Sustainable Foreign Direct Investment in the Amazon

By Billy Millie¹, Fernanda Schaefer² and Gabriel Franco³

In the face of novel sustainable trends relating to the importance of environmental protection, international investors are concerned about increasing Amazon deforestation rates. Global financial institutions have been threatening the Brazilian government with divestment in the country due to its reluctance to employ more sustainable methods to conduct its agribusiness activities and extract resources from the jungle, mainly citing a lack of priority issue of forest degradation. One of the largest concerns comes from food processors allegedly leading cattle to deforested lands in the Amazon, promoting desertification, along with an increase in the pollution the livestock generates. As a consequence of these concerns, investors now consider Brazil a “risk country” caused by uncertainty in investment conditions, as well as by the lack of predictability in its regulatory policies. Therefore, this context leads to a suspension of the purchase of Brazilian government bonds, which damages the country’s reputation for investors on a global level.

However, increasing investment in natural resources in the Amazon may be compatible with maintaining ecological sustainability, but some basic concepts are crucial to understanding.

Footprint

Ecological or carbon footprint refers to the quantity of pollutants emitted by human waste, land usage, and natural resource extraction. By finding more sustainable ways to extract resources and improve the ecosystem’s overall biodiversity, companies and investors can reduce the carbon footprint typically generated.

This concept can also be understood in terms of non-energy ecological footprint, being an essential variable for food production, timber, and creating materials needed for urban centers’ infrastructure⁴. This implies that the non-energy ecological footprint excludes the land area responsible for producing the energy that humans use, along with the forest area that absorbs the CO₂ emitted from our fossil energy use. Based on recent academic studies, the overall ecological footprint uses equivalent to 1.4 planets, which equates to 140% of environmental capacity.

As a result, the ecological footprint has expanded beyond the environmental capacity at which the rate of consumption of these resources is not permanently sustainable. In this case, if resource extraction continues to grow, the capacity of carbon pollutants will be reached shortly, prompting an abrupt change in human behavior, which may be too late. Since we have evidence supporting human-caused climate change, a complete transformation in the way we do business is imperative, which becomes a responsibility of the private sector if the government neglects to do so.

REDD+

One of the most critical programs in the effort to mitigate climate change through sustainable forms of international business and investment is REDD+. The REDD+ program is an initiative issued by the United Nations Framework Convention on Climate Change (UNFCCC), established in 1992 to incentivize investment in sustainable industries. The Convention is committed to reducing human-based Greenhouse Gas Emissions (GHG). One of its focuses is minimizing the negative impacts of forest degradation, hence crucial to preserving the Brazilian Amazon.

The idea of REDD+ rests on bilateral agreements between developed and developing countries, in which the former provides financial resources to the latter as an incentive to reduce GHG. Currently, complex political factors have made the REDD+ initiative less effective than hoped.

Another essential aspect of the REDD+ program is its impact on the image of Brazil in the eyes of foreign investors and environmentalists. On the one hand, foreign direct investments (FDI) bring economic returns and lay the groundwork for development and growth. On the other hand, through unsustainable farming and livestock practices, FDIs may negatively affect local communities, including indigenous populations and the natural environment. Therefore, initiatives like the REDD+ program effectively bridge the gap between foreign investment and environmental protection.

At the end of 2021, the United Kingdom will host the Conference of the Parties COP26 in Glasgow, Scotland. Every year, there is a COP with the members of the UNFCCC, in which the main objective is reaching carbon neutrality (net-zero emissions) by 2050, pressuring the countries to present their commitments for 2030 consistent with the Paris Agreement. In this regard, the UK and the European Union should be seen as an example of encouraging climate action in all sectors. Britain has been improving its low-carbon and renewable-energy economy, which ensures its international influence⁵. One of the country’s opportunities to achieve its GHG emission target is the trade deals, such as the UK’s interests in a Free Trade Agreement with Mercosur.

The Free Trade Agreement (FTA) between the European Union (EU) and Mercosur, which represents the most critical trade deal among these countries, has been facing some difficulties to be ratified since it was established in June 2019. The EU is Mercosur’s leading foreign investor and trade partner, in which the EU exports machinery, transport equipment, chemicals, and pharmaceuticals, in exchange for mainly meat and agriculture products. This agreement would foster international market access in a global protectionist trend. However, the biggest concern is environmental impact, which is intensified by the increase in meat exports. Therefore, due to the Brazilian government’s inability to foster more sustainable extraction of resources in the Amazon, it falls upon private investors to lead the change required in these industries.

ESG Investing, Carbon Credits, and Green Bonds

Another way to ensure the necessary change happens is through Environmental, Social, and Governance (ESG) investing.

ESG investing is also known as sustainable investing, seeking positive returns and long-term impact on society, the environment, and the business’s performance. According to the Financial Times Lexicon, ESG is “a generic term used in capital markets and used by investors to evaluate corporate behavior and determine companies’ future financial performance.” Companies that consider this in their performance attract investment to manage resources better, prevent pollution, and reduce any adverse outcomes that might harm the planet. Companies also need it to promote better social and governance impacts, i.e., consider addressing diversity, protecting human rights and encouraging to include non-performance information for investors worried about sustainability.

For instance, one industry where green bonds can benefit business and the environment is palm oil production in the Amazon. With the exclusive production of palm oil over vast tracts of land, the environment becomes susceptible to monoculture’s detriments, which reduces the natural biodiversity of the given area. However, companies like Natura & Co (NYSE: NTCO), “The Body Shop” and “Avon’s” owner, have begun incorporating methods like the Agroforestry System (SAF), which aims to improve the sustainability of palm oil production by reestablishing the biodiversity of the area⁶. This method benefits the biodiversity of the area, but it also increases the amount of CO2 absorbed by the plants. For instance, a palm oil production area of 375,000 hectares that is bio-diversified using SAF would be expected to absorb 2.4 million tons of CO₂ annually⁷. According to the Global Carbon Project, Brazil, as a country, emitted over 450 metric tons of CO₂ in 2018 alone⁸. While there is still a long way to go in entirely eliminating carbon footprint worldwide, the green bonds that incentivize sustainability provide a terrific way to begin establishing a cleaner planet.

Some of these new types of investments are related to the carbon market, such as carbon credits and green bonds.

Carbon credits are equivalent to Certified Emission Reductions (CER), which are awarded for GHG reductions. The main goal is to manage the environmental impact of FDIs, minimizing global warming by encouraging sustainable businesses. The Kyoto Protocol (1997), later revised by the Paris Agreement (2015), aims to limit greenhouse gases emitted by the nations wound the globe. Countries that achieve these emission reduction targets are then rewarded with carbon credits and have a right to use or trade them with other states that have exceeded their emission limits.

Another significant result of the revised Kyoto Protocol is green bonds. Considered an effective alternative to financing long-term investments, green bond investors are responsible for encouraging industry in the Amazon, but in an environmentally sustainable way. Working like debt securities, green bonds aim to incentivize clean and renewable energy projects, pollution control, biodiversity conservation, and other sustainable resource extraction methods.

There is abundant evidence to support that Green Bonds and other ESG investments are not only positive for the environment but, practically, a terrific opportunity for investors.

Recently, the Managing Director of the International Monetary Fund, Kristalina Georgieva, delivered a speech titled “The Great Reset.” With this term, Georgieva highlighted the economic downturn caused by the COVID-19 pandemic as “the Reset”, an opportunity for the economy to build a “greener, smarter, and fairer world in the future⁹.”

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¹ Billy is currently part of Sidera’s USA market access and expansion team. He has worked with Sidera Consult since interning with them in their Global Internship Program in the summer of 2020.

² Fernanda is currently studying Business Administration at Insper, São Paulo, with interests in consulting and strategic planning. Fernanda is also an intern at Sidera Consult, doing their Local Internship Program.

³ Gabriel is currently majoring in Business Administration at Insper, São Paulo, and is interested in consulting and supply chain management. Gabriel is also an intern at Sidera Consult.

⁴ Jorgen Randers, “Overshoot, Collapse, and Creating a Better Future,” 06/25/2020 https://www.chelseagreen.com/2019/overshoot-collapse-creating-better-future/ , accessed

⁵ COP26: A Roadmap for Success, https://hoffmanncentre.chathamhouse.org/article/cop26-a-roadmap-for-success/ , accessed on August 14, 2020

⁶ Carolina Saldanha Ures, “International Investments in the Amazon,” Sidera Consult, June 24, 2020, pg. 5.

⁷ Ures, “International Investments in the Amazon,” pg 5.

⁸ Global Carbon Atlas, http://www.globalcarbonatlas.org/en/CO2-emissions , accessed on June 29, 2020.

⁹ Kristalina Georgieva, “The Great Reset,” IMF, 3 June, 2020. https://www.imf.org/en/News/Articles/2020/06/03/sp060320-remarks-to-world-economic-forum-the-great-reset