September 10, 2019 / In-depth

Investors turn up the heat on Amazon fires

By Joe McGrath, ESG Clarity

Fund firms face growing pressure from investors to do the right thing

Investors turn up the heat on Amazon fires

As the Amazon fires rage on, the situation has got so bad even the Archbishop of Brazil has got involved. Worried about what the destruction will do to the climate, Erwin Kräutler has described the fires as a “true apocalypse”.

It is estimated that the Amazon has lost more than 1,330 square miles of forest since President Bolsonaro, who’s been accused of putting economic growth before protecting the forests, took office in January.

With leading environmentalists continuing to blame big corporations – specifically those in the food and agricultural sectors – for creating the demand that finances the fires and deforestation, asset managers are facing their own mini apocalypse as the pressure to assess their investments and respond adequately to the fires gets greater with every passing day.

While beef and soya production are recognised as the biggest drivers of the fires, deforestation-risk investments go far beyond these industries, touching the supply chains of businesses involved in everything from paper, pulp, and timber to rubber, palm oil, and clothing.

Indeed, H&M, the world’s second biggest fashion retailer, has become the latest clothing brand to announce it will stop purchasing leather products produced in Brazil due to the wildfires – warning it will not lift the ban until it’s verified the leather does not contribute to environmental harm in the Amazon.

As companies and investors alike consider the long-term effects of the fires on company performance, a number of asset managers have been spurred to take action.

At the start of September, one of Norway’s biggest pension funds KLP, contacted companies with activities in Brazil to find out whether they have contributed to the fires.

KLP has invested US$14m in shares and loans in US companies that supply Brazilian soya, including Archer Daniels Midland, Bunge and Cargill.

While the firm said it has already excluded JBS, the world’s biggest meat company and a giant player in Brazil’s beef industry, from its investment portfolio due to corruption, it is putting pressure on other investors to reconsider their holdings in the company.

“We aim, in the first instance, to have a dialogue and hear what the companies are doing,” Jeanett Bergan, KLP’s head of responsible investments, said. “We will also look into Norwegian companies which import soya products from Brazil in order to evaluate this and urge them to do all they can to protect the rainforests.”

If there is evidence KLP is invested in companies that contribute to deforestation, the company has stated it will withdraw from the investments – a clear sign the asset manager views the fires as an immediate threat to investment performance.

Similarly, fund manager Storebrand ASA, which manages more than NOK 729bn in assets and puts sustainability at the heart of its operations, has also contacted the companies it invests in to gain assurance, according to Bloomberg. The firm has stated it aims to exit companies that contribute to deforestation by 2025.

While these are being seen as positive steps, Louisiana Salge, impact specialist at EQ Investor, said sustainable investment risks from the fires will be difficult for asset managers to quantify.

“On a very broad scale, continuously eliminating large chunks of a very active part of climate regulation poses existential threats to the stability of the whole system,” Salge said. “Climate change itself is a long-term risk, whether looking at it from traditional or sustainable investment angle.”

“Precisely because of the importance of the Amazon in regulating the Earth’s climate system, it is hard to quantify exact contribution of the recent fires to climate change exacerbation,” Salge explained.

Australian asset manager First State Investments agrees. It believes the fires are an emerging issue, so it is too early for fund managers to measure the impact in conjunction with the wider economic performance of Brazil.

Nevertheless, the company remains concerned about the long-term risks emanating from failing to protect the Amazon, which it stated is home to 10 per cent of the world’s known biodiversity and plays a vital role in regulating the global climate from CO2 absorption.

“We will continue to monitor developments closely as to how they may impact trade deals and relationships along with the risk of widespread international consumer boycotts,” Joanna Woods, portfolio manager, emerging markets debt at First State Investments, said. “We are also monitoring the potential environmental and long-term investment impacts from weakening environmental regulation.”

While First State does not intend to change its current exposure to Brazil at this point, Woods said it aims to ensure its general positive near-term macroeconomic outlook is not put at risk by the domestic and international response to the situation.

But one fund manager that altered its exposure to Brazil is Nordea Asset Management.

It was one of the first firms to take a bold stance, putting its Brazil sovereign bond purchases on hold last month as it feared the fires could negatively impact the bonds ESG scores.

“We know that much of the agricultural activities [in Brazil] are financed through the bond market,” Salge said. “For us, we don’t have exposure to Brazilian government bonds, nor to Brazilian corporate bonds in our Positive Impact portfolios. We do have some equity exposure to Brazil, but not related to the agriculture, food, or forestry space,” Salge stated.

While the fires force asset managers to consider whether they should divest from certain companies and sectors, it could force some to consider new opportunities.

“Using green bonds to protect the Amazon and finance alternative, sustainable agricultural practises would be a good option to turn this tragedy around irrespective of the Brazilian government’s current plans,” Salge added.

This is exactly what one fund has done.

In June, the Responsible Commodities Facility launched the world’s first green bonds for sustainable soy production in Brazil. The facility is expected to provide US$1bn over the next four years to fund the production of 180 million tonnes of responsible soy and corn.

However, for EQ Investor, investing sustainably in relation to Brazil’s land-use would have to involve an active bond strategy with in-depth impact due diligence and impact assessments.

“A problem can arise when investing passively, like with a green bond tracker,” Salge warned. “While standardisation on what constitutes a real green bond is developing, there is no legal framework or definition that applies to all geographies yet, nor any compulsory audit.

“A sectoral approach is not sufficient to understand the real impact of the projects a bond is financing. For example, a green bond by Fibra, tagged as a forestry-centred green bond, does not in fact provide additional ecosystem protection but instead a monoculture where the Amazon used to thrive,” Salge commented.