On January 1, 2019, Jair Bolsonaro began his tenure as the president of Brazil. In Bolsonaro’s first eight months in office, his administration has had a profound impact on Brazil’s forests and its Indigenous population, and critics now link Bolsonaro’s anti-environment policies and rhetoric with the wildfires affecting Brazil’s Amazon rainforest. But Bolsonaro is not the only one fuelling the fire as agro-businesses expand into forested regions, driven by global demand for Brazilian commodities. Consumer goods like beef and soy are largely to blame for the need to clear land. Thus, food producers sourcing ingredients in Brazil, financial industries and trading governments all have a role in addressing deforestation and human rights issues in Brazil.

Bolsonaro’s destructive policies

Less than a year in power, Bolsonaro’s impact on the environment and Indigenous peoples has been far-reaching. Deforestation levels in Brazil between July 1 and 22 of this year alone were 111% higher than they were in all of 2018. Over 120 pesticides were authorized in 2019 to date, some of which have been classified by the U.S. Environmental Protection Agency as “dangerous” or “extremely dangerous” for humans and the environment. All this occurred under the auspices of the Brazilian Ministry of Agriculture, whose powers have increased at the expense of the Ministry of Environment. The MoE and its anti-deforestation agency, Ibama, have suffered drastic budget cuts since Bolsonaro came into power, lessening their ability to identify and penalize instances of illegal deforestation. The new Minister of Environment, Ricardo Salles, dismissed environmental fines as ‘ideological’, leading civil servants in the Ministry to distance themselves from the minister in an open letter in April.

The Bolsonaro administration has also proposed transferring the protection of Indigenous rights to the Ministry of Agriculture again after congress voted against the initial proposal. Because of his strong ties to Brazil’s agribusiness, many are concerned the Minister of Agriculture will further subordinate Indigenous land rights to agricultural industry interests. During his campaign, Bolsonaro swore “to not demarcate another centimetre of Indigenous land” for protected status. Roughly 12% of Brazil’s lands are Indigenous lands, spread over 700 territories, of which about a third is waiting for official recognition.

Corporate deforestation pledges 

Bolsanaro’s reputation as “the most environmentally dangerous head of state in the world,” as The Economist recently put it, doesn’t just affect Brazil’s forests and Indigenous communities. International firms will want to keep a watchful eye on exactly how they’re doing business in Brazil. The Brazilian beef and soy industry has been singled out for fuelling many of the roughly 26,000 fires recorded in the Amazon this month, as land is typically cleared by farmers and ranchers to grow crops and raise cattle. Brazil is the largest beef exporter in the world with around 25% of the global beef market. In the last year, it has also surpassed the U,S. as the world’s largest exporter of soy (much of that soy is used as animal feed). As well, global demand for Brazil’s timber exports is contributing to the deforestation. Chances are high that firms taking advantage of less rigorous regulations may be doing so on disputed or demarcated Indigenous territories.

Despite Brazil’s regulatory rollbacks, countries and companies importing from Brazil have their own commitments on deforestation and human rights to uphold. Given the misalignment of these commitments with Brazil’s policies and practices, continuing to buy commodities from Brazil could prove to be contentious and pose reputational risks. In May 2019, several UK food retailers were named and shamed in the media for continuing to purchase products from Brazil’s JBS (the world’s largest meat processing company) despite the fact that investigations found the company was sourcing cattle from illegally deforested areas in the Amazon.

Over 50 of the world’s biggest companies (including Cargill, McDonald’s, Walmart, and Lloyds Banking Group) have pledged to halve deforestation in their supply chains by 2020 under the 2014 New York Declaration on Forests. This after a 2010 alliance on deforestation driven by the Consumer Goods Forum (CGF) saw 400 international companies pledge to zero net deforestation supply chains for palm oil, soy, beef and pulp and paper by 2020. American agri-giant Cargill, one of the largest exporters of Brazilian soy, has been heavily criticized for recently announcing that it would not meet its 2010 pledge. It’s also facing a backlash for backtracking on its commitment to a soy moratorium in Brazil’s Cerrado region – known as the world’s most biodiverse savanna.

Forest-related commitments in agricultural supply chains

Being implicated in the deforestation of Brazil’s traditional Indigenous lands could also put companies at odds with their public commitments on human rights, which are aligned with the interests of the UN’s Office of the High Commissioner for Human Rights (OHCHR). The 2007 UN Declaration on the Rights of Indigenous Peoples was seen as a landmark development for the OHCHR. Providing mechanisms for Indigenous peoples to provide free, prior, and informed consent for projects in the Brazilian Amazon may be a way forward for companies looking to ease current tensions. In April, an Ecuadorian court suspended government plans to auction off Indigenous Waorani territories for oil exploration stating that the government didn’t receive the tribe’s consent.

Role of the Financial Sector

Multinational corporations aren’t alone in their exposure to Brazil’s Amazon and Cerrado. Banks play a central role as an intermediary between the financial markets and the consumer goods sector, including food and agricultural companies. Boycotts of Brazilian beef and byproducts overseas could lead to longer loan payback terms and negatively impact banks’ credit portfolios. Similarly, if improvements to environmental standards take priority in EU-Mercosur trade negotiations, banks operating within Brazil will be under increased exposure to ESG integration against financials risks.

Sustainalytics looked at the financing policies of 13 of the biggest domestic and foreign banks in Brazil by assets (10 domestic, 3 foreign).  Only three of the Brazilian banks (Banco do Brasil, Caixa Econômica Federal, and Itaú Unibanco Holding S.A.) have general environmental and social guidelines that mention or address deforestation, Indigenous peoples or cattle ranching practices. Notably, none of the banks in our research sample has a standalone policy addressing Indigenous peoples and rights. The three foreign banks (Barclays PLC, BNP Paribas SA, and JPMorgan Chase & Co.) had policies addressing deforestation and soft commodities (i.e., cattle ranching, timber products, soy, etc.).

In the absence of stronger environmental protections from the Brazilian government, bank financing policies can be influential in ensuring borrowers respect international norms and standards. Poor or non-existent policies can exacerbate the deforestation practices fueling Brazil’s fires.  Domestic and foreign banks operating within Brazil can manage their exposure to reputational and other ESG risks by establishing or improving social and environmental lending policies for sensitive sectors like agriculture and soft commodities.

For instance, French international banking group BNP Paribas encourages its agricultural commodities producers to have their crops or plantations certified against Round Table on Responsible Soy, Better Cotton Initiative, Bonsucro or UTZ principles and standards by 2020. It encourages cattle farmers to have their production systems certified by 2020 against the Standards for Sustainable Cattle Production Systems by the Sustainable Agriculture Network.

Banks could also work with NGOs that monitor the environmental and social impacts of deforestation and set up ESG funds that exclude poor performers with respect to deforestation practices. They could also introduce or bolster requirements for consultation with Indigenous Peoples.

Altamira, Brazil. Photo by Victor Moriyama/Greenpeace.

Call for a regulatory crackdown by Europe

While the EU has enforced legislation on illegal timber, illegal fishing and conflict minerals, there is no regulation on agricultural goods linked to deforestation. As a major trading bloc and a significant consumer of agricultural products associated with global deforestation, the EU holds some responsibility and has an opportunity to drive change and set best practice standards.

The European Commission has received numerous requests from academics and stakeholder initiatives, such as the Amsterdam Declaration, calling for regulations requiring proof that goods placed in the EU market don’t contribute to either global deforestation or human rights abuses. A 2017 motion by the European Parliament called for regulation of the EU’s footprint on the world’s forests and highlighted the need for effective protection of Indigenous peoples rights and forest-dependent communities.

We all have a role in making sure Brazil’s rainforest is safeguarded well into the future. Governments can regulate beef, soy, timber and other imports linked to deforestation. The financial sector can leverage its role and influence companies to reduce deforestation and improve relationships with Indigenous peoples. It’s also incumbent on the consumer goods industry to uphold its voluntary commitments in the face of weakened regulations and protections. Much will depend on the willingness of the actors involved, be they cattle farmers, multinationals, consumers, banks or investors, to recognize the power they hold, and to act on it.

Jean-François Obregón is a Senior Associate, Insurance, Real Estate and Asset Management Research at Sustainalytics and based in Toronto.

Jessica Grant is an Associate, Consumer Goods Research at Sustainalytics and based in Amsterdam.

Thijs Huurdeman is an Associate, Consumer Goods Research at Sustainalytics and based in Amsterdam.

A version of this story first appeared on Sustainalytics.com.

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Before we get started, I need to communicate that cannabis stocks are much riskier investments than the typical big companies we look at in this column. A high Beta suggests heavy volatility, so only invest if you’re ready to put on a safety belt and go along for an intense ride.

Canada-based Canopy Growth (WEED:TSX) is the largest cannabis company on the stock market today. I first heard about Canopy in 2014 when they purchased the abandoned Hershey’s chocolate factory in Smiths Falls, Ontario and turned it into a massive greenhouse for growing medicinal cannabis. Their share price was hovering around $2 at that time, and what a ride it’s been for investors with the share price reaching a high of $67.74 in October last year just before legalization in Canada. On April 15, it opened at $55.74. With popular brands like Tokyo Smoke and Tweed, Canopy is well-positioned to blaze a trail in the now-legal recreational market. Alcohol maker Constellation Brands, which we profiled in our St. Patrick’s Day showdown, recently made a US$4 billion investment in Canopy.

But how sustainable is Canopy? Not very, according to this report from sustainable investment research firm Sustainalytics. Canopy scored poorly on several measures, including energy intensity and the use of pesticides. Canopy does not publish an annual sustainability report, so lots of important data goes unreported. A quick look at their Corporate Social Responsibility webpage shows a focus on educational partnerships with groups like Mothers Against Drunk Driving (MADD) and the Canadian AIDS Society, which is laudable. However, the only environmental initiative I found was a partnership with TerraCycle to develop recyclable packaging. With a lot of question marks around energy/water consumption and a lack of policies that ensure safe growing practices, investors have cause to be paranoid.

A much smaller Canadian company, The Green Organic Dutchman (TGOD:TSX) is a medicinal cannabis producer that only grows certified organic product. It, too, has yet to deliver a formal sustainability report to date, but they do publish specific sustainable principles like recyclable packaging (their glass jars should avoid the overpackaging backlash that Ontario Cannabis Store products have faced), and a commitment to efficient technologies like heat transfer and water reuse. Most importantly, all of The Green Organic Dutchman’s farms and greenhouses are certified organic. They’ve just started selling to medicinal customers and have short-term plans to enter the recreational market. Sadly, stoners won’t be able to smoke a legal organic joint from TGOD this weekend.

You’ll notice on our scorecard (below) that both companies have pretty high CEO-to-worker pay ratios, but Canopy’s has definitely raised eyebrows. Canopy’s CEO, Bruce Linton, collected over $6 million in total compensation in 2017, equivalent to 15% of the company’s $40 million revenue that year. Love that TGOD’s CEO pay was only $1 in 2018, but some will argue that the $2.5 million in shares he earned as a bonus that year tipped the scales, considering the company had yet to earn any revenue or launch their IPO.  In contrast, the median total compensation of 101 other high-growth companies at IPO stage (including LinkedIn, Yelp and Google) was US $564,000 (C$750,000), according to Crunchbase.

There’s no doubt that The Green Organic Dutchman wins this week’s Sustainable Stock Showdown, but a big question remains. Will cannabis consumers live up to their tree-hugging stereotype? If so, then I expect the organic certification to be valuable as consumers should be willing to pay more for The Green Organic Dutchman’s product. That said, the legal cannabis market is still young and it’s impossible to predict. If consumers don’t care about their green being truly green (namely certified organic), then we’ll find ourselves in a “race to the bottom,” whereby companies compete to grow the cheapest crop. The race to cut costs is all too common for traditional commodities like wheat and oil. Cannabis is still just a commodity at the end of the day, and, in this scenario, The Green Organic Dutchman will have a much harder time competing.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!  

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. Tweet him at @timenash.

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