Nordea mulls lifting Brazil restrictions as investors welcome Lula victory

Nordea Asset Management is considering lifting its restrictions on new investments in Brazilian sovereign debt following the election of Lula as the country’s president on Sunday, as other investors engaging the government on deforestation welcomed the news.

The €237 billion manager said it wouldn’t buy any new debt from the Brazilian government in 2019 over concerns that the scale of deforestation and wildfires in the Amazon had greatly increased under former president Jair Bolsonaro. Nordea has already excluded all three of the country’s largest meat producers due to deforestation concerns.

Eric Pedersen, head of responsible investments at Nordea AM, said he was “optimistic” that the quarantine could be lifted and signalled that the emerging markets debt team was looking into lifting the restriction. He said the first step expected from the government would be to enforce the existing forest code and rebuilding IBAMA, the Brazilian Institute of Environment and Renewable Natural Resources; as well as other agencies.

However, Pedersen warned of “strong interests” which had benefitted from previous policies on the Amazon, and said he hoped for a peaceful transition of power from Bolsonaro to Lula. Bolsonaro, who had previously claimed that Brazil’s electronic voting system was insecure, is yet to concede more than a day after Lula was pronounced the winner.

Investors involved in engagements with the Brazilian government were also cautiously optimistic, including several members of the Investor Policy Dialogue on Deforestation (IPDD), which was set up to engage sovereign issuers on deforestation topics.

Graham Stock, senior EM sovereign strategist at IPDD co-chair BlueBay, said that Lula’s policies on deforestation looked much better than those of Bolsonaro, whose administration he described as a “willing but frustrating counter-party”.

Stock said he expected Lula’s transition team to send a delegation to COP27 next week, and that relations with the international community will be “much more comfortable”, with Norway already signalling its willingness to discuss resuming financial aid for the protection of the Amazon which it had suspended in protest of Bolsonaro’s policies.

Emine Isciel, head of climate and biodiversity at Storebrand, the other co-chair of the IPDD, said that she welcomed Lula’s pledge to combat deforestation, and that Storebrand had already been engaging with his team over the past months.

Tommy Piemonte, head of sustainability research at Germany’s Bank für Kirche und Caritas, has been conducting his own engagements with the Brazilian government as part of an alliance of Catholic investors and organisations.

While Piemonte warned that there was no certainty Lula would fulfil all his election promises, he said he expected to find “more open doors” in Lula’s government. “For the time being, we are relieved that Lula won, in terms of protecting the Amazon and the indigenous and traditional people living there.”

Piemonte emphasised the investment case for engaging the Brazilian government on deforestation. Damage to the Amazon and subsequent knock-on effects to the Brazilian climate will have a negative impact on the agricultural sector, which forms a large part of its GDP. This will in turn have a negative impact effect on its credit ratings, he said.

Daniela da Costa, an emerging markets portfolio manager at Robeco, said that she maintained a positive view on Brazil “for now” following mentions of sustainability, fostering investments and tax reform in Lula’s victory speech. However, she warned that Lula will need to select “respected names” for the finance ministry and state-owned companies to calm the market, and called for a sustainable and responsible growth agenda to be discussed.

Anders Schelde, CIO of Denmark’s AkademikerPension, said that Brazil has been put on hold by some investors, and has been seen as “an international pariah” in recent years, but prospects had significantly improved from his perspective. He said that the actual delivery of promises was key, but Lula’s pledge to once again seek to reduce deforestation delivered on a key priority for many international investors.