The Chain: Mixed Messages from the Brazilian Government on Deforestation Heighten Risks for Investors, Businesses

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August 26, 2020

The Brazilian government has sent mixed signals regarding the urgency to tackle deforestation in the country. As pressure from international investors has stepped up against land clearing for agricultural purposes in Brazil, the government has said it will take steps to assuage their fears and reduce forest loss. However, when speaking to domestic audiences, government officials tend to downplay agriculture’s role in deforestation. Since President Jair Bolsonaro took office at the beginning of 2019, he has favored agribusiness expansion and prioritized the interests of the right-wing ruralist bench in Congress over environmental protection, climate change action, and indigenous rights.

In a recent interview with o Estado de São Paulo, Minister of Agriculture Tereza Cristina did not acknowledge that the expansion of the agricultural sector in Brazil threatens the Amazon rainforest. Specifically, Tereza said that agribusiness has no interest in the Amazon because of the lack of infrastructure and logistics in the biome. “We do not need the Amazon,” she said, arguing that the country’s agriculture sector can be productive without operating in that part of Brazil.

At the same time, however, government officials have expressed concern over deforestation and have vowed to take action when speaking with international audiences. The Brazilian government has come under pressure from companies, European government officials, and international investors. For instance, in late June, investors with approximately $4 trillion under management communicated to government officials to halt efforts to weaken protections of public lands, allow for mining in indigenous areas, and deregulate oversight of forest management. Some investors have warned of divestments from companies operating in Brazil, with Nordea following through on its threat by selling its shares of JBS SA, the largest Brazilian meatpacker. In May, a group of European companies, which included Tesco and Marks & Spencer, said they may stop purchasing Brazilian products if the country moves forward with initiatives that accelerate deforestation in the Amazon. Similarly, leaders of Brazilian companies met with the Vice President, advocating for the government to pass stringent measures to bolster action against deforestation and improve supply chain transparency.

The government has said that it has similar goals to the investors in protecting forests but has been weakened by limited staffing for environmental regulation. The government promised to ban fires in the Amazon for four months during the dry season, use the military to guard against deforestation, and offered investors the opportunity to purchase parts of the rainforest to finance its conservation. No investors have agreed to this proposal due to insufficient evidence of climate results. Brazil has also renewed talks with Germany and Norway about funding for the Amazon Fund, which has stalled over Brazil’s weakening protection of its forests. These efforts have not been sufficient in curbing deforestation, but indicate government intent to show international audiences that it is taking the problem seriously. That is in contrast to government rhetoric that appeals to domestic audiences, as government officials shift their message and deny that there is a deforestation problem.

NGOs, investors, and businesses have criticized Cristina’s comments and the government’s mixed messages, urging officials to adopt policies that increase transparency, support supply chain traceability, and implement and enforce consistent measures to reduce deforestation. Despite Cristina’s statement that agribusiness does not need the Amazon, the cattle industry – the main contributor to deforestation – is highly active in the area and contributes to 8.5 percent of the country’s GDP. “Agribusiness is already in the Amazon, profiting from the devastation of the forest to plant soybeans and, above all, open pastures for cattle,” wrote members of Grupo Carta de Belém, a group of social movements, trade unions, and NGOs. They also pointed out other inconsistencies in her interview, such as Brazil’s role in global commodity markets, the agriculture sector’s failure to take sufficient steps to reduce exposure to COVID-19, and the role of biodiversity destruction in emerging infectious diseases. One group of NGOs and other stakeholders affected by agricultural expansion, in mid-August, called on the government to take emergency action by 1) imposing a moratorium on deforestation in the Amazon; 2) applying stiffer penalties for deforestation and environmental crimes; 3) resuming plans to develop targets, timetables and implementation plans through the Action Plan for Prevention and Control of Deforestation in the Legal Amazon; 4) protecting indigenous lands; and 5) restoring resources and enforcement power to government agencies that oversee deforestation and environmental crimes.

Market access risks to grow as countries pursue legislation

The lack of consistency in messaging, compounded by the government’s rollback of regulations that curb land-grabbing and deforestation, affect the country’s reputation overseas and risk negatively impacting the revenues of international companies operating in the country. Weak or empty responses to calls to take stronger environmental action may allow for opportunistic financial returns in the short run while accelerating longer-term market risk factors and threatening the sustainability of business models that depend on natural resource availability. Investors and customers are likely to continue to pressure both the government and companies to put the proper safeguards in place, or they will reduce their exposure to investments in the country. These risks extend to reputation, financial, regulatory, and market access risks for companies. For instance, China is establishing more restrictions on meat imports, mostly over COVID-19 worries. Germany and the UK, meanwhile, are considering the passage of laws to prompt companies to eliminate deforestation and human rights abuses in their supply chains. France already has measures in place to reduce exposure to deforestation-linked commodities, including the Corporate Duty of Vigilance Law, under which companies can be sued for environmental damage, such as links to deforestation. These developments reflect the elevated role of deforestation as a priority issue not only in NGO and investor circles but also in governments of major consumer countries. Other EU countries are likely to follow as they work to curb greenhouse gas emissions and mitigate reputational risk. Notably, the EU-Mercosur trade deal is facing major opposition due to deforestation-linked products such as soy and beef, which may prevent its passage and drastically reduce market access opportunities in the region.

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