Comment: Traders may face reputational risks as deforestation increases in Brazil

Thursday, December 6th, 2018

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.