How can investors help save the Amazon?

Hello from London. Having just joined the FT this week, I am still getting used to the perfect view of St Paul’s Cathedral, and to bumping into a different journalistic idol every day. 

In my previous job, I reported on the global investment flows behind illegal deforestation in the Amazon and the Congo Basin — so it seemed only fitting to kick off my time with the Moral Money team with some tropical content. 

Today, we have a perspective on this issue from each side of the Atlantic. Simon interviewed the head of one of the world’s biggest development banks: Gustavo Montezano, president of Brazil’s BNDES. Montezano — a key appointment of rightwing president Jair Bolsonaro — argued against investor boycotts of Brazilian companies linked to deforestation, saying they will hurt the Amazon more than they help it.

Meanwhile, importer countries have the tough task of developing new ways to hold the finance sector accountable for its role in illegal deforestation. As the UK pushes towards a pledge to help halt global deforestation by 2030, a government advisory group has proposed tough new measures for the country’s financial sector. (Kenza Bryan)

Will boycotting Brazil do more harm than good?

If you’ve been closely tracking the fate of the Amazon rainforest, you’ll have learned to dread the periodic updates from INPE, the Brazilian space agency, on deforestation in the region. The latest report on Friday was the worst yet. INPE’s satellite data showed that a record-breaking 3,988 sq km of forest were destroyed in the first six months of this year — well over double the area of London.

In the eyes of many experts and campaigners, a huge share of the blame for the increasing destruction in the Amazon lies with the administration of President Jair Bolsonaro. The crisis has been driving calls for investors and consumers to steer clear of companies linked to deforestation. However, when I spoke this week to one of the most powerful officials appointed by Bolsonaro — Gustavo Montezano, president of the national development bank BNDES — he insisted that boycotts will do the Amazon more harm than good.

“Each investor, each consumer who stops buying things from Brazil, is pushing deforestation — not the other way round,” Montezano argued. The key driver of the crisis, he said, was the “poverty and misery” afflicting the region, which could be alleviated with the help of foreign investment.

As one of the biggest institutions in Brazil — indeed, one of the biggest development banks in the world — BNDES must bear its share of the blame for a growth drive that has fallen into near-paralysis over the past decade, leaving millions trapped in poverty across the nation. BNDES had assets of R$737bn ($136bn) at the end of last year — more than two-fifths the figure for the World Bank.

The make-up of BNDES’s portfolio has come under fire, with holdings in companies like meat producer JBS and oil group Petrobras, which have faced heavy criticism on environmental issues. Since the then 39-year-old Montezano — reportedly a longstanding friend of Bolsonaro’s sons — took charge of BNDES in 2019, it has been moving rapidly to sell down those stakes, he told me. While that’s lowered the bank’s carbon footprint, he added, this wasn’t the main motivation.

“We shouldn’t be speculating in the market,” said the former London-based investment banker, adding that BNDES’s development finance mandate is ill-served by secondary trading in the shares of corporate giants. “For many years our country has been managed by people that thought . . . the state should be competing with the private market.”

This looks very much like an implicit criticism of former presidents Luiz Inácio Lula da Silva and Dilma Rousseff, who led Brazil from 2003 to 2016. Lula is now the bookmakers’ clear favourite to defeat Bolsonaro in October’s presidential election (see his recent FT interview), meaning Montezano’s days at the helm of BNDES could be numbered.

Many environmental advocates would welcome Lula’s return, remembering signs of progress in tackling deforestation during his presidency. I saw for myself how far the situation had worsened under Bolsonaro when I travelled through the Amazon during my research for my recent book (you’ll find a short film I made on that trip here).

When I mentioned that visit to Montezano, he fired back that he had spent 50 days studying the situation on the ground, which had reinforced his sense of the urgent need for development in the region. A powerful means of pursuing growth while tackling deforestation, he said, would be scaling up the issuance of carbon credits from the region, to reward local people for protecting the forest. BNDES is looking to expand its work in that area, he said — both by financing carbon credit projects, and by using its balance sheet to offer buyers guarantees on the quality of credits.

As we’ve written before, quality in that market is a subject of huge controversy. And Brazil’s persistent efforts to derive financial rewards for protecting the Amazon have seen it accused of “extortion” and “blackmail”. But Montezano was adamant that what’s needed is new ways for people in the region to earn money without destroying the forest. “All the economic incentives in those regions,” he said, “are to cut down the trees.” (Simon Mundy)

Finance sector must be held accountable for role in deforestation, UK task force says

At the COP26 climate summit last November, Boris Johnson pledged that the UK would help halt global deforestation by 2030 and that it would improve corporate disclosure requirements on biodiversity. Now, the Global Resource Initiative, a UK government task force, has advice on how the financial sector can help see that pledge through. 

The GRI’s proposal is startlingly straightforward: ban all lending and investments towards commodities produced on illegally deforested land. 

If the government acts on the recommendations from the GRI, which assesses how Johnson’s November pledge could be implemented, it would become illegal for banks, pension funds and asset managers based in the UK to lend to or invest in companies responsible for unlawful deforestation. The onus would be on financial institutions to check that firms they invest in are compliant with local law.

Last year, the UK financial sector sank an estimated £40bn into companies that directly produce, trade and buy three of the commodities most likely to be grown on deforested land: Brazilian beef and soy, and Indonesian palm oil, according to the World Wildlife Fund. This number rises to £200bn if passive investments are included alongside direct financing like loans and revolving credit facilities from banks. 

UK pension funds’ public equity and corporate bond investments in companies that produce, trade or invest in commodities often grown on deforested land are worth more than £300bn, according to research by the campaign group Make My Money Matter. Around £1 of every £5 invested in UK pensions is linked to these types of companies, it said, warning this could jeopardise the pension sector’s ability to reach its net zero goals. 

Part of the problem could be over reliance on disclosure mechanisms such as the Task Force on Climate-Related Financial Disclosures, according to the GRI, which said these systems fail to capture environmental harms that are difficult to quantify in carbon terms.

Another challenge is the lack of obvious legal avenues to hold the financial sector accountable for its funding of environmental crime, the report said. The UK’s anti-money laundering rules, which ban financial firms from benefiting from illegal activity at home and abroad, are difficult to apply to environmental crimes. And while the UK last year banned imports of goods produced on illegally deforested land, financial institutions are not held accountable for their role in the value chain. The EU has also omitted the sector from its proposed deforestation law.

Deforestation accounts for more than a tenth of global emissions but still arguably poses less reputational risk to financial institutions than investments in fossil fuels. That reflects the serious lack of reliable data around the problem. In aggregate, deforestation linked to commodities like beef, soy, palm oil and rubber is mostly carried out illegally, the GRI said. But “laundering” of these commodities to obscure their origin is rife, and there is no universal system to trace soyabeans or beef from farm to plate.

Despite these challenges, the GRI argued it would be “inconsistent and unacceptable” for the government to exclude the financial sector from legislation which applies to supermarkets and commodity traders in the real economy.

“In the absence of clear legislation there is nowhere near the level of sophistication, understanding and agreement on biodiversity protection as there is for fossil fuels,” Charlie Kronick, senior programme adviser at Greenpeace, told Moral Money. “The carbon accounting behind deforestation is complicated and the financial sector has been slow to acknowledge this.” (Kenza Bryan)

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