Analysis: IPCC warning on meat consumption adds to scrutiny of beef producer Marfrig’s $500m ‘transition bond’

Bond from Brazilian company divides market as focus turns to meat production

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Today, the world’s top climate scientists have said that meat has little place in a 2°C world. The UN’s Intergovernmental Panel on Climate Change (IPCC) has released a report on land use, in which it warns that “dietary choice can have severe consequences for land”, recommending “sustainable diets [that] are high in coarse grains, pulses, fruits and vegetables, and nuts and seeds” and low in “energy-intensive animal-sourced” foods.
It’s bad timing for Brazil’s Marfrig Global Foods. The second biggest beef producer on the planet last week sold $500m in ‘sustainable transition’ bonds, joining Repsol in the ESG hall of fame: a major carbon emitter in an industry whose very existence threatens to scupper the Paris Agreement, selling bonds to finance sustainability improvements. And, like Repsol’s deal, it has divided the market.
Francesca Suarez, an ESG analyst at French responsible investment house Mirova says Marfrig’s efforts, which focus on improving the social and environmental standards of its vast supply chains, are very welcome.

“Transition can’t become a get-out-of-jail-free card”

“Marfrig is fully committed to ensuring that the sourcing of cattle is done in the most sustainable and transparent way possible, and this bond was to showcase their dedication to that, and hold them accountable,” she says. But she believes the notes are “better suited for mainstream bond portfolios wanting to have better transparency with regard to how funds are being used”, not dedicated green or sustainability portfolios.
Mirova didn’t buy Marfrig’s bond. Neither did fellow responsible investment stalwart PGGM in the Netherlands, who told RI it had “come to the conclusion that this does not qualify as a sustainability bond” because it wasn’t “financing new sustainable activities or investing in a climate solution”.
Earlier this year, at RI Europe, PGGM’s Head of Responsible Investment, Brenda Kramer, told the audience it had snubbed Repsol’s deal in its green bond portfolio for similar reasons.
But there is a key difference between the Repsol bond and Marfrig’s offering.
“Let’s be clear: this isn’t a green bond and it wasn’t marketed as one,” says an ESG specialist at one of the bond’s underwriters. “We didn’t pitch this to green bond funds and portfolio managers, because we all knew this was something different.”
Instead, the notes were aimed at broader investors with whom Marfrig wanted to build a dialogue over sustainability. Consequently, the bond became the world’s first ‘sustainable transition’ bond.
Does this difference in labelling explain away the accusations of greenwashing, then? Investors have been calling for fixed-income to move beyond green bonds and into a more integrated mainstream approach for years.
And Marfrig is sticking its head above the parapet by acknowledging the need to tackle deforestation. Two days before the IPCC issued its report pointing out the climate-misalignment of the meat industry, Brazil’s National Institute for Space Research (NISR) revealed a 278% rise in deforestation in the Brazilian Amazon year-on-year under the lead of climate sceptic President Jair Bolsonaro.
The NISR is a government body, but the research has caused it to lock horns with Bolsonaro, who reportedly sacked its head, Ricardo Galvao, last week, saying he was “in the service of some NGOs” and that the study was damaging for Brazil.
Against this political backdrop, Marfrig’s move to publicly enter the deforestation debate could be seen as bold – there is clearly no pressure from lawmakers to do so, and some political risk from wading into the debate.
Marfrig has also published its second-party review – something not all issuers choose to do – in which Vigeo Eiris points out its doubts around the issuer’s ability “to effectively manage and mitigate the environmental and social risks associated” with the bond. It’s a big stumbling block, and one that Greenpeace had also voiced concerns about.Marfrig acknowledges the hurdles, telling RI its bond was a ‘transition’ bond “because we recognise that there are still many social, economic and environmental challenges [around] harmonising the production and conservation of [the Amazon], given the characteristics of our industry”.
And that appears to be the crux of the problem. The word “transition” is very precious to green investors, because it underpins all the investment and engagement that must be done in the decades ahead. It’s relatively new as a concept for capital markets (having previously belonged to risk management and scenario analysis) but could potentially be a game changer for responsible investing – both in terms of allocating capital effectively and widening the investment universe – if the markets can work out a way of identifying credible transition strategies to finance.
The idea is not without controversy, but is being supported by the EU’s green taxonomy, which explicitly deals with climate transition, and its Green Bond Standard, which is expected to provide clarity to both issuers and investors on the topic. Green bond champion AXA has its own idea of what a transition bond should look like, and has issued guidelines outlining its expectations from issuers, and the Canadian government has been asked to support such an asset class to kick-start an industrial shift in its resource-heavy economy.
There have been a couple of energy-focused transition bonds in the market before, but experts are nervous about the potential for getting it wrong, and damaging the reputation of green finance.
A universal definition of ‘transition’ will be tricky to pin down, but the starting point is not being put up for negotiation: a ‘transition’ means the shift of capital and business activities towards a 2°C-or-lower world.
“Transition bonds need to be more than half-green things that don’t actually contribute to a transition to Paris-alignment,” points out Sean Kidney, Founder of the Climate Bonds Initiative and a member of the Technical Expert Group developing the EU’s Green Bond Standard.
Kidney says CBI will take some time to assess the Marfrig deal before making any decisions on its credibility, but he said the issuer “should get a big tick” for its work on deforestation and disclosure. “The bigger question, though, is about the future of the meat industry in the context of the Paris Agreement. And ‘transition’ can’t become a get-out-of-jail-free card – big conversations need to be had.”
Marfrig does have a clear transition plan, but it isn’t framed in the context of Paris. The firm “is making many efforts to affect a transition from a historically complex and environmentally- and socially- challenging supply chain to a supply chain that is more positive to the environment and socially responsible in terms of deforestation, animal welfare, carbon/methane emission and slave/child labour,” it tells RI by email.
But responsible investors are demanding more. And other potential issuers will need to sit up and take note if they want to avoid getting it wrong.
“To be a transition bond, we would have expected projects such as R&D into alternative plant-based protein sources,” says Mirova’s Suarez. “Additionally, the overall corporate strategy direction would need to be towards decreasing its beef production and increasing its exposure to more sustainable and plant-based proteins.”
This week Marfrig, which is the world’s largest hamburger producer, announced an agreement with US agribusiness outfit Archer Daniels Midland Co to produce and market vegetable protein products.

Marfrig’s bond will not finance a transition to a low-carbon business model, and the firm has no public plans to make such a transition. Its choice of label may prove to be a setback for the embryonic ‘transition bond’ market, putting other issuers off and confusing an already chaotic conversation. But, when responsible investors spend so much time calling for transparency – championing the likes of CA100+, CDP and the TCFD – it’s easy to see why Marfrig felt that upping its disclosure would be enough to put it in the game.