(Bloomberg Opinion) -- Investors with more than $4.5 trillion in assets want Brazilian President Jair Bolsonaro to stop loosening environmental rules and do more to control escalating deforestation in the Amazon and beyond. This may be their moment. Upcoming virtual discussions are well-timed: Faced with a pandemic-shattered economy and record outflows, the populist government that has brushed off foreign donors as interfering busybodies will find it harder to ignore sovereign bond holders and equity owners. They can help their case with a show of support for extra green incentives, like biodiversity and carbon credits.
Big funds are becoming increasingly outspoken with governments, and not for pure altruism. It’s clear that poor management of Brazil’s natural wealth — most immediately with a proposed law that will legalize land grabs — is a symptom of deeper dysfunctions that manifest themselves in other areas, too, directly increasing risks for investors. Bolsonaro has failed to take the coronavirus seriously and garbled official guidance. Having parted company with two health ministers since April, Brazil has the second-highest number of cases after the United States.
Brazil had previously done well in combatting deforestation, but the rate has worsened significantly under Bolsonaro. Last month, at the start of the dry season when farmers and loggers seek to clear ground, the number of fires rose to a 13-year high, according to the National Institute for Space Research. That will lift carbon emissions this year, even as the rest of the world sees a drop in climate-warming gases. Earlier in the year, Environment Minister Ricardo Salles was caught on camera suggesting that the government use the pandemic to push through more deregulation.The 32 major investors, led by Norway’s Storebrand ASA, said in a letter sent to Brazilian embassies last month that all of this increases “reputational, operation and regulatory risks.”The question of how the wider world convinces emerging economies to put global environmental priorities first has never been easy to answer. Concepts like payment for ecosystem services — compensating governments for forgoing the immediate benefits of land clearance — are helpful, but have often been resisted. Norway, which has paid $1.2 billion into the Amazon Fund under just such a program, suspended payments last year after Bolsonaro’s government, suspicious of non-governmental organizations, questioned the organization and closed the committee that selected projects. Investors have a louder voice than most, not least because Covid-19-era Brazil has little choice but to listen. Public debt is edging toward 100% of gross domestic product, the budget gap has ballooned and the currency has performed dismally of late. The economy could shrink more than 9% this year, according to the International Monetary Fund.
Yet how do fund managers turn talks with ministers into actually bringing change? Engaging with a government, be it South Korea or Brazil, is less straightforward than lobbying a company, where enough unsatisfied shareholders can ultimately spill the board.
Raising awareness and highlighting concerns publicly as a group, as investors have done, is one step, coming when Brasilia is more sensitive to outside perceptions. Funds can afford to be specific in their demands, making it easier for both sides to measure success.
There’s always the threat of divestment, most effective when made with the promise of reinvestment if behavior improves — a stick with a carrot attached. Done coherently, that can mean not just selling out of government bonds or shares in locally listed firms, but dumping shares in companies like beef producers and others with unsustainable Brazilian supply chains, widening eventual sources of pressure on the government. In one of the more creative examples, a green bond issued by Norway’s Grieg Seafood ASA last month explicitly promised the cash would not be used to buy feed from trader Cargill Inc. due to “soy-related deforestation risk.” Investors cannot dictate government action, but they can point to portfolio risk and cause plenty of direct and indirect pain.
A few more carrots might help, though, in dealing with a government that has responded better to investment arguments than to moral ones. Options could include support from major investment firms to develop means of monetizing Brazil’s natural wealth by, say, the sale of carbon credits, as the head of wood-pulp producer Suzano SA pointed out last week, or biodiversity credits, increasingly in demand as firms scramble to offset emissions. Salles has estimated $120 per hectare would be necessary annually to protect the Amazon — a small price to pay given the region has the capacity to absorb as much as 5% of the world’s carbon emissions.
Policy makers can provide backup for investor-led efforts at a time when a free trade deal agreed between the European Union and Mercosur, South America’s commercial block, has already met resistance. Real change in Brazil cannot happen without the agricultural sector lobbying for conservation. Bard Harstad, who works on environmental economics at the University of Oslo, says that will happen when producers anticipate that market access is under threat. Withholding the ratification of the agreement until conservation measures are re-introduced, or writing in credible conservation as a condition, would make the message plain.
In the simple terms populists like: Money talks.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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