This comment is by Matt Piotrowski, a Senior Analyst at
Climate Advisers
The changes to environmental regulations that are expected
to occur with Jair Bolsonaro’s presidency in Brazil will increase pressure on
consumer goods companies, traders and investors to take additional measures to
limit their exposure to deforestation.
To date, trading companies operating in Brazil have favored
environmental regulations, which have helped to avoid reputational backlash. If
products coming out of Brazil lose an environmental
stamp of approval, traders could face additional risks. Sourcing of
deforestation-linked soy, for example, would undoubtedly increase reputational
risks for soy traders.
Although major companies such as ADM, Bunge, Cargill, COFCO,
Louis Dreyfus and Amaggi either have or are in the process of developing
zero-deforestation policies, they may still be exposed to sourcing soy from
legally or illegally deforested farms. For ADM, for instance, up to 30
percent of its equity value may be impacted due to Cerrado
deforestation, Chain Reaction Research (CRR) found in a report published
September 21, 2018. This has occurred under the relatively robust regulatory
regime currently in place. If this is eroded, those risks will increase.
Even if the deforestation is in line with new Brazilian
regulations, Bunge, Cargill, ADM and the others can only live up to their
zero-deforestation commitment if they start excluding commodities from legally
deforested areas as well.
These companies dominate the country’s soy trade. With
reduced oversight from the government, their vigilance in excluding
deforestation-linked soy from their supply could do much to determine changes
in the rate of deforestation. A backlash from consumers, if the rate of
deforestation rises, may intensify pressure on companies. There is evidence
they are taking measures to head that off pre-emptively.
ABIOVE, an organization that represents major traders and
others in Brazil’s agribusiness, reaffirmed its members’ commitments to curbing
deforestation in a statement on
October 24, 2018. Similarly, the Brazilian Coalition on Climate, Forests and
Agriculture – soy producer Amaggi and trader Cargill are both members – called for
sustaining environmental protections and for Brazil to remain in the Paris
Agreement in a position paper published October 24, 2018.
If environmental regulations are loosened as expected,
traders, as well as downstream companies, investors and banks, will have to
assume greater responsibility to monitor their supply chains. Improving
traceability may increase costs initially for the companies, but the actions
will likely pay off over the longer term by mitigating reputational risks from
operating in Brazil during a time of increasing deforestation. Reputational
risk could lead to engagement or divestment from financial institutions.
Nonetheless, the ability of European and US consumer goods
companies to engender reform through their supply chains may be diminishing.
China’s market influence is growing, as it imports
increasing volumes of soy, and is under less pressure to avoid
deforestation – legal or otherwise.
This story is modified from its original
version, which was published on Chain Reaction Research on November 2,
2018.
