Letter from Brazil: Meeting net zero and eliminating deforestation

We are proud to be one of the many investors committing to transform the economy to net zero by 2050. However, targets that are 30 years off can result in a ‘not my problem’ attitude, with action delayed to the next generation. 

We can’t afford to do this, especially when it comes to deforestation. It is impossible to meet our net zero commitments without addressing the deforestation in our portfolios – land-use change is having a massive impact on our climate; tropical forest deforestation now accounts for 8 percent of all CO2 emissions, more than the entire EU. 

Ending deforestation and implementing nature-based solutions could provide a third of the solution to the Paris climate target of keeping the global temperature rise below 1.5 °C, but only if we act now, so we need to eradicate it from our activities as quickly as possible. 

$8.7 trillion of capital – a sum not to be ignored – is already committed to eliminate agricultural commodity deforestation from portfolios by 2025, a feasible timeline that reflects urgency of the problem and forces us to act immediately. 

Global problems need global solutions  

Financial institutions in Europe and the US tend to make up the majority of groups with net zero, deforestation and other climate and nature-related commitments. We very much welcome this leadership but believe that delivering on global challenges demands action and collaboration from investors across the world. When it comes to tackling deforestation, for example, it is vital that investors in producing countries, such as Brazil, get deeply involved.   

Here in Brazil our financial sector is small and very locally focused, and to date has ignored the drive for ESG and sustainability in the West. We think this is a big mistake, with the risk that our economy will fail to adapt to new regulation, making it less competitive.   

As a result, part of our efforts to meet our own commitments involve inspiring the Brazilian financial sector, and regional economy, to act on climate and deforestation. A challenge and a learning experience – with a few surprises along the way.  

Inspiring ESG action in Brazil  

First off, lectures and webinars are not working for us in Brazil. Instead, we have found a proactive approach, that actively engages and empowers other investors, to be far more successful, and have set up investor practice groups to share our knowledge.  

At the same time, we are working with western partners to share technology and data. For example, we have a partnership with Global Canopy to develop a Brazilian version of TRASE, which provides supply chain mapping on the trade and financing of deforestation-linked commodities.   

We believe that more dialogue across the globe is essential to drive the changes we need, and recently joined forces with a large English pension fund on an engagement with a mining company, breaking down language barriers and using our local knowledge to successfully encourage the company to change their approach to safety standards.   

Closer to home, research into the ESG credentials of different financial institutions has helped to drive more general progress on climate-related issues. For example, XP Investments, a major financial player in Brazil, recently conducted an ESG-ratings assessment of both local and international asset managers, awarding only 4 percent of Brazilian asset managers at least 4/5 (the highest score was 5) on ESG. This study has led to increased Brazilian interest in ESG and XP is now engaging with several asset managers to help them on their ESG journey. 

Redirecting finance towards net zero   

When it comes to meeting our own net zero and deforestation targets we have developed a multi-strategy approach to cover all levels of capital flow. We have a strong commitment to net zero running through the heart of everything we do, and firmly believe that proactive engagement geared towards redirecting capital is the only way to work towards a more sustainable economy: divestment won’t change anything.  

Our ambition is to be a key player in ending deforestation in Brazil by eliminating deforestation, conversion, and associated human rights abuses from our portfolios by 2025, and we are setting up an active ownership strategy to help deliver on this goal. This will take positions in high-risk companies, such as meat packers, and we will use our influence as shareholders to support investee companies to change their business models – for example by eliminating deforestation risks and developing sustainable production chains.  To our surprise, the reception from companies about this strategy has been wonderful; many of them want to change but have never had sufficient shareholder pressure to act. Some have even invited us to have a seat on their Board, despite our relatively small initial investment.  

We are complementing this approach through our work with IFACC, which seeks to enable innovative financial mechanisms for the soy and beef chains in the Amazon, Cerrado and Chaco, with a strategy based on supply chain finance to help private companies on the producing side (ie. farmers) to develop deforestation-free supply chains.  

A moral duty to act  

Above and beyond all the target setting, strategizing, collaborating and engaging, we must remember we all have a moral and fiduciary duty over our global biomes. In Brazil we have the most diverse biome on the globe, and with researchers recently warning that destruction of the Amazon could rise another 16 percent this year, action has never been more urgent.   

So, as we go about delivering on our net zero targets, and ramping up our action to address deforestation, I believe the moral question is more important than ever. Our duty is not just with our shareholders, but all the stakeholders on the planet, including those not yet born. We need to develop a planetary imagination: shifting our mentality from shareholder to stakeholder capitalism, repurposing value rather than merely extracting it.  

This mindset, together with a strong net zero and deforestation commitment, a competitiveness to adapt, and an ability to collaborate, is vital if the financial sector is to meet its obligations in the new green economy. 

The author is Jose Pugas, partner & head of ESG and Agribusiness at JGP Crédito, Brazil.