Amazon deforestation hit an 11-year high in 2019. A satellite image showing fires in the Brazilian Amazon in August 2019 is pictured above. // Photo: NASA.

Major European investment firms have reportedly threatened to divest from Brazilian beef producers, grains traders and government bonds if they do not see advances in protecting the Amazon rain forest. Brazil’s government responded on July 9 by announcing a ban on fires in the Amazon for 120 days. The investors’ concerns follow an 11-year high in Amazon deforestation in 2019, President Jair Bolsonaro’s first year in office. What factors have led to the increase in deforestation? Will Brazil’s 120-day ban on fires satisfy investment managers, or should the country still expect divestments? To what extent will the risk of divestment lead to more long-term protections of the Amazon in Brazil?

Emine Isciel, head of climate and environment at Storebrand Asset Management in Norway: “The escalating deforestation in Brazil, combined with reports of a dismantling of environmental and human rights policies and enforcement agencies, are creating widespread uncertainty among investors about the conditions for investing in or providing financial services to Brazil. Storebrand recognizes the crucial role that tropical forests play in tackling climate change, protecting biodiversity and ensuring ecosystem services, all of which are important issues for our long-term financial results. We have been leading and coordinating a public policy dialogue with Brazilian embassies around the world and so far 34 investors representing over $4.6 trillion have joined its initiative. We have expressed our concern to the Brazilian government and want a dialogue about how we see protection of forests and human rights as essential for our continued investment in Brazil. We want to continue to invest in Brazil and help show that economic development and protection of the environment need not be mutually exclusive. Divestment is a real option for managing risks arising from deforestation, but our hope is that the government will listen to our concerns and take action to reduce deforestation significantly. Following a meeting with the investor coalition, the Brazilian government announced that it planned to ban setting fires in the Amazon for 120 days. This is potentially great news and an important step to prevent a repeat of last year’s catastrophic forest fires, but it remains to be seen whether it will be enforced. The fire ban affects already deforested areas, so the real question is whether the government will crack down on new deforestation.”

João Teixeira da Costa, partner at Benchmark Investimentos in São Paulo and co-founder of environmental journalism nonprofit oeco.com.br: “Brazilian newspaper Valor Econômico reported on July 9 that Brazilian commodity exports may already be suffering an undeclared boycott from buyers in Europe who do not want to be associated with unchecked deforestation in the Amazon. The Bolsonaro regime, responding to the pressure from trade partners as well as international investors, tasked Vice President Mourão with defending its environmental policies. Interpreting warring factions within the Bolsonaro administration is always a challenge, but some of the more pragmatic, free-market-oriented groups close to agro exporters and to the finance industry apparently managed to alert the president that neglecting environmental issues is costly. Brazil desperately needs foreign investment in infrastructure, health, sanitation and urban development, a reality laid bare by the Covid-19 pandemic. Brazil could tap into these resources if it could show some respect for best environmental, social and governance (ESG) practices. But there are reasons not to expect a fundamental change. Early in his term, Bolsonaro insisted that he would not try to build a base for himself in Congress trading patronage for votes. But the growing pressure from judicial investigations that could lead to an impeachment vote has caused him to change tack and to seek whatever support he can muster. He is unlikely, therefore, to confront the agrarian caucus in Congress, which tends to align more with illegal ranchers and loggers than with the agrobusiness export sector. International investors would do well to keep an eye on the satellite images. Until Bolsonaro shows a willingness to confront the squatters on public land that are driving deforestation in the Amazon and other endangered biomes, no sweet talk in the palaces of Brasília will make any difference.”

Thomas Rideg, president of M-Brain Americas Inc: “Brazil holds a very strict environmental code, but deforestation of the Amazon is a result of illegal activity by both local and foreign players. Reasons range from roadside clearance fires, small cattle ranchers, illegal logging, Indigenous people clearing for crops and even large players. July to September is fire season all over South America, so this is the right time to impose a 120-day ban. But as most activity is already illegal, vigilance must be tight. The good news is that INPE announced on July 8 that fires in the Amazon region have declined 23 percent from a year earlier. No country can accuse Brazil’s agribusiness performance and environmental sustainability without swallowing a huge dose of hypocrisy. Brazil has the world’s second-largest agribusiness industry but utilizes only 7.8 percent of its land; compare that to 57 percent in Germany. Brazil also has the world’s strictest forestry code. More than 63 percent of land is in its virgin state, as compared to 1 percent in Europe. The Brazilian Amazon region alone has 107 million hectares of Indigenous reserve, as compared to 22 million hectares of reserve in the United States. Let’s not even begin discussing clean energy as compared to the European Union. It is no secret that Brazil is recovering from a political crisis and faces economic and social challenges, but the advances with its sustainability and agribusiness are second to none. Divestures by European investment firms would be a protectionist move disguised as concern for the Amazon. Meanwhile, China is increasing investments in this sector daily. Brazil recently announced that its agribusiness industry will hit a high in production in 2020, at 245.9 million tons.”

Galina Besedina, Paris-based portfolio manager for global emerging markets equities: One of the factors that has led to Amazon deforestation is the growth of the middle-class population in emerging markets and, as a result, the increase in demand for different types of commodities. Brazil is one of the world’s largest producers and exporters of meat, agricultural products and biofuels, requiring vast arable and cattle land. The Brazilian government’s reluctant policy toward forest protection is a result of its short-term view on the local economy, and Bolsonaro’s supporters benefit from the export of these commodities. In recent years, some government policies have even encouraged deforestation, which, of course, creates a significant concern for international investors. Concern about climate change is not a new issue for investment managers as clients are insisting on more responsible and sustainable capital allocation. Therefore, the investment managers who have joined the movement will most likely keep their promises and divest from Brazil if no significant progress is made to stop the deforestation, considering high reputational risks. However, it is hard to say what will be regarded as good progress on this issue, and when precisely the investment community will pull the trigger. Brazil depends on foreign investments, and local corporates have their influence. In this light, the government may come up with an action plan to protect the Amazon. The main concern here would be whether this plan is ever implemented if not all global investors, including more Chinese ones, join the club and continue to put pressure on the local government.”

Gilberto M. A. Rodrigues, professor and head of the graduate program in international relations at the Federal University of ABC: “The Amazon has been at risk since President Bolsonaro took office in January 2019. His mindset regarding environmental protection is completely outdated and similar to those of the rulers of past authoritarian regimes, when military rulers thought the environment was an obstacle to economic development and believed that foreign governments were only interested in strategic resources under the forest, such as oil and uranium. The situation is even more problematic due to Bolsonaro’s opposition to Indigenous peoples, who have been victims of many kinds of state violence, including genocide, according to many experts and NGOs. Moreover, the environment minister, Ricardo Salles, a far-right lawyer allied with conservative landowners, has no commitment to environmental protection at all. Salles is responsible for one of the most regressive environmental policies in contemporary Brazilian history that was not seen even in the last days of the military regime. Besides, the government has dismantled Ibama, an autonomous environment protection agency. So there is no doubt that deforestation is a policy adopted from the top. The 120-day ban on fires is a smoke screen. The only way to recover credibility of a responsible environmental policy is to change the minister (who is formally accused of crimes against public administration) and re-establish Ibama’s authority. Foreign divestment would be the most powerful way to foster public opinion awareness and private sector support to lead the government to a long-term policy toward protecting the Amazon.”

Mark Langevin, director of BrazilWorks and senior advisor to Horizon Client Access: “President Jair Bolsonaro gutted the leadership and enforcement capacity of environmental protection agency Ibama, turning a blind eye to illegal logging and mining activities as well as violence against indigenous communities, key conditions underlying the rise in deforestation. Last year’s Amazon fires ravaged the forest and led Norway and Germany to suspend their donations to the Amazon Fund amid growing criticism of Bolsonaro and Minister of the Environment Ricardo Salles. In response, Bolsonaro appointed Vice President Hamilton Mourão to chair an ‘Amazon Council.’ Six months in, Mourão’s leadership is lackluster, and Salles’ performance continues to add fuel to the fire as the world braces for another Amazon burning season. Twenty-nine prominent investment firms signed a letter this month calling for the government to combat deforestation. The effort is led by Norway’s Storebrand Asset Management, but also includes The Church of England, U.S. based Domini Impact Investment and Pax World Funds, as well as Japan’s Sumitomo Mitsui Trust Asset Management along with São Paulo headquartered Fram Capital. These investors are engaged with companies operating in Brazil, including Cargill, Bunge and ADM, as well as Brazilian producers JBS, Minerva and Marfrig, to evaluate supply chains, production and sustainability. These equities carry escalating reputational risk but could suffer devaluation if leading investors decide to raise their portfolios’ ESG standards through divestment. Their decisions unfold amid a rising tide of commodity chain activism that focuses global attention on the Bolsonaro administration’s abject failure to protect its most valuable natural resource.”

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