ESG Discrepancy Between Soy Growers and Financiers Creates Risk of More Expensive Financing

The large-scale expansion of soybean cultivation in Brazil has been identified as one of the key drivers of deforestation in the last 20 years. The Cerrado, which is a particularly biodiverse and carbon-rich biome, has been rapidly converted. Prior analyses by Chain Reaction Research have found that soy producers face financial risks from ongoing involvement in this Cerrado deforestation. This report builds upon two previously-identified key trends:

  • At least 49 percent of soy traders have committed to make their supply chains deforestation-free. The share as well as the strength of commitments are expected to further increase in the mid-term future. This creates market access risk for producers with weak sustainability performance.
  • High ESG-performers are perceived as less risky due to their association with high performance. This likely gives them to access to cheaper green finance. Some rural financing programs are also cheaper for producers with higher sustainability standards.

This paper looks in detail at the financing relations between nine key soy producers and their investors, scrutinizing any mismatches between the ESG performance of the two. They are scored from 0 to 100 on a set of sustainability and policy indicators. The paper also explores whether soy producers face the risk of more expensive financing due to weak sustainability commitments and scores.

  • Key findings:
    • There is risk of more expensive commercial financing, which accounts for around 53 percent of all rural financing. The risk stems from a significant discrepancy between the ESG policy scores of some large soy growers (averaging 18 out of 100), compared with the average scores of their major investors (31 out of 100). Producers with low ESG scores are more than 80 percent credit financed and their major creditors have an average policy score of 45. Some investors provide cheaper green financing alternatives, likely disadvantaging low-scoring soy producers.
    • Some engagement from concerned investors may also address the weak ESG scores of their soy investees. This may raise awareness among the producers and lead to better ESG policies, or may result in worse financial conditions for ESG policy laggards. The subsidized rural credit system, accounting for 30 percent of rural financing, already offers cheaper options for sustainability improvements.
    • Risk from more expensive barter-based financing is limited. This type of financing accounts for 17 percent of rural financing and is provided by agri-traders, ­­risk stems from the stark contrast between soy producers with weak environmental standards, as opposed to 49 percent of the traders having some form of zero deforestation commitment. Traders may impose ESG requirements over their supply chains, which may also result in severed financing ties with non-compliant parties. Nevertheless, such developments are too early in implementation stages to infer direct risk.
    • Soy growers might risk worse financial terms, such are increased cost of debt and equity, reduced net profits, reduced present value of free cash flows, lower return on investments, hampered growth and ultimately, potentially lower share prices. It may eventually be cheaper for low-scoring soy growers to adopt better ESG policies than to risk these impacts.

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