Investor activism can be a powerful force for good. Holders of bonds and stocks are pressing companies and governments globally to improve governance, reduce carbon emissions, pursue gender balance and racial diversity, as well as deliver rising profits. But what if their targets ignore the pressure?
This is the dilemma facing asset managers who clubbed together last year to put pressure on the Brazilian government and its far-right president Jair Bolsonaro to curb deforestation of the Amazon. The investor group, which has grown to encompass $7tn in assets under management, had five aims: the most important was a “significant reduction” in deforestation. Others included the enforcement of Brazil’s Forest Code, and the prevention of fires in or near forest areas to prevent a repeat of the burning seen in 2019.
Just over a year and several high-level meetings later, the results are clear: deforestation has surged by 17 per cent in the first six months of 2021, according to preliminary government data. The impressive-sounding Forest Code is fast becoming a dead letter, because the agencies who police it have had their budgets gutted. Last month, the environment minister — a close Bolsonaro ally — quit amid a criminal investigation into whether he had colluded with illegal loggers to export Amazon timber.
With most of their objectives unmet, what should the investors do now? The question is pressing because environmental experts believe as much as 40 per cent of the remaining Amazon forest is nearing a tipping point, where fires and droughts risk turning it into dry open savannah.
Arguments for more time feel weak. Few believe that Bolsonaro, beholden to a noisy constituency of loggers, ranchers and evangelicals, will change his ways in his term’s final 18 months. Budgets for environmental agencies can be restored at a pen stroke and enforcement stepped up, if the political will exists. Brazil has shown in the recent past, notably during 2009-17, that it can reduce deforestation sharply when it wishes to. The government’s recent pledge to send the army back to the Amazon to combat deforestation repeats a failed strategy; properly funded environmental agencies have proved far more successful in the past.
The investor group’s members did not say what would happen if their targets were not met. Some argue that continued engagement is preferable to selling and losing influence — a thesis often used to defend continued investment in fossil fuel producers.
Not all is lost. The Bolsonaro administration’s cavalier disregard for the country’s natural wealth is not shared by many Brazilian businesses. Companies exporting to Europe and America are alarmed by the risk of consumer or investor boycotts if government inaction makes the Brazil brand too toxic. Some Brazilian companies are aiming to match the best global standards on ESG metrics; they deserve encouragement. Even the meat sector, a late convert, has woken up to the need for credible methods of tracing the origin of the cattle it slaughters, though implementation is too slow.
Yet in the case of the Bolsonaro government, a year of high-level dialogue has coincided with a sharp deterioration in the Amazon. Continued engagement in such circumstances risks undermining the credibility of a commitment to ESG. In a year of exceptional circumstances amid the pandemic, it has been difficult to discern an environmental discount on Brazilian government bonds. This needs to change. It is time for investors to send a $7tn signal to Brasília that unless deforestation abates, they will sell.