Emerging Market Debt and the Amazon rainforest

How bond managers are taking up the climate fight

Thede Rüst, Head of Nordea’s EM Debt Team and manager of Nordea’s Emerging STARS Bond strategy

The world’s tropical rainforests play a vital role in keeping life on earth hospitable. However, these rainforests are under threat from human destruction – mainly to make way for farming, but also to clear roads for mining.

For example, November 2020 brought grim news from INPE, Brazil’s space agency. Amazon rainforest destruction reached a 12-year high, with a 9.5% increase in the amount razed to the ground over the previous year – to 11,088 sq km. This is about the size of Jamaica.

The scale of destruction has increased since early 2019, when the head of state encouraged an expansion of cattle grazing, soya cultivation and mining in the region. Meanwhile, the government cut funding to federal agencies with the power to fine and arrest farmers and loggers breaking environmental law by destroying forest.

At Nordea Asset Management, we are highly concerned about Brazil’s climate policy. It is financially material to our portfolios – as it poses reputational, operational and regulatory risks that can have an impact on sovereign bonds.

Consumers, companies and governments will be more reluctant to deal with corporates implicated in the destruction – such as agribusinesses using former forest land or meat processors using cattle that have grazed on it. The same holds true for Brazilian government bonds.

If it becomes more isolated, the Brazilian economy may see growth slow – harming the value of all assets in Brazil and even those of its neighbours. For example, France, Ireland and Austria have plans to block parliamentary ratification of a trade agreement between the EU and the Mercosur bloc – which includes Brazil, Uruguay, Paraguay and Argentina – unless the Brazilian government agrees to do more to tackle Amazonian deforestation.

Applying pressure on Brazil

Fixed income managers can play an important role in the fight to curb deforestation in the Amazon, due to the ability to hold governments responsible by applying pressure. Nordea Asset Management’s emerging markets debt team did this in 2019, in response to the threat deforestation posed to the value of Brazilian sovereign bonds.

Citing the negative financial materiality of the rainforest destruction, we decided in 2019 that we would no longer buy Brazilian government bonds for any of our internally managed EMD debt strategies, including our Emerging STARS Bond strategy. We also divested from Brazilian meatpacker JBS.

In July last year, Nordea Asset Management became a founding member of the Investors Policy Dialogue on Deforestation (IPDD). The IPDD engages with public agencies and industry associations on this issue – initially in Brazil, where the need is most urgent.

Also, in June last year, 29 investors signed a letter of concern and sent it to the Brazilian government demanding it curb deforestation and protect the rights of indigenous people. As an outcome to the letter, NAM was invited to a call with Roberto Campos Neto, the president of the Brazilian Central Bank. This led to further dialogues with the Brazilian vice president, Hamilton Mourão, as well as other ministers on the Amazon council. Consequently, Nordea Asset Management and eight other leading investors were invited to discuss deforestation with the Brazilian government.

Leading Brazilian banks and companies responded with a letter of their own to the government that carried a similar message. The IPDD has since swelled to 43 members responsible for about $6trn in assets under management.

Deforestation affects all investors

Rainforest deforestation in the Amazon and elsewhere is a major threat to the global climate and economy, and an even greater threat to countries where it is happening. Deforestation is a vitally important issue, not merely to investors in the field of ethical investment. It is relevant to every investor, because it threatens the value of assets they hold and affects the assets they might choose to buy in the future.

Neither JBS nor the Brazilian government have done enough yet to make us change our investment stance – but we are encouraged by the progress. In the meantime, we will act in the interests of our clients by keeping up the pressure.

Encouragingly, we are seeing positive corporate actions in Brazil. It is clear some of the corporate citizens of Brazil are realising these pressures and are seeking innovative solutions. For example, paper and pulp company Suzano, a group we are invested in, came up with an interesting structure of issuing carbon-linked bonds. This essentially means if Suzano does not reduce its emissions, it will have to pay a higher coupon.

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