Social pressures, market forces and elected leaders influence corporate decisions on environmental, social and governance (ESG) issues. Journalist Stephanie Tondo examines the state of ESG in Brazil and the potential impacts of its upcoming presidential election.

In a couple of months, Brazilians will choose their next president for a four-year term and the world’s attention is focused on what the elections will mean for the environment and for policies to combat climate change globally. Newspapers such as The Washington Post and Domani have already quipped that the Brazilians’ choice will be between the current president Jair Bolsonaro and the Amazon rainforest. But judging by his government so far, experts warn that the reelection of the current head of state would represents a setback not only for the Amazon but for all aspects of environmental, social, and governance (ESG) investments in the country.

This year’s Brazilian presidential elections will be between Bolsonarothe largest representative of the extreme right wing and a vocal opponent of environmental and social causesand former president Luiz Inácio Lula da Silva. Lula, leader of the Workers Party (PT), was arrested as part of Operation Car Wash in 2018, which prevented him from participating in the presidential elections of that year. Operation Car Wash had been conducted by the federal police of Brazil to combat corruption and money laundering, culminating in dozens of arrests of politicians across the country.  

The first round of elections will take place on October 2. If none of the candidates reach a majority of valid votes, there will be a second round of voting on October 30.

But to what extent do the principles and ideology of a country’s president really influence ESG investments? Some argue that the initiative for transitioning to a green economy will actually come from corporations, due to market demand. In an interview with ProMarket, Chicago Booth professor Robert H. Gertner pointed out that in the US, for example, companies have updated their social and environmental policies primarily in response to changes in social norms.

“Governance is important,” Gertner stresses,“and a lot of it is about actually making sure that you have a system that maximizes shareholders returns. And ethics can play a role in the perception of a country’s ability of making sure that companies are acting in a way that leads to greatest returns to its shareholders.

“It’s much more demand from society, customers, and investors,” he said. If you think about the US, the ESG agenda is moving forward with little regulation. From boards of investors to pension funds, people are really paying attention to the environment.

On the other hand, Gertner admitted that consumers and investors tend to be inconsistent. In moments of crisis, investments in ESG can be put aside.

“It’s not clear if there’s enough investor pressure to shift returns in prices. People wear two hats. They support green initiatives, but when the price of oil goes up, they can increase investments in that market, rather than thinking it’s a great incentive for reducing the use of fossil fuels.

Fábio Alperowich, the founder of the Brazilian investment fund FAMA, which focuses on ESG companies, believes that we can no longer rely solely on market demand.

“We have arrived at a situation where it isn’t enough for individuals and companies to do their part. We need regulation combined with public policies,” he told ProMarket.

Alperowich argues that if Bolsonaro were reelected, it would generate a negative expectation for investments in ESG in Brazil.

“In recent years we have had a huge setback in the ESG agenda. Brazil looks bad in every aspect,” he asserts. “Deforestation. Little regard for the environment. There were now the deaths of Bruno and Dom in the Amazon. The handling of the pandemic was horrendous. There is a very negative perception not at the corporate level, but at the country level.

Setback in Environmental Policies

In June, British journalist Dom Phillips and indigenous specialist Bruno Pereira were shot dead and their bodies burned and buried during an expedition in an Amazon region known for conflicts involving drug trafficking and illegal logging and mining. Phillips had been interviewing native people in the region about this situation.

Non-governmental organizations believe that the deaths were consequence of the Bolsonaro administration’s disregard for environmental inspections and its dismantling of public agencies such as the Brazilian Institute for the Environment and Natural Resources (Ibama) and the Indigenous National Foundation (Funai). These federal institutions had been responsible for ensuring compliance with laws protecting the environment and the rights of native people.

In May 2020, a video of a meeting between President Bolsonaro and his ministers was released in which the minister of the environment, Ricardo Salles, advises his colleagues of the opportunity brought by the pandemic to divert media attention, which would make it possible to “run the cattle” into the Amazon forest. He meant that agribusiness could surreptitiously begin to use environmental protection lands to expand their business. His speech was not criticized by any of the authorities present at the meeting.

In a speech to agribusiness stakeholders in January of this year, Bolsonaro also celebrated the fact that environmental fines on rural properties had dropped by 80%, which he considered sign of support for that industry. Environmental fines are one of the instruments used to prevent agribusiness from deforesting areas of environmental protection. The reduction in fines shows that environmental protection agencies are not performing their function, and that agribusiness will not face obstacles to producing in areas of the Amazon rainforest.

With almost half of its territory covered by the Amazon rainforest and one of the least carbon-intensive energy sectors in the world, Brazil had for many years been well-positioned to lead the way toward a more sustainable global economy. During the last four years, however, the country has been moving in the opposite direction, breaking records in deforestation.

In Brazil’s Legal Amazon—an area that amounts to 59% of the country’s territory and includes eight states—deforestation reached 1,120 square kilometers in June 2022, according to the Brazilian National Institute for Space Research (Inpe). This is the highest level for the month of June since 2016, the first year of the research. The deforested area in that month alone is almost the size of the city of Rio de Janeiro, or almost twice the city of Chicago. This was the third consecutive year of record deforestation in Brazil.

Greenwashing as a Policy

One of the biggest challenges when it comes to sustainability is greenwashingboth by companies and by governments. In June, after suffering harsh criticism from the international community for his disregard for the Amazon, Bolsonaro signed a decree that created a regulated carbon market in Brazil. Despite seeming to be a positive measure, the decree interrupted the finalizing of a carbon market bill that had been discussed in Congress for more than a year. The bill was authored by Congressman Marcelo Ramos, who opposes Bolsonaro.

“The bill was maturing in a democratic way,” Fábio Alperowich told ProMarket, but it was trampled by a presidential decree that says nothing. The fact that there is a carbon decree is theoretically positive, but I see it differently. This was done for electoral purposes and to tell the United States and Europe that the president was doing something.

Bolsonaro’s decree includes definitions for the concepts of “carbon credit” and “methane credit,” but it does not provide any objective measures for the implementation of these credits. The congressional bill, on the other hand, would have created a cap-and-trade market, in which some sectors would have mandatory targets for reducing greenhouse gas emissions.  

A President Must Lead by Example

Although environmental concerns dominate much of the discussions about ESG, the social and governance aspects are also important. And especially in these matters, the president’s image can have a positive or negative impacts on Brazilian businesses, particularly when it comes to investments coming from abroad.

Regarding diversity, Bolsonaro has repeatedly opposed measures to encourage the hiring of women and Black people by public and private companies.

In 2015, when he was still a congressman, Bolsonaro argued that women should receive lower wages because they get pregnant and are absent from work during maternity leave. In 2021, President Bolsonaro accused one of the country’s most important businesswomen, Luiza Trajano, of being a socialistafter her online retail company, Magazine Luiza, launched a trainee program dedicated to recruiting Black applicants.

Despite Bolsonaro’s rhetoric, Brazilian diversity consultant Ana Minuto, CEO of Minuto Consultoria, believes that a transformation in the labor market will happen within capitalism: Companies that do not invest in diversity and the well-being of their workers will lose their market share and will be left behind.

“Most companies are all white; they don’t know the Black population,” Minuto told ProMarket. And Black people, who comprise half of the Brazilian population, don’t trust these companies. ESG will have an impact on these businesses.

But society does not rely only on companies and individuals,” she adds. The state still needs to create affirmative policies to make changes happen.

Minuto points out that while most CEOs have already understood the importance of diversity for companies, many of the challenges in implementing these measures lie with the managers who do the hiring. Such challenges will not be lessened by the words and actions of a president who has little regard for minority rights.

“This moment brought the real vision that we are a racist, sexist, and homophobic country, and that we have to act on this problem. This historic moment brought a lot to the surface, which is painful, but made us understand that we can’t keep sweeping the dust under the carpet.

In terms of Brazil’s future governance, despite the fact that there have been several allegations of corruption against Bolsonaro and his family since the beginning of his government, it is Lula who is distrusted more by both the market and the voters, due to his conviction in Operation Car Wash. Either outcome will have real consequences for ESG investing. “Governance is important,” Gertner stresses,“and a lot of it is about actually making sure that you have a system that maximizes shareholders returns. And ethics can play a role in the perception of a country’s ability of making sure that companies are acting in a way that leads to greatest returns to its shareholders.

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