Can the investors woo Bolsonaro for Amazon?

Investors with more than $4.5 trillion in assets want Brazilian President Jair Bolsonaro to stop loosening environmental rules and do more to control escalating deforestation in the Amazon and beyond. This may be their moment.
Upcoming virtual discussions are well-timed: Faced with a pandemic-shattered economy and record outflows, the populist government that has brushed off foreign donors as interfering busybodies will find it harder to ignore sovereign bond holders and equity owners. They can help their case with a show of support for extra green incentives, like biodiversity and carbon credits.
Big funds are becoming increasingly outspoken with governments, and not for pure altruism. It’s clear that poor management of Brazil’s natural wealth — most immediately with a proposed law that will legalise land grabs — is a symptom of deeper dysfunctions that manifest themselves in other areas, too, directly increasing risks for investors. Bolsonaro has failed to take the coronavirus seriously and garbled official guidance. Having parted company with two health ministers since April, Brazil has the second-highest number of cases after the United States.
Brazil had previously done well in combatting deforestation, but the rate has worsened significantly under Bolsonaro. Last month, at the start of the dry season when farmers and loggers seek to clear ground, the number of fires rose to a 13-year high, according to the National Institute for Space Research. That will lift carbon emissions this year, even as the rest of the world sees a drop in climate-warming gases. Earlier in the year, Environment Minister Ricardo Salles was caught on camera suggesting that the government use the pandemic to push through more deregulation.
The 32 major investors, led by Norway’s Storebrand ASA, said in a letter sent to Brazilian embassies last month that all of this increases “reputational, operation and regulatory risks.”
The question of how the wider world convinces emerging economies to put global environmental priorities first has never been easy to answer. Concepts like payment for ecosystem services — compensating governments for forgoing the immediate benefits of land clearance — are helpful, but have often been resisted. Norway, which has paid $1.2 billion into the Amazon Fund under just such a program, suspended payments last year after Bolsonaro’s government, suspicious of non-governmental organisations, questioned the organisation and closed the committee that selected projects. Investors have a louder voice than most, not least because Covid-19-era Brazil has little choice but to listen. Public debt is edging toward 100% of gross domestic product, the budget gap has ballooned and the currency has performed dismally of late. The economy could shrink more than 9% this year, according to the International Monetary Fund.
Yet how do fund managers turn talks with ministers into actually bringing change? Engaging with a government, be it South Korea or Brazil, is less straightforward than lobbying a company, where enough unsatisfied shareholders can ultimately spill the board. Raising awareness and highlighting concerns publicly as a group, as investors have done, is one step, coming when Brasilia is more sensitive to outside perceptions. Funds can afford to be specific in their demands, making it easier for both sides to measure success. There’s always the threat of divestment, most effective when made with the promise of reinvestment if behavior improves — a stick with a carrot attached.

—Bloomberg