• Responsible Investing

ESG focus: Sustainability under Brazil’s strongman

Brazil’s President Jair Bolsonaro may threaten to roll back important environmental policies protecting the Amazon, but companies – and investors – don’t have to follow suit.

ariel view of deforestation

Similar to US President Donald Trump, the recently-elected Brazilian President Jair Bolsonaro’s rise to power rested on a populist agenda to clean up the government, grow the economy and reduce red tape. And, like Trump, Bolsonaro has crucially linked what he perceives to be anti-growth red tape to the environmental movement, openly questioning the science behind climate change. If he follows through on his campaign promises, as the early evidence suggests, it could have a detrimental environmental impact; not only to Brazil but to the planet.

In some instances, Bolsonaro’s threats to the environment may even trump Trump’s. Within Brazil’s borders is about two-thirds of the Amazon rainforest, which serves as ‘the lungs of the world’; producing about 20 per cent of the total oxygen generated globally.1 Deforestation of the Amazon, therefore, would have an environmental impact far beyond Brazil’s borders.

In an open letter in May, eight former environment ministers warned Bolsonaro’s administration could reverse years of progress. The deforestation rate in Brazil generally has been in decline or stabilising since 2004,2 mainly due to new policies to protect key areas and indigenous territories, improved monitoring and enforcement, and pressure from the private sector and environmental groups. However, the deforestation rate is showing some signs of rising more recently.3

“We’re talking about biodiversity, life, forests,” the ministers wrote.4 “The Amazon has an incredibly important role in global warming. It’s the world’s air conditioner; it regulates rain for the entire continent.”

Deforestation in Brazil's Amazon

In the fourth part of our series on how ESG is evolving in emerging market equities, Jonathan Toub, emerging market equities portfolio manager, and Sora Utzinger, ESG analyst, discuss how environmental, social and governance (ESG) considerations are becoming more important for investors with exposure to Brazil.

Bolsonaro has been called ‘The Tropical Trump’. In what ways do their ESG agendas look similar?

Utzinger: They both emerged from a backdrop of rising inequality; benefitting from an undercurrent of populism sweeping across the world. As a candidate Bolsonaro questioned the reality of climate change and, much like Trump, cast environmental protection policies as a ploy by foreign-influenced meddlers intent on holding back Brazil’s economic growth.

Just as the Trump administration has criticised the US Environmental Protection Agency and dismissed scientists on the organisation’s advisory board, Bolsonaro wants to replace the independent National Council of the Environment (known as Conama) with his own government appointees.5 One of his first acts as president was to transfer the nation’s forestry service to the agriculture ministry, essentially making it easier to clear rainforest land for agribusiness.

How important is the Amazon rainforest to the planet?

Utzinger: The Amazon generates about 20 per cent of the total oxygen and absorbs as much as one-tenth of the fossil fuel emissions in the world. If we destroy between 20 and 25 per cent of the Amazon, the impact could push it over a tipping point, at which the damage could be irreversible in eastern, southern and central Amazonia. 6 We’re at about 16 or 17 per cent,7 so we’re not very far off.

Deforestation is damaging the Amazon, but so is global warming. Rising temperatures could contribute to a higher frequency of droughts, which can reduce the rainforest’s ability to absorb carbon dioxide.8 The Amazon serves many purposes. It’s not just about carbon. For example, it’s home to about ten per cent of all the known wildlife in the world, despite covering less than one per cent of the earth’s surface area.

How concerned should investors be about Bolsonaro’s environmental policies?

Toub: As a starting point, we remain very bottom-up in our analysis, and presidents come and go in Brazil. From an environmental point of view, we expect a relaxation around deforestation under Bolsonaro, and there will be local companies that may benefit from these policies. But our stance is that regardless of the political climate, we should be able to find companies that not only adhere to good environmental standards, but also good social and corporate governance standards. Better companies will look beyond the minimum.

What incentives do companies have to go beyond the minimum, as you put it?

Toub: Investors are scrutinising how companies operate from an ESG perspective more carefully, so Brazilian businesses that want to attract foreign capital will need to comply to global best practices. They also will need to follow stricter standards if they’re doing business overseas, because ESG is increasingly embedded in global trade. In 2017, for instance, the French National Assembly passed the corporate duty of vigilance law. This requires multinational companies to carry out mandatory risk assessments across their supply chain to identify and prevent activities with adverse human rights and environmental impacts.9

Brazil is the world’s top exporter of commodities, including sugar, beef, maize and soybean; much of it going to Europe and the US. Therefore, companies with higher ESG standards may be in a better position to expand their businesses. These are also the types of companies that may be more attractive to investors in the long term.

What about Brazil’s social policies?

Utzinger: The social component is often connected to the environmental and governance policies, in Brazil and elsewhere. For example, one agency in Brazil is tasked with demarcating land for indigenous communities. That responsibility used to sit with the justice ministry but has now been transferred to the agriculture ministry under Bolsonaro. This represents a weakening of the justice ministry, which is a governance issue. You also have a shift in priorities, from decisions based on justice to those based on economic rationale to benefit the country’s agriculture industry. If indigenous people are displaced to clear land for logging, cattle or crops, that is a human rights issue. And it’s an environmental problem. The E, the S and the G are all related.

Do you expect to see ESG improvements in any areas under Bolsonaro?

Toub: Some of the policies relating to corporate governance are positive. Importantly, Bolsonaro named Paulo Guedes, a University of Chicago alumni, as minister of the economy. A free-market advocate, he is expected to bring in more orthodox monetary and fiscal policies to Brazil, including reducing its unsustainably high pension burden.

The government has also promised to sell off some of the state-owned enterprises (SOEs). With the largest number of SOEs in Latin America, Brazil is ‘Latin America’s China’.10 A few of these state-owned assets could become more attractive as they migrate to become private companies. We’re looking at one of the state banks that historically had done a lot of the heavy lifting for government-subsidised loans, so it wasn’t necessarily being run for profit. As the governance structure evolves towards a level at which private companies are run, there’s more focus on credit scoring and all the things you would expect to ensure that the bank has a better chance of making a profit for minority shareholders.

How would you assess Bolsonaro’s ability to drive through key reforms, given the difficulties for previous leaders to do so?

Toub: What Brazil needs to do this year is to make real progress on pension reforms. This is a priority because Brazil’s debt-to-GDP ratio is trending upwards and approaching about 80 per cent while the pension system is bankrupt. Brazil offers unsustainably generous retirement terms for anyone working in the state sector. For example, for military personnel, retirement benefits average 70 per cent of the final salary with inflation-linked payments, which is unheard of anywhere else in the world.

Investors rushed into Brazilian equity following Bolsonaro’s ascendancy in local polls in early October 2018, leading to a 35 per cent rally in the MSCI Brazil index between then and February 2019, compared to a turbulent but flat MSCI Emerging Markets Index. However, Brazilian equities have underperformed by about four per cent since then, as exuberance regarding Bolsonaro’s ability to enact economic reforms has waned and the reality of the ongoing issues facing the country has dented growth expectations. Meaningful social security reforms are needed this year to restore investor confidence, attract much needed capital inflows and support Bolsonaro’s tenure.


  1. Mari Margil, ‘Our laws make slaves of nature. It’s not just humans who need rights,’ The Guardian, 23 May 2018
  2. Phillip Fearnside, ‘Deforestation of the Brazilian Amazon,’ Oxford University Press, September 2017
  3. Amazon rainforest deforestation 'worst in 10 years', says Brazil’, BBC, 24 November 2018
  4. 'Exterminator of the future: Brazil’s Bolsonaro denounced for environmental assaults,’ The Guardian, 9 May 2019
  5. Brazil’s Bolsonaro plans to axe environmental panel that protects Amazon rainforest,’ The Independent, 8 April 2019
  6. Thomas E. Lovejoy and Carlos Nobre, ‘Amazon Tipping Point,’ Science Advances published by the American Association for the Advancement of Science, 21 February 2018
  7. Amazon deforestation is close to tipping point,’ Phys.org published by Science X Network, 20 March 2018
  8. Carol Rasmussen, ‘NASA finds Amazon drought leaves long legacy of damage,’ NASA’s Jet Propulsion Laboratory, 9 August 2018
  9. The French Law on Duty of Care: A Historic Step Towards Making Globalization Work for All,’ Business and Human Rights Journal, Cambridge University, July 2017
  10. Kenneth Rapoza, ‘When it comes to state-owned companies, Brazil is the China of Latin America,’ Forbes, 3 November 2018

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