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High deforestation rates in Brazil and massive fires in the Amazon have put agricultural companies operating in the country and their investors in the spotlight. Agricultural supply chains are key drivers of deforestation, with cattle and soy playing major roles. With agricultural expansion taking place in Brazil and environmental regulations having been loosened there since 2012, current conditions point to the need for stricter execution of zero-deforestation commitments for actors along commodity supply chains, including producers, traders, FMCGs, and retailers. Companies are also under pressure to curb purchasing or producing agricultural commodities connected to legal deforestation.
Lack of meaningful government actions in recent years means the agricultural industry and international commodity supply chain actors have become even more critical in curbing deforestation. Companies have relied on Brazil’s Forest Code, which was updated in 2012, to guide their zero-deforestation policies, but the Code still allows for large areas of natural forests and other ecosystems to be deforested in the Cerrado. Moreover, Brazilian President Jair Bolsonaro favors agribusiness over environmental protection, reducing the country’s law enforcement and conservation efforts. Against the current backdrop, companies operating in Brazil are seeing more scrutiny about their role in deforestation, which could lead to increasing reputation, financial, and market access risks. Their investors and lenders are also seeing more pressure to engage with the companies. A new report from NGO Mighty Earth maps out which soy and meat companies are closely linked to the Amazon fires and deforestation in the Cerrado.
The cattle industry is a major contributor to deforestation in Brazil despite commitments among major players to eliminate deforestation in their supply chains. Approximately 80 percent of the country’s beef is consumed domestically, but exports are rising, particularly to China. JBS, Marfrig, and Minerva operate high-risk slaughterhouses despite having signed multilateral Cattle Agreements that aimed to improve the industry’s sustainability efforts and reduce deforestation. These three companies, which supply the top retailers, operate approximately 70 percent of the cattle slaughter capacity in the Amazon. Major shareholders and lenders include BlackRock, Deutsche Bank, BNP Paribas, Santander, HSBC, JPMorgan, and Vanguard.
Soy traders are also seeing pressure to address their role in deforestation. This sector is dominated by the ABCD traders – ADM, Bunge, Cargill, and Louis Dreyfus. China’s Cofco International, Glencore Agriculture, and Brazil’s Amaggi are also major actors. All have zero-deforestation commitments, but they have given conflicting signals regarding their policies, including shifting timelines and details on implementation. Moreover, most policies address only illegal deforestation. These traders (except for Amaggi) are members of the Soft Commodities Forum (SCF), which is focused on reducing deforestation in 25 high-risk municipalities in the Cerrado. Despite efforts under the SCF, traders may not adequately mitigate deforestation risks, as CRR recently noted in its report on Cargill.
In light of the recent Amazon fires, Norway’s largest pension fund, KLP, said it has reached out to ADM, Bunge, and Cargill to encourage them to take action to protect Brazil’s rainforest. KLP holds USD 50 million in either loans or shares of the three companies. Similarly, Storebrand Asset Management, also based in Norway, has reached out to companies and is looking into which firms may be responsible for the fires. “We have an ambition to exit companies that contribute to deforestation by 2025,” Storebrand’s head of sustainable investments said. Sweden’s government is, meanwhile, in talks with its pension funds to ensure they are not financing companies linked to deforestation. More investor pressure may follow. A number of NGOs have been active for some time in calling on the financial community to pressure the agricultural industry to curb deforestation. For instance, Amazon Watch launched a campaign this year highlighting the financial sector’s role in funding major companies that have high deforestation risks in Brazil.
CRR reached out to a number of financial institutions including HSBC, Santander, BNP Paribas, UBS, BlackRock, APG, and Deutsche Bank to see if they have had conversation with companies operating in Brazil about the fires and higher deforestation levels. They have not yet responded to CRR’s request.
Market Access Risks
Companies operating in Brazil could face market access risks as a result of a backlash amid recent developments. Some EU members have proposed renegotiating the EU-Mercosur Free Trade Agreement, which would negatively impact Brazil’s soy and beef exports. At the same time, the European Commission recently released proposals to increase action to curb deforestation globally and cut the EU’s imports commodities tied to deforestation. EU legislation could further limit options for Brazilian exporters.
One unintended consequence of the EU reducing dependence on Brazilian imports is Brazil deepening trade ties with China, where corporate sustainability efforts lag Europe and the United States. Trading between Brazil and China has tightened particularly in the past year and a half as Washington and Beijing have ratcheted up their trade war. As a result, Brazil has exported larger volumes of soy to China. Last year, Brazil’s total exports of soy reached 83.6 million metric tons, rising 22 percent versus 2017 and more than double levels seen in 2013. Cofco International’s chairman, Johnny Chi, recently told a group in São Paolo that his company plans to increase purchases of Brazilian soy by five percent per year over the next five years. He added that Cofco is looking to provide farmer access to international carbon markets to provide them credits for conservation and reforestation. “Transformation to sustainable agriculture can only happen while protecting the interests of farmers and others who depend on the trade of agricultural goods,” Chi said, according to a Bloomberg report.
To reduce exposure to reputation, market access, and financial risks from deforestation, companies could reaffirm publicly their zero-deforestation commitments; tell suppliers that they will not purchase products that are connected to deforestation; improve traceability in their supply chains; address both legal and illegal deforestation; publicly disclose progress toward zero-deforestation targets; and increase investment in implementation.