Investors warn Brazil to stop Amazon destruction

More than two dozen financial institutions around the world are demanding the Brazilian government rein in surging deforestation, which they said has created “widespread uncertainty about the conditions for investing in or providing financial services to Brazil”.

The call for action, delivered in a letter to the Brazilian government on Tuesday, comes as concerns grow that investors may begin to divest from Latin America’s largest economy if Jair Bolsonaro’s administration fails to curb environmental destruction.

“As financial institutions, who have a fiduciary duty to act in the best long-term interests of our beneficiaries, we recognise the crucial role that tropical forests play in tackling climate change, protecting biodiversity and ensuring ecosystem services,” said the letter, signed by 29 financial institutions managing more than $3.7tn in total assets. Signatories included Legal & General Investment Management and Sumitomo Mitsui Trust Asset Management.

“Considering increasing deforestation rates in Brazil, we are concerned that companies exposed to potential deforestation in their Brazilian operations and supply chains will face increasing difficulty accessing international markets. Brazilian sovereign bonds are also likely to be deemed high risk if deforestation continues.”

Deforestation in the Amazon rainforest has surged in Brazil since the election of Mr Bolsonaro, a rightwing former army captain, who supports opening the protected lands to commercial activity.

In the first four months of this year, an area twice the size of New York City was razed as illegal loggers and wildcat gold miners took advantage of lax enforcement during the coronavirus pandemic to cut down forest. The land is typically converted into pasture to raise cattle.

Ricardo Salles, Brazil’s environmental minister, also stoked controversy when he was caught on video saying the government should take advantage of the media’s focus on the Covid-19 pandemic to “change and simplify” environmental rules.

Jan Erik Saugestad, chief executive of Storebrand Asset Management, a Norwegian group with $80bn under management and a signatory of the letter, said: “We want to stay invested in Brazilian companies, but there needs to be a stable and predictable regulatory and environmental framework and policies that are aligned with sustainability that will make a change of course.

“Eventually if we don’t see this kind of change, the risk of staying invested might reach a point where we might not stay invested.”

A portfolio manager at a European asset management group, which has signed the letter, said: “It is not only a threat. We would consider divesting. We believe Brazil may face structural economic challenges if it does not adjust its course of action.”

Investors said they are particularly concerned about Brazil’s meatpacking industry, which risks being shut out of international markets over its alleged role in deforestation. Brazil’s JBS has been repeatedly accused by environmentalists of buying cows from deforested lands in the Amazon.

Last month, more than 40 European companies, including Tesco and Marks and Spencer, warned they would boycott Brazilian products if the government did not act on deforestation.

“The biggest fear is always that our assets lose value. This could be through those companies losing market access but also due to reputation damage,” said the European portfolio manager.

Last year, the asset management arm of Nordea suspended purchases of Brazilian government bonds following rampant Amazonian wildfires caused by loggers and ranchers clearing deforested land.

Gabriella Dorlhiac, executive director at the International Chamber of Commerce in São Paulo, said such campaigns have “a very real impact on companies here”.

“It is not only the loss of contracts. Look at the EU-Mercosur trade deal. There is a threat that something that took 20 years to be finalised will be put in jeopardy.”

The EU-Mercosur trade deal was agreed by the two blocs last year, but has made little progress towards ratification, with successive European countries voting it down in national parliaments.

“The Brazilian government should take steps to urgently reverse the increasing rates of deforestation,” said Jonathan Toub, an equity fund manager at Aviva Investors.

“In our equities portfolios, we had a positive bias to Brazil at the start of the year. However, policy mis-steps have increased our concerns about the government’s priorities. We have reduced our exposure to Brazilian assets in recent months.”