The Chain: Financial Institutions May See Reputation Risks from Links to Deforestation

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May 13, 2019

Similar to physical actors along commodity supply chains, investors are facing greater pressure to limit links to deforestation, a trend that could expose them to reputation risks. A recent report from Amazon Watch (for which CRR partner Profundo provided research on the downstream supply chain) highlights this growing risk. It argues for reform among investors in companies that play a role in supply chains with products linked to deforestation. The report calls on financial institutions to use their influence to spur changes among companies operating in Brazil, where deforestation is threatening to continue to rise under Jair Bolsonaro’s administration. Bolsonaro favors agribusiness over environmental protections and has appointed cabinet members who have undermined environmental regulations and are hostile to indigenous groups. Amazon Watch’s report was written in coordination with the Articulation of Indigenous Peoples of Brazil (APIB), whose members feel particularly vulnerable amid the current political climate in Brazil.

Fast-moving consumer goods companies (FMCGs), commodity traders, and producers are facing possible reputation risks from the likelihood of not meeting 2020 zero-deforestation targets or not having any commitments at all. This risk is now extended to the financial community. Large financial institutions that have exposure to major players in Brazil’s agricultural commodity supply chains, such as soy traders and beef producers and exporters, include: BlackRock, Vanguard, T. Rowe Price, JPMorgan Chase, Barclays, Bank of America, HSBC, BNP Paribas, Banco Santander, among others. Thirteen financial institutions provide USD one billion or more in credit to the main commodity traders in Brazil – ADMBungeCargill, and Louis Dreyfus. Amazon Watch’s research did not identify wrongdoing by ADM and Louis Dreyfus, stating: “Our findings broadened the analysis of the financing of the two major international traders fined by IBAMA — Bunge and Cargill — to include other members of the so-called ABCD group made up of ADM, Bunge, Cargill, and Louis Dreyfus, which dominate the global grain trade.”

See graphic below for the major financiers of the big players in the Brazilian beef industry – JBS, Minerva, and Marfrig — which has grown significantly in recent years as exports now make up 20 percent of total supply.

Figure 1: US and EU Financial Institutions Providing Credit to Major Brazilian Beef Exporters

Source: Amazon Watch

The report’s authors suggest financial institutions develop zero-deforestation policies with requirements for companies to follow. A zero-deforestation policy for financial institutions should, according to Amazon Watch, include the following: 1) The obligation that companies map their suppliers; 2) Companies provide details of investigations or illegal activity tied to deforestation or land grabbing; 3) The monitoring of companies for evidence that points to connection to deforestation; 4) Greater transparency and attention to human rights; 5) Action to stop financing companies when they violate commitments.

Amazon Watch’s call for financial institutions to take action to curb deforestation comes soon after others have made similar statements. For instance, a group of U.S. Senators, in February, wrote letters to major financial institutions pressing them to increase their attention to deforestation risks in their portfolios. Of the eleven financial actors that the Senators contacted, all but three were listed in the Amazon Watch report. Meanwhile, the European Commission is seeking to increase its ambition in limiting the EU’s exposure to deforestation-linked supply, which may include actions that involve financial institutions.

The financial community is becoming increasingly aware of deforestation risks. Investors with more than USD 6 trillion in assets, led by Ceres and PRI, have made statements in the past nine months calling on companies operating along the soy supply chain to curb deforestation risks and for the Roundtable on Sustainable Palm Oil (RSPO), a certification body, to review and bolster its standards.

The increased attention on deforestation, and, in particular, activity in Brazil is happening in large part due to the deterioration of enforcement as a result of the Bolsonaro administration. Deforestation rates in Brazil were on the rise before Bolsonaro took office, increasing since 2012 after years of steady decline. According to preliminary data from the Brazilian government, approximately 790,000 hectares were deforested in the Amazon last year, a 14 percent rise from 2017. The current political climate increases pressure on consumer goods companies, traders, and investors to mitigate impacts from deforestation risks.

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