Paper maze and lack of transparency cloak investment in companies involved in Amazon deforestation

Last year, journalist Débora Gastal decided to start putting aside a nest egg so she will be comfortable in her golden years. At the age of 31, she joined the 13.5 million Brazilians

with a private or supplementary pension plan—an investment option in which the bank uses clients’ funds to play the financial market and generate returns. As she works for a climate change non-profit, Gastal didn’t want to finance corporations in the fossil fuel industry or other companies not committed to the environment. But unbeknownst to her, her money was helping finance the petrochemical, pulp and paper, and pesticide industries.

She tried to discover where Banco do Brasil was putting her money, but her branch manager could not tell her. So, she looked for the information in the investment report she receives by email every month. Again, there was no mention of the companies in which her savings were invested, only a list of funds with pompous titles that administrate them: Premium IV, Multi Dividendos I, Estratégia 2035 III, and so on, together with the return each investment was generating for her.

“I wanted to be able to choose the companies I was investing in, to support the causes I believe in. But I had to invest in the dark, betting only on profitability,” lamented the journalist.

Like Gastal, millions of Brazilians who invest in funds may be supporting companies involved in serious environmental issues. “Funds, whether they are pension funds or stocks, are intermediate investment structures. You are trusting a manager with your money—paying others to make decisions for you. And investors have traditionally been more concerned with the profit their portfolios generate than with the social and environmental risks they generate,” explains Gustavo Pimentel, director of SITAWI, an organization that develops financial solutions for positive social and environmental impact.

If the client’s goal is to deposit her savings in businesses that are good for the planet, it is worthwhile to do some research when choosing one of the 67 share brokers and 94 distributors listed on the CVM, or Brazilian Securities and Exchange Commission. They are companies that lay their chips on user-friendly online platforms involving little bureaucracy to win over non-specialized clients. One of their missions is to orient those who do not entirely understand the market’s workings about the best investments to make—which would include pointing out risks of investments contaminated by practices that harm nature, according to a Brazilian Central Bank norm: “national financial institutions should establish criteria and evaluation mechanisms for risk in operations related to economic activities with more potential for causing social and environmental damage.”

But if this is being done, it does not reach the end of the chain where Débora Gastal and other clients lie. For example: in December of last year, XP Investimentos—one of Brazil’s largest brokers managing R$ 409 billion belonging to 1.7 million people—recommended that clients buy shares in JBS. “The company’s results are expected to remain strong with strong demand from the United States […], growing Brazilian exports and a favorable environment for the protein sector due to the African and Chinese swine fever.” That same month, BTG Pactual also named JBS as a “featured product” on its shelf.

They appear to be good recommendations for the planet’s largest beef producer, which recently announced its 2019 results, its best ever: a record profit of R$ 6 billion (US$ 1.2 billion). But JBS is also the company most exposed to deforestation in Brazil according to an Imazon study. It owns 32 meat packers (21 of which operational) in the Amazon, and the region where its potential suppliers are located includes 1.75 million hectares that have been embargoed by IBAMA due to environmental crimes. Another 1.65 million hectares in JBS’s buy zone were clear-cut between 2010 and 2015 and 1.24 million hectares of forest were at worrisome risk of being logged after 2016, the year in which the researchers’ work finished.  In all, JBS’ activities cover 4.6 million hectares of cut forest or forest at risk of clear cutting, a number equal to 1% of the rainforest’s total area inside Brazil.

International groups call for responsibility

These sorts of data are not included in XP’s client reports, even though they are important to international investors. At the peak of the Amazonian wildfires in September 2019, a group of 254 money managers from all over the world with portfolios valuing more than the GDP of China (a total US$ 18 trillion) released a letter manifesting concern over “the financial impact that deforestation could have on invested companies due to the increase in reputational, operational and regulatory risks”.

Another manifesto, this time signed by 46 investors worth US$ 6.8 trillion, addressed itself specifically to the beef sector and called for a halt to deforestation within the supply chains. It happens that two thirds of all clear-cutting in the Brazilian Amazon and Cerrado biomes is land that is later transformed into pasture. Every year, the Amazon rainforest loses up to 580,000 hectares to cattle farming—an area nearly four times the size of the city of São Paulo—even though it is already known that not one more tree needs to be cut to maintain the sector’s economic gains.

Conscious that the savannization of Amazonia, which will come as result of uncontrolled clear-cutting, will affect global climate, and in turn “severely harm the agricultural sector and other economic activities, reducing rainfall and increasing temperatures on the long term”, the managers who signed the first letter alerted that companies whose reputations were contaminated by deforestation will “find it increasingly difficult to access international markets”, imposing economic losses on business and consequently, the pockets of those who fund them.

“The movement on the part of investors to include social and environmental factors in their decision-making processes began for ethical reasons. But as time passes, they have realized that this will reduce investment risk and could also lead to greater profit”, observes Pimentel, who calls for “more critical mass in Brazil”: “We need people like Débora Gastal who question why their money is going to certain companies. What we most hear from investment firms is that their clients don’t want to know about it,” he laments.

Impossible to track large investors

The same mechanism that doesn’t allow Débora Gastal to follow her money’s path into the petrochemical industry—which she would not support, if asked—works to mask the funding of companies committed to practices that harm the environment by large investors. But while Gastal fights for more information, the big players in the chain benefit from the lack of transparency, assuring profit without having to show their faces.

It is true that public information is available on the CVM website.  It includes the investment portfolio of the funds to which Gastal’s Money was applied and the corporate structure of the companies operating on the stock Market. Here, any person can see that the BNDES (Brazilian Development Bank) owns 21% of JBS.

But aside from selling shares, the companies operating on financial markets have other means of raising funds that are harder to track because they do not show up as direct participation in company structure. They can emit debt securities, get corporate loans and sell a series of other products to which the financial market gives difficult names: debts, bonds, debentures etc.

In seeking out these hidden investors, international organization Global Witness published a study in September of last year revealing the main investors in three beef companies that most buy cattle in the Amazon. The name of the study is suggestive (Money to Burn), and it aimed to show “how banks and investors finance the destruction of the world’s largest tropical forests”, including the Amazon. The document shows that aside from the BNDES, JBS relies on funding from American Capital Group, BlackRock and Deutsche Bank, Germany’s largest bank.

The list of those funding Marfrig (the 5th most exposed to deforestation according to the Imazon study) includes Santander and North American Brandes Investment Partners.

Meanwhile, Minerva was granted nearly half a billion dollars in credit by Bank of America between 2013 and 2019. And while it publicly includes itself in the global fight against poverty and in favor of sustainable solutions, the World Bank loaned US$ 62.5 million to the company, which ranks 10th in risk for deforestation in the Amazon.

In all, the three meatpackers operating in the rainforest received over US$ 18 billion in financing between 2013 and 2019 by way of financial products, according to the analysis developed by ((o)) eco which was based on raw data from Global Witness. This number is based on information provided by 255 investors in 26 countries. Most of the money came from Brazil (48.1%) but the United States holds a 22.7% share and the UK, 12.1%. Spain, represented solely by Santander, ranks fourth with 7.6% of the investments.

While it is revealing, the Global Witness study did not manage to go as deep into the matter as it wanted. Once again, the problem is a lack of transparency. Chris Moye, Global Witness’ forest investigator, explains that it is only possible to track resources with open capital companies who trade their shares on the Brazilian stock market. This is the case of JBS, Marfrig and Minerva.

But each of these companies owns subsidiaries both inside Brazil and out—companies they control either directly or indirectly, and which contribute to their business, but which have different tax ID numbers. The problem is that many do not trade shares on the stock market and are therefore not subject to transparency controls on financial operations like their mother companies are. “Data on the subsidiaries is impossible to find, it’s a dark world that no one is managing to investigate. Not to mention that these companies use tax havens, making it even more difficult to track their operations. The fact that they keep their money in offshore accounts shows that they are trying to hide something,” points out Moye.

Minerva, for example, controls 5 companies in Brazil and 24 in other countries.. Three of these companies exist solely to receive financial resources and are in financial havens. In all, the 29 companies compose Minerva’s main business, but not one is subject to stock market controls, as all have closed capital.

The situation is even more complex in the retail sector, which buys the beef and sells to consumers. Grupo Pão de Açúcar, for example, has no fewer than 67 controlled companies and 27 associated companies. Of this total, only two have open capital and therefore cannot be fully investigated.

All of the beef industry’s big players—JBS, Marfrig and Minerva—like the largest retail chains—Pão de Açúcar, Walmart and Carrefour—have been signing agreements to assure consumers that the beef they are buying is free of illegal deforestation. In the case of the meatpackers, the main accords are the Public Commitment on Amazon Cattle Ranching (an initiative of Greenpeace, which later abandoned the agreement) and the Deferred Prosecution Agreement created by the Federal Prosecutor’s Office (MPF), which became known as the TAC da Carne, or Beef TAC. But in November of last year when the accord was 10 years old, Federal Prosecutor Daniel Azeredo was categorical  in releasing new TAC audits: “No company buying cattle in the Amazon today can say that it has no cattle coming from deforested áreas in its supply chain (…) Neither meatpackers nor any supermarkets”.

Profit culture prioritized over care for environment

It is easy for bank managers to ignore individuals who save their money, but large investors have the power to change the practices of the financial market. Banks and brokerage firms have the habit of developing products and policies specifically for the purposes of those with over R$ 10 million to invest. In Brazil, only 0.23% of those filing tax returns have patrimony near  or above this value. “This is the magic number, above which the investor receives special treatment,” notes SITAWI director Gustavo Pimentel.

But in practice, most heavyweights are willing, for the time being, to finance deforestation in exchange for a good rate of yield.

Between July and September last year, the fires burning in the Legal Amazon set records, reaching 39, 176 outbreaks in August according to INPE data. In December, investigative journalists showed that, based on Imazon data, nearly 70% of the fire alerts sounded by NASA over the period were located in the meatpackers’ potential buy zones – while the area covers less than half of the Brazilian part of the forest.

Of the 554,000 alarms, 250,000 (45%) were sounded in JBS’ buy zones, 80,000 (14%) in Marfrig’s buy zones, and 66,000 (12%) in Minerva’s. Still, JBS shares rose in value, reaching R$ 33.20, its highest price since September of 2015.

“Most of the beef producers gained value during the burn crisis because investors knew that demand for Brazilian beef would grow with the swine flu in China and the trade war between the US and China,” states Martin Cole, analyst at Fitch Solutions. The company produces reports and forecasts on diverse sectors of the economy, which aid in decision-making of its clients, which include business owners, investors, banks and governments.

“There is a magic word on the financial market: materiality. There is no use in talking with an investment manager about the rainforest, the environment. He wants to know how many billions it’s going to cost him,” adds Paulo Barreto, senior researcher at Imazon and attentive observer of investment profiles in the cattle farming productive chains.

There are already reports of international institutions cutting investments in Brazilian beef producers, but this has been because of their involvement in corruption scandals rather than in deforestation. In the case of JBS, the materiality of loss due to corruption is clear. In 2017, the company promised to pay R$ 10.3 billion in a leniency agreement during the Operation Car Wash investigation. This led a group of shareholders to file a lawsuit against the company, claiming damages of R$ 1.4 billion due to scandals involving the Brazilian political class.

This trend leads Barreto to believe that, had the Federal Prosecutor’s Office fined JBS in 2018 when the company was accused of 19% irregularity in the Beef TAC audit, deforestation would generate a palpable loss and could drive away investors. At the time, the Prosecutor’s Office preferred not to apply the sanctions specified in the judicial agreement.

A more favorable scenario for penalizing deforesters began to take form after the burn crisis of 2019, which was used by European nations as an argument for an eventual boycott of the trade agreement between Mercosul and the EU. Signed by national leaders last June, the treaty is still awaiting approval by the parliaments of the involved nations. “If the government doesn’t manage to fight illegal forestation and lower it to 2017 levels, I don’t think there is any chance of ratifying [the agreement] in Germany,” said Germany’s ambassador to Brazil, Georg Witschel, in an interview with newspaper Valor Economico.

Aside from this, the press media—including international—has begun to make the connection between deforestation and the beef industry, pointing to those who finance it.  “One of the elements of materiality is reputation, which is relevant because it can make people stop buying from a certain company and make financial organizations stop investing or to at least loan money at higher interest rates. But this movement is still quite slow. Things aren’t moving ahead the way they should be,” concluded Barreto.

Counterpoint: the corporate responses

The Brasilprev response (read entire document here):

Brasilprev affirms that it does not directly purchase assets but rather investment funds from managers. In this purchase, the company undergoes an engagement process together with the manager so that all assets composing the Brasilprev portfolio undergo evaluation according to Environmental, Social and Governance (ESG) concerns. This assessment made by the manager can lead to the elimination of  an asset or increase/diminish their weight within the funds.

The BTG Pactual response (read entire document here):

BTG Pactual affirms that the BTG Pactual Equity Research team carries out fundamentalist and independent analyses, one objective of which is to define recommendations for buying or selling shares of companies listed for its clients. All risk factors that could compromise companies’ capacity to generate value are taken into consideration, including ESG (Environmental, Social and Governance) criteria.

In the specific case of JBS, the BTG Pactual Equity Research team published a report last November 6 exclusively dedicated to the initiatives associated to the company’s ESG criteria.

The JBS response (read entire document here):

JBS affirms that it meets the social and environmental criteria established by all nations that most participate in the world protein market. The company also upholds a public commitment relating to deforestation and monitors its entire productive chain via independent annual audits that “show that the Company’s cattle purchases are not sourced from farms connected to deforestation.” JBS also affirms that it is investing in projects aiming to increase controls over indirect suppliers.

The Marfrig response (read entire document here):

Marfrig hereby informs that it upholds the Public Commitment on Amazon Cattle Ranching which it assumed in 2009, for “Zero Deforestation” in the Amazonia biome, and that it has also signed the Mato Grosso TAC. The company affirms that it utilizes satellite systems to monitor its suppliers and that for the 7^th consecutive year and independent audit confirmed 100% conformity in its purchases. Marfrig also asks its suppliers to voluntarily supply the names of the producers and farms from which they may have acquired animals in the past as a means of increasing control over indirect suppliers.

The Minerva response (read entire document here):

Minerva affirms that the audits carried out for the Public Commitment to Sustainable Cattle Ranching and the Beef TAC prove the environmental conformity of its purchases within the Amazonia biome, which are 100% monitored. As far as indirect suppliers are concerned, the company says that it is “evaluating the possibility of testing a tool that electronically crosses GTAs, developed by the University of Wisconsin, called VISIPEC”, which “can help to define risk mitigation strategies for illegalities on the part of indirect suppliers.”