ESG awareness rises in Brazil’s pension industry, but more needed, says report

Brazilian pension funds are making slow progress on ESG integration, according to report

Brazil’s $180bn pension fund industry is increasingly addressing ESG in its investment policies, but it is rarely translated into effective practices, according to a report on responsible investment in the country.

The report, Responsible Investment in Brazil 2016, is written by Brazil-based ESG think-tank and research house, SITAWI – part of the Vigeo Eiris global network. It analyses the investment policies of Brazil’s top 50 pension funds, and transparency reports from 14 PRI signatories.

It finds that Brazil’s top 25 pension funds all mention ESG in their investment policies, compared with 72% in 2015. Among the top 50, this figure is 78%, compared with 67% last year. But, it notes, this is probably reflective of the recent introduction of regulation requiring pension funds to state in their investment policies whether they consider social and environmental issues in investment decisions.

In practice, the report says, ESG policies are still largely basic or aspirational with small improvements compared to 2014.

Speaking to RI, Gustavo Pimentel, Managing Director at SITAWI, says only a few pension funds in Brazil have what could be described as an advanced level of ESG integration. These include Real Grandeza – the pension fund for electricity firm Furnas Centrais Elétricas – which, for example, has developed a methodology for assessing the social and environmental performance of investee companies across different asset classes, using a qualitative rating.Pimentel said one barrier to pension funds adopting meaningful ESG policies was their available resources.

The report notes that the Brazilian pension fund industry is highly concentrated, which could speed up the adoption of ESG integration.

But it also highlights Brazil’s conservative approach to asset allocation, which undermines ESG incorporation: in 2015, more than 70% of Brazilian pension fund assets were allocated to fixed income. A high concentration of this was in government bonds. Only 18.5% of assets were allocated to equities. This asset mix can make it harder to assess ESG in portfolios, the report claims.

Pimentel also noted that Brazil’s pension funds did not provide enough incentives to external managers to consider ESG issues, describing this as the biggest challenge. He said SITAWI was planning to work with the PRI to educate Brazilian pension funds on engaging with external managers and including ESG requirements at the mandate stage.

He added that activism from pension fund beneficiaries on ESG issues – such as fossil-fuel divestment or engagement campaigns – had not yet gained momentum in the country. But, he pointed out, recent scandals in Brazil, including the ongoing Petrobas saga, and human rights issues connected with hydropower dams, were bringing ESG awareness more to the fore.