Industry Investment Policy

ESG Investment and the Amazon

Why is the Amazon of importance?

The Amazon Rainforest is vanishing before our very eyes. This is the result of the excessive, and at times illegal, deforestation and wildlife events caused by corporate invasion. Currently, the Amazon is not only the source of modern medicine ingredients, it is also a major wildlife habitat and accommodates the ancestral homes of  local indigenous tribes. Ecologically, the Amazon stores a high amount of rainwater, prevents soil erosion and produces a notable proportion of the world’s oxygen. Unfortunately, with  its continued destruction and a lack of deforestation prohibition or forestry protection policies, the Amazon and the aforementioned entities it supports are threatened with extinction. Commodity producing companies, Institutional Investors and political administrations who have a stake in the Amazon receive scrutiny as their actions contribute massively to its rapid depletion. Also, over the past ten to fifteen years there has been a rise in the importance for ESG (Environmental, Social, Governance) policy within companies. This has meant that the public and shareholders are increasingly focusing on how companies take accountability for their practices and how companies envisage to enact more sustainability-related practices. As a result ESG policy has helped identify which companies (and their investors) are enabling the damage to continue in the Amazon and those who are trying to prevent further damage. 

What has happened in the past that is of concern?

Whilst the soy and cattle production industries are  the largest culprits of deforestation in the Amazon, oil and gas extraction, mining, civil engineering and urban planners are also  worsening the situation. Companies extort the indigenous populations, cut down the rainforest and even create wildfires to make way for their own synthetic landscapes. For example, in the graph below we see the annual net change rate of forest area across countries in which the Amazon Rainforest lies. Our analysis shows that the rate of deforestation has been increasing since 2010 in various countries such as Brazil, French Guiana and Venezuela. While Peru’s and Bolivia’s annual net change rate of deforestation has decreased over time, realistically this minor decrease may be negligible in contributing to the Amazon’s overall net change rate of deforestation. This is because their land size is much smaller compared to Brazil and other larger nations which occupy more of the Amazon.

There is data which also shows that the number and percentage of oil/gas blocks overall have increased by 32% over the past 8 years in the region. A large proportion of these oil/gas blocks are being built in Ecuador and Bolivia, which are relatively sizable countries. Some countries such as Peru and Columbia, however, have been able to reduce the number of oil/gas blocks over the same time period. This is showing that the countries within the Amazon seem to not be working collectively to protect the Amazon and suggest some countries are more committed, and self-interested, in petroleum-based projects which will bring them wealth, as opposed to preserving their natural habitats.

Other ways the life in the Amazon is being destroyed is through corporate employees introducing diseases which the indigenous peoples have built no resistance to, thus threatening the survival of local populations. It is alarming to know that the lack of rainforest and its waterfall stores may eventually lead to the area drying up, being replaced with a savannah (depleting plant and animal life) and reducing the region’s carbon sequestering capacity.  In recent times, the Amazon suffered an unprecedented wildfire. It is believed that one of the reasons it occurred was because Brazil’s new President Jair Bolsonaro slashed environmental protection agency funding and replaced part of his staff guarding the Amazon with unqualified soldiers. This demonstrated that the government was also complicit in their own natural habitat’s destruction and were allowing it to be subject to exploitation.

Are there any major establishments enabling this damage?

The agricultural initiative ‘Provisional Measure 910’ which was submitted to the Brazilian Congress in 2020 focuses on the legalisation of privatising public land. Initiatives such as these make it so that local governments are also indirectly liable to the damage the Amazon suffers because they are allowing these types of legislative acts to exist and for this land to be used in unethical ways. But largely, institutional investors appear to enable deforestation by formulating policies containing exploitative loopholes which permit their clients to continue carrying out their harmful activities. For example, the Bank of America and JP Morgan have placed a ban on ‘illegal’ logging and deem wildfires as ‘uncontrolled’ fires, but do not explicitly state regulations around the use of ‘controlled’ fires (to clear way for land) or ‘legal logging’ processes.

BlackRock, the world’s largest investment firm, claims to be committed to ESG principles and has received awards in recognition for their “leadership in corporate social responsibility [and] sustainability”. In January 2020, their Chief Executive Larry Fink even pledged to place sustainability at the centre of the firm’s investment approach. Yet the firm invests in companies which have a devastating impact on the Amazon. They have also supported these companies’ management over votes for controversial shareholder proposals on climate change. When BlackRock was questioned on supporting companies that enable deforestation, one of their spokespersons commented that“Deforestation and indigenous rights are critical issues, which also carry risks to investment returns. We engage with companies on these and other ESG risks, and where they are not being appropriately managed or progress is not sufficient, we (as shareholders) take voting action against management”. One of Blackrock’s largest agricultural clients JBS, who are the world’s biggest meat processing company, breed cattle from ranches within Brazil’s Uru-Eu-Wau-Wau and Kayabi indigenous reserves, which in itself casts severe doubt upon the sincerity of BlackRock’s ESG policies. Similarly, BlackRock have also invested $1.6 million in Frontera, who hold the rights to Block 192, which is the largest oil block Peru known for its links to huge quantities of toxic production and oil spills; this company has been negatively impacting the local indgenous people and the environment. So far BlackRock’s authenticity of acting within the scope of their risk-averse ESG policies is still questionable; mostly because their markets still revolve around stimulating negative agricultural and extraction production practices.

What efforts have been taken so far to mitigate this destruction?

Hope is not all lost. Jan Erik Saugestafd, the CEO of Storebrand Asset Management reported his concerns and pinpointed that there needs to be a focus on more effective management of agricultural supply chains, as they have a great opportunity to leverage influential change. He suggests by applying maximum pressures here, it ought to rollover and change corporate behaviour as a whole. To commit to the cause his establishment has disclosed that by 2025 their portfolio will not contain any assets which can be seen as contributing to illegal deforestation. Also in 2019 a signatory was signed by 230 companies worldwide worth $16.2 trillion, who all claimed that they would commit to mitigating destruction to the Amazon by eventually issuing their own deforestation policies. However, as of today only 10% of the investors have chosen to disclose their own specific zero-deforestation policies and plans for dealing with forest-risk commodities. This lack of support suggests that most of these companies are either halting their sense of urgency to reform their ESG policies or simply do not care about making an effort to fight for the cause they signed up to. Nonetheless multinational corporations such as BNP and HSBC have led the way already by disclosing their own policies. HSBC have also agreed not to finance clients who fail to comply with ‘No Deforestation, No Peat and No Exploitation’ activity. Meanwhile, Aviva Investments actively pushed cattle exporter Minerva Food for more traceability within its indirect supply chain and joined an investor initiative which is lobbying against the Brazilian government.

How can investors attempt to improve the situation?

The major dilemma is that major financial firms deny the extent of their wrongdoing. Global Canopy’s Niki Mardas commented that deforestation is fuelled by the financial sector as they send the message that numerous investments in this region will always remain safe in companies who commit these (illegal) activities, suffer negligible punishments and still rake in top profits. To mitigate the destruction there needs to be increased support for ethical investing where shareholders and fund managers actively threaten to divest when companies are not environmentally focused. In this way blue chip companies may feel increased pressure to comply with new legislation in order to maintain their profitability. Another consideration could be creating encouraging government intervention initiatives. Here the South American administrations could  penalise non-compliant companies within the Financial Services industry, such as Itaú Unibanco Holding and Banco Bradesco SA (two of Brazil’s biggest banks), as they directly act as a back channel for international money to flow to the companies which damage the Amazon. Their lack of accountability ought to be exposed in order for these companies to feel compelled to reform their ESG policies. A less abrupt approach would be for shareholders and financial regulatory authorities to assess the actions of the executive directors at companies who pose a high-risk to enabling deforestation, such as the Chief Executive or Chief Risk Officer, as they command the greatest influence over a company’s actions. Shareholders and regulatory bodies could assess how successful these directors are at implementing deforestation or environmental policies and quantifiably measure their compliance processes at regular intervals; they can evaluate ESG performance and either reward good environmental and social behaviour with bonuses or punish negative behaviour with severe penalties and unfavourable publicity. While these solutions might appear to be easy to implement and hopefully solve the problem quickly, they do not consider the complexities of South America’s established existing trade and supply chains. Notably, the Brazilian beef production industry has been currently enjoying growth, mostly because Asian beef consumption has been increasing and since the consumer’s local supply is constrained, Brazilian companies have emerged as their lowest-cost producers. The underlying challenge is to find the most sustainable and financially viable solution whilst allowing the companies to keep up with growing global demand and economic presence. 

It seems the survival of the Amazon is largely down to the corporations that have a presence in the rainforest and making them take responsibility.  If they want to continue experiencing economic prosperity, they need to also consider strategies which allow them to continue doing so but in a more sustainable way. Given the links of agribusiness and extractive industries to deforestation in the Amazon, focused efforts are needed to ensure ESG approaches limit forest cover loss in the future. In this way they will be preserving wildlife, satisfying their investor’s needs to address environmental concerns and maintaining good publicity for taking accountability. There is only a short timeframe in which the companies involved need to come together in order to support the protection of this vital yet sensitive ecosystem before it is permanently gone.

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