The Amazon rainforest and Brazil's Capital Market
Brazil is once again making the headlines in global media, unfortunately for a bad reason.
The wildfires in the Amazon rainforest cannot be ignored. It is a dense matter, full of nuances, where segregating facts from fake news is very hard, making it difficult to identify causes and responsibilities without dangerously getting involved with party or ideological biases.
It is not our job, while asset managers, to have a technical opinion but, in our view, a pragmatic one, we must understand the economic consequences for the country, as well as demand from our own ecosystem (companies and managers) more attention to a theme that has been constantly left behind, except in dire situations such as the present one.
CDP (formerly known as Carbon Disclosure Project) – one the most well known and respected entities when it comes to climate changes – points out that, within its covered universe, Brazil is the country with the lowest priority about climate changes at the Board of Directors. Only half of the companies discuss it at board meetings compared to 54% in Argentina, 65% in Mexico and 87% in Europe.
Another CDP poll shows that Brazil is at the bottom range when it comes to the inclusion of climate in most business plans. Only 55% of Brazilian companies have included the matter, compared to a global average of 72% and 84% in Europe.
It is quite bewildering that Brazil, the country with the largest biodiversity on Earth, relegates such an important theme, making it harder to come up with adequate and fast answers for such emergency situations, leading to a unnecessary vulnerability.
As seen, there is an abyss between how this is seen in Europe (high priority) and in Brazil (secondary), and this may have serious consequences for the country’s economy. It cannot be ruled out that sanctions may well be applied, affecting exports especially to Europe. Even worse, it may hurt the approval of the historic deal between the EU and Mercosul after more than 20 years of negotiations.
Unfortunately, Brazil typically reacts to shocks instead of working to prevent them. As a major example, the pension reform was approved only after the country hit a critical level of primary deficits. Only now, after seeing parts (though small) of the rainforest burning to ashes, is this grabbing the deserved attention from politicians.
The only bright side is that it is no longer possible to leave this matter aside and it is our duty – as should be from all investors – to bring this to the table and have it inserted in long term business plans.
At the end, thinking and applying ESG is taking into consideration relevant matters to reduce and/or mitigate future risks and it is past the time to deal with this. It is our job, as investors and asset managers, to address this with the invested companies and make our part in helping Brazil step out of the ranks that put the country on the top of illegal fires in the Amazon rainforest.