoken to agreed it was too early to get into timelines and projected milestones for the engagement; however, all agreed that independent data tracking progress on deforestation and traceability on commodities’ supply chains, from both the government and private sectors, needs to be accessible.
In the coming months, which tend to be the peak for fires, Graham Stock, Partner of Emerging Market Sovereign Research at BlueBay Asset Management, said: “We'll be watching very closely to see that we get improvements on those metrics.” However, he added: “It's not really a question of us saying ‘you have to hit this target’, it’s drawing attention to the fact that we're watching these metrics, and they feed into our views on investment across a range of assets in Brazil. We’re putting the government on notice that the better performance on this front is a requirement as far as international investors are concerned.”
On the type of data, Seiji Kawazoe, Senior Sustainability Officer at Sumitomo Mitsui Trust Asset Management, said: “We need to take advantage of the technology, for example satellites. You can see from space what people are doing.” Indeed, there are existing systems the coalition could utilise, for example, the European Space Agency and EOS’s LandViewer observation data. Investors agreed that the data source adopted needed to be something agreed across all parties, for there to be a shared platform for monitoring.
A new kind of engagement?
Kawazoe predicts this “global institutional collaborative engagement” will become more frequent. Likewise, Saugestad said: “We strongly believe that it's true the interaction between the three parties is a useful tool, it broadens the toolbox for engagement. The reason why we do engagements is to create change.”
Currently, KLP are evaluating whether they will invest in Saudi Arabian companies or not. Bergan said: “One of the first things we did was to approach the government representatives to inform about our evaluation and ask for help in our engagement with companies. We need to be comfortable with the human rights situation before investing.
We informed about our ESG approach and expectations and asked questions about Saudi companies responsible business practice approach.”
Today (july 14) the coalition has a call with the Speaker of the Parliament and members of the lower house of Brazil. They are also preparing for engagements with Brazilian companies who are potentially exposed to deforestation. Saugestad said: “We are keeping the momentum going and starting to look for concrete action.”