We need to talk about Brazil: How are responsible investors reacting to Bolsonaro?

A watering down of election rhetoric is anticipated

Brazilian markets surged into the new year as investors welcomed the election of far right candidate Jair Bolsonaro to the presidency.

But his reception on the world stage has been somewhat cooler.

Bolsonaro is notorious for having waged a provocative populist campaign which portrayed “gender ideology” – a term referring to LGBTQ lifestyles – as an existential crisis for Brazilian society, and for his remarks disparaging women and minority communities.

Despite the controversies, voters have pinned their hopes to a package of complicated pensions and tax reforms which Bolsonaro has pledged to push through. The new administration must also reckon with widespread crime, corruption and a floundering economy.

But at this stage, the new administration’s priorities seem to be its political agenda.

In the short time he has taken office, Bolsonaro has signed executive orders transferring the regulation of new indigenous reserves to the agricultural ministry – seen as a concession to agribusiness interests, removing LGBTQ concerns from the remit of the human rights ministry and granting sweeping powers over civil society to his administration.

These early moves notwithstanding, a number of market participants surveyed by Responsible Investor expect his election rhetoric to be watered down before influencing any policy decisions.

Lupin Rahman, global head of sovereign credit at PIMCO, points to Bolsonaro’s restrained appearance at Davos – where he assured other world leaders that the “environment must go hand-in-hand with (economic) development efforts” – as an example of this in practice.

She said: “We don’t know what the actual policies are going to be so we have to reserve judgement. Having said that, I think the backlash of the media attention has probably reined him in a bit.”

Similarly, Marcelo Seraphim, Head of Brazil at the Principles for Responsible Investment (PRI), said: “Bolsonaro has already walked back a number of his pledges. We do not expect that things will change with regards to our engagement projects, and the sustainability agenda.

“PRI guidelines for signatories remain the same, engagement projects remain the same, companies will work on improving policies and practices, we do not expect these to be jeopardised.”

According to Seraphim, investors wary of Bolsonaro should not reduce their positions in the country, calling this an “inappropriate” response.

“Instead, we want to be more positive and capitalise on, for example, the new administration’s focus on infrastructure, which provides opportunities for green infrastructure, pensions reform likewise will have a positive impact on the market. There are a lot of positive things also in this transition to a new government.”

PIMCO’s Rahman also advises restraint, saying that investors taking overly moralistic or subjective positions are in danger of “not fulfilling the fiduciaries of their clients”. Investors should instead refer to international codes – such as the SDGs and PRI Principles – to determine what is acceptable.
For the PRI, engagement with the government will be a key plank moving forward.“We think it is crucial to educate the new administration on the opportunities presented by responsible investment instead of seeing it as an obstacle to economic growth and prosperity. We are very positive that we will succeed.”

The PRI are yet to reach out to the new administration and were unable to share any details for upcoming engagement activities.

Bruno Moraes, a Sao Paulo-based director at Actis, the UK-based emerging markets investor, concurs with the PRI although he envisions a larger role for investors leading on responsible investment.

“It is crucial to educate the new administration on the opportunities of responsible investment”

He said: “For now, we don’t foresee any action that could impact or put boundary conditions, such as ESG principles, at risk. Committed responsible investors (as well as development banks and like-minded commercial banks) have always followed international best practice environmental and social standards, and will provide significant safeguards against harm.”

Peter Uhlenbruch, Investor Engagement Officer at the Asset Owners Disclosure Project, part of ShareAction, lists a number of examples where this has been effective.

“Recent years have shown the successful and positive impact of the investor-supported ‘We Are Still In’ coalition in the United States as a strategic response to the climate policy vacuum under the Trump administration. The Paris Agreement itself is largely an outcome of sustained investor influence while other investor coalitions such as Climate Action 100+ are having a positive impact on corporate behaviour.”

For equity investors concerned about deforestation, Impax Asset Management, an SRI specialist, suggests examining their exposure to soy and beef in food company supply chains. Currently, there are “no certifications for ‘non-deforesting’ soy or beef as there are for timber or palm oil” potentially leaving the commodities vulnerable to deforestation risk in the event that environmental protections are dismantled.

On the other hand, sovereign debt investors need to be more “pragmatic” of their influence says PIMCO’s Rahman. Firstly, Brazil “issues very little in terms of external borrowing and focuses a lot more on domestic local markets”. More broadly, “sovereigns’ objectives are much more fluid than profit maximisation, and the impact of a lot of environmental and social policies are latent and more medium term”.

However, “the process of global investors actually signalling what is important to them is crucial”.

“If you can have investors on one side signalling that sustainable investment, achieving the Sustainable Development Goals and having a blueprint for achieving them is an important consideration, while at the same time you have international finance institutions (IFIs) together with NGOs and interest groups saying similar things, it’s going to help to move the needle.”

“When issuers go through a difficult period, whether due to economic shock or regime change or more populist pressures, they tend to gloss over some of the negative impacts of their policy choices. That’s when investors have to be a lot more forthright in terms of calling out issuers.

“At the end of the day, if an issuer does not want to take corrective action, it reflects on the price of their bonds.”