Brazilian flames bring heat onto global ag

Reaction to the Amazon fires shows how institutional investors are assuming leadership positions in a global debate about how best to strengthen management of shared environmental resources.

Even before his inauguration, it was clear that the conversion of rainforest into farmland would be closely watched by international observers of Brazil’s new president, Jair Bolsonaro.

In the months since he was sworn in, Bolsonaro’s confrontational rhetoric has combined with an increase in fires in the Brazilian Amazon. These are thought to have been encouraged by his administration, which has swiftly met with condemnation from governments, businesses and civil-society groups worldwide.

The parent company of the North Face and other clothing brands, for example, announced plans to stop sourcing leather from Brazil. A student group at Harvard, meanwhile, was inspired to reiterate calls for the university’s endowment to divest from all its farmland, including in Brazil. The G7 offered $22 million to help suppress the fires, which Bolsonaro rejected.

Among institutional investors responding to the events was KLP, an $80 billion Norwegian pension that released a statement in late August expressing its concerns.

It called for “rapid dialogues” within the week and for companies in which it had invested to demonstrate the efforts they were making to ensure they did “not contribute to devastating environmental damage.”

In addition to Archer Daniels Midland, Bunge and Cargill – in which KLP has invested $14 million through shares and loans – the pension called on international investors to cooperate in their response.

Though KLP’s exposure to agriculture comes through passive investments in index funds, the pension’s head of responsible investments, Jeanette Bergan, told Agri Investor that it undertakes continuous monitoring to ensure its capital is not contributing to human rights abuses or environmental degradation.

She said that following a decision in 2000 to enshrine transparency as a key focus of its responsible investor program, agriculture had emerged as an area of particular focus for KLP’s efforts. These have also included steps to limit exposure to deforestation related to Indonesia’s palm oil industry.

Bergan explained that NGOs in Norway are  “extremely competent” in analyzing pension funds and investments, and that KLP’s decision to express its concerns about the fires in Brazil was, at least in part, in anticipation of outside pressure on the issue.

“We always have had a policy to say we are following these companies, we are very concerned,” she said. “That would be the normal process. The only difference this time was that we came out and said ‘we are concerned, we are following up’ instead of [waiting for] a journalist calling up and asking.”

Bergan added that KLP was also starting to engage with Chinese groups active in Brazil about deforestation, and that its statement had elicited responses from BlackRock and Deutsche Bank.

“Most companies, we haven’t heard from and we are trying to chase them,” she said.

Land use in any country is determined by a complex interaction of history, geography, economics and culture that cannot be controlled by any individual. In confronting Bolsonaro’s Brazil, the international community is having to grapple with a brand of politics that cripples long-term policy-making efforts in a context of increasingly tangible anxiety around environmental challenges.

As theorists point to a future which they suggest could see military conflict born of a responsibility to protect the environment, global agriculture will increasingly find itself at the center of debates about the balance between local development and management of global resources.

For investors, it is instructive that in looking to quickly corral a group to put pressure on the Brazilian authorities, Bergan said she saw participation in collective initiatives like the Brazilian Soy Moratorium as positive but not sufficient. Part of what makes the recent increase in Brazilian wildfires especially distressing is that in recent years there had been progress on the issue – a structural one in which such collective pressure can be said to have had some impact.

Brazil is not the only country beset by abrupt policy change and the capture of critical decision-making processes by highly-empowered individuals. Investors on both sides of the GP/LP nexus that are savvy enough to recognize Bolsonaro as the symptom of a wider problem will follow KLP’s lead in building the muscles necessary to respond. In doing so, they are likely to be rewarded over the long term.