Sustainable Investment In Brazil 2009 (april 2009)
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IFC
Sustainable
Investment
Country
Reports:
Sustainable Investment in Brazil 2009
Final Report April 2009
www.terieurope.org
IFC Sustainable Investment Country Reports:
Sustainable Investment in Brazil 2009 FINAL REPORT APRIL 2009
Prepared for International Finance Corporation (IFC) A Member of the World Bank Group www.ifc.org IFC Task Manager Brunno Maradei, Project Officer, Environment & Social Development Department Prepared by TERI‐Europe www.terieurope.org Written and edited by Ritu Kumar and Dan Siddy Copyright © 2009 International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 All rights reserved. The findings, interpretations, and conclusions expressed in this publication should not be attributed in any manner to the International Finance Corporation, to its affiliated organizations, or to members of its board of Executive Directors or the countries they represent. Neither the International Finance Corporation nor TERI‐Europe guarantee the data included in this publication and neither party accepts responsibility for any consequence of their use. The material in this work is protected by copyright. Copying and/or transmitting portions or all of this work may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and hereby grants permission to the user of this work to copy portions for their personal, noncommercial use, without any right to resell, redistribute, or create derivative works there from. Any other copying or use of this work requires the express written permission of the International Finance Corporation. For permission to photocopy or reprint, please send a request with complete information to: International Finance Corporation, c/o the World Bank Permissions Desk , Office of the Publisher , 1818 H Street NW, Washington, DC 20433 All queries on rights and licenses including subsidiary rights should be addressed to: International Finance Corporation, c/o the Office of the Publisher, World Bank , 1818 H Street, NW , Washington, DC 20433, Fax: +1 202‐522‐2422
TERI‐Europe TERI‐Europe is a not‐for‐profit organisation specialising in the links between sustainable development in emerging markets and the role of business and investment. TERI‐Europe’s partners and sponsors include IFC, the European Commission, the UK Foreign & Commonwealth Office, the UK Department for International Development, Unilever and the Association of British Insurers. TERI‐Europe is based in London. www.terieurope.org
The authors Ritu Kumar is director of TERI‐Europe and a sustainable investment advisor with the emerging market private equity firm, Actis: [email protected] www.act.is Dan Siddy is an associate fellow at TERI‐Europe and director of Delsus Limited, a specialist advisory firm on ESG investment in emerging markets: [email protected] www.delsus.com
About IFC
IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. Our new investments totalled US$16.2 billion in fiscal 2008, a 34 percent increase over the previous year. For more information, visit www.ifc.org. IFC’s Sustainable Investing Team For the past four years, IFC's Sustainable Investing team has delivered technical and financial support for projects that aim to mobilize sustainable capital flows into emerging markets. The goal is to increase the volume of mainstream investment that uses ESG analysis as a standard practice in their investment decision. IFC’s approach is twofold: To catalyze capital market flows into sustainable investment, IFC works to (a) promote the business case for sustainable investment by drawing lessons from IFC’s own portfolio, (b) establish frameworks to identify and assess new sustainable investment opportunities, and (c) develop new financial products (e.g. Sustainability indices); and To support fund managers investing in sustainable companies, IFC works (a) with private equity funds in IFC’s portfolio to assist them to establish ESG analytical processes, and (b) with capital market actors to improve the enabling environment for the market to recognize and value sustainability in corporate valuation. IFC is committed to continue its work in partnership with key market actors to improve the enabling environment and address barriers to sustainable investment in emerging markets. In order to do this, IFC’s work is centered in three areas: policies and standards, knowledge management and investment vehicles. The Sustainable Investing team is part of IFC’s Environment and Social Development Department, and benefits from the generous financial support of IFC and the Governments of Japan, the Netherlands, Norway, Canada, South Africa and Switzerland. For more information, please visit the Sustainable Investing website at www.ifc.org/sustainableinvesting.
Table of Contents ACKNOWLEDGMENTS....................................................................................................................... i GLOSSARY OF ABBREVIATIONS .........................................................................................................ii EXECUTIVE SUMMARY .....................................................................................................................iii 1. INTRODUCTION........................................................................................................................... 1 Objectives ................................................................................................................................................ 1 Scope ....................................................................................................................................................... 1 A snapshot in time................................................................................................................................... 2 Exchange rates used ................................................................................................................................ 2 Structure of the report ............................................................................................................................ 2 2. COUNTRY OVERVIEW .................................................................................................................. 3 Summary.................................................................................................................................................. 3 Brazil’s economy...................................................................................................................................... 3 The stock market ..................................................................................................................................... 3 Key industries and companies ................................................................................................................. 4 Key environmental and social issues ....................................................................................................... 4 3. CORPORATE SUSTAINABILITY INDEX ........................................................................................... 5 History ..................................................................................................................................................... 5 Objective.................................................................................................................................................. 5 Management and governance................................................................................................................. 5 Eligibility .................................................................................................................................................. 6 Sustainability criteria and methodology.................................................................................................. 6 Portfolio composition .............................................................................................................................. 7 Use by investors .................................................................................................................................... 11 Research into an ISE ‘premium’............................................................................................................. 11 Corporate buy‐in ................................................................................................................................... 12 Reaction to and use of the ISE ........................................................................................................... 12 Non‐inclusion of Petrobras ................................................................................................................ 12 Questionnaire response rate.............................................................................................................. 12 Commercial business model.................................................................................................................. 14 Future directions ................................................................................................................................... 14 4. ASSET MANAGERS......................................................................................................................15 Market overview ................................................................................................................................... 15 Status of sustainable investment .......................................................................................................... 18 5. RETAIL FUNDS ............................................................................................................................19 Market overview ................................................................................................................................... 19 Status of sustainable investment .......................................................................................................... 19 6. PENSION FUNDS.........................................................................................................................25 Market overview ................................................................................................................................... 25 Status of sustainable investment .......................................................................................................... 25 7. FOREIGN INVESTMENT...............................................................................................................29 Market overview ................................................................................................................................... 29 Status of sustainable investment .......................................................................................................... 29 8. OTHER MARKET PARTICIPANTS ..................................................................................................33 Brazilian Development Bank.................................................................................................................. 33 Overview ............................................................................................................................................ 33 Status of sustainable investment....................................................................................................... 33 High Net Worth Individuals ................................................................................................................... 35
Overview ............................................................................................................................................ 35 Status of sustainable investment....................................................................................................... 36 9. ENABLING ENVIRONMENT .........................................................................................................38 Regulatory and policy frameworks ........................................................................................................ 38 Environmental legislation and enforcement...................................................................................... 38 Pension fund transparency ................................................................................................................ 39 Non‐financial disclosure requirements .............................................................................................. 39 Listing rules and guidelines................................................................................................................ 40 Voluntary non‐financial reporting ......................................................................................................... 40 Sustainability reporting ..................................................................................................................... 40 Carbon Disclosure Project .................................................................................................................. 44 Global Compact Communications on Progress.................................................................................. 45 Indices, equity research and ratings ...................................................................................................... 45 Specialised indices in addition to the ISE ........................................................................................... 45 Dow Jones Sustainability Index .......................................................................................................... 45 Independent sustainability research and rating products ................................................................. 46 Sell‐side equity research on sustainability issues............................................................................... 46 Networks and associations .................................................................................................................... 46 Industry bodies .................................................................................................................................. 46 UNEPFI ............................................................................................................................................... 47 LASFF ................................................................................................................................................. 47 UNPRI................................................................................................................................................. 47 Development finance institutions ......................................................................................................... 49 Language barriers .................................................................................................................................. 49 Green consumerism .............................................................................................................................. 49 10. BUILDING ON SUCCESS.............................................................................................................51 Overall market size ................................................................................................................................ 51 Consolidated estimates of SRI assets under management ................................................................ 51 Brazilian SRI in a global context......................................................................................................... 52 Strengths and weaknesses .................................................................................................................... 52 Strong commitment........................................................................................................................... 52 Strong business case.......................................................................................................................... 52 Contribution to sustainable development ......................................................................................... 52 Strategic challenges and risks............................................................................................................ 53 Issues on the horizon............................................................................................................................. 53 The ISE paradox ................................................................................................................................. 53 Limited research coverage................................................................................................................. 54 Stagnation in the asset management sector ..................................................................................... 55 Limited involvement of foreign portfolio investors ............................................................................ 56 Fragmentation and overlap in market leadership ............................................................................. 56 Recommendations................................................................................................................................. 56 Update the ISE’s commercial business model.................................................................................... 56 Make greater use of ISE data............................................................................................................. 57 Create a commercial market for ESG research .................................................................................. 58 Develop human capital ...................................................................................................................... 58 Implement an international strategy................................................................................................. 58 Invest in research and development .................................................................................................. 59 Foster competition and innovation.................................................................................................... 60 Organising for success ........................................................................................................................... 61 APPENDIX A: COUNTRY PROFILE .....................................................................................................65 Profile .................................................................................................................................................... 66 Millennium Development Goals ............................................................................................................ 69 Economy ................................................................................................................................................ 70 GDP growth ....................................................................................................................................... 70 Value‐added....................................................................................................................................... 70
Foreign trade ..................................................................................................................................... 70 Private capital flows .............................................................................................................................. 71 International context ......................................................................................................................... 71 Brazil .................................................................................................................................................. 71 The stock market ................................................................................................................................... 73 Market size ........................................................................................................................................ 73 Corporate governance segments....................................................................................................... 75 Key companies and industries............................................................................................................ 76 Capital raising.................................................................................................................................... 78 Performance ...................................................................................................................................... 80 Market participants ........................................................................................................................... 80 Key environmental and social issues ..................................................................................................... 81 Principal issues................................................................................................................................... 81 New national plan on climate change ............................................................................................... 82 APPENDIX B: EXAMPLES OF ESG ISSUES IN THE INTERNATIONAL MEDIA.........................................83 APPENDIX C: SWOT ANALYSIS.........................................................................................................88 APPENDIX D: SUSTAINABILITY IN BRAZIL'S PRIVATE EQUITY MARKET ............................................92 Market overview ................................................................................................................................... 93 Fundraising Activity ........................................................................................................................... 93 Investing Trends................................................................................................................................. 95 Exit Trends ......................................................................................................................................... 95 Developing Brazil’s venture capital industry...................................................................................... 96 Status of sustainable investment .......................................................................................................... 96 Mainstream private equity ................................................................................................................ 97 Clean technology and venture capital ............................................................................................... 98 Sustainable entrepreneurs................................................................................................................. 99
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ACKNOWLEDGMENTS Particular thanks are due to Brunno Maradei at IFC for his patient and effective management of this study, and to Bruno Erbisti (Votorantim), Luiz Maia (TriPod) and Gladis Ribeiro (Pereni) in Brazil who provided wise counsel and opened many doors. Actis: Beatriz Amary and Donald Peck AIG Capital: Cristiano Gioia Amazonia: Gustavo Pimental Banco Real: Pedro Villani and Eugenia dos Santos Buosi BM&F Bovespa: Izalco Sardenberg, Murilo Robotton Filho, Ivan Wedekin, Alvaro Affonso Mendonça and Rogério Marques CES‐FGV: Mario Monzoni and Patricia Berardi CVM: Sergio Weguelin Delsus Ltd: Rachel Mew, Joe Roland, Colin Hedges and Dougal Benson DGF Investimentos: Sidney Chameh, Antônio José Duarte, Humberto Casagrande and Frederico Greve Ecoinvest: Carlos Martins EcoSecurities Brasil: Mauricio de Moura Costa Greenvest: Marco Galhardo HSBC: Paula Peirão de Oliveira IADB: Luiz Ros IFC: Euan Marshall, Brunno Maradei, Cecilia Bjerborn, Berit Lauridsen, Maria Delores Hermosillo and Miguel Martins Mercer Limited: Danyelle Guyatt and Helga Birgden New Carbon Finance: Camilo Terranova Pereni Soluções Sustentáveis: Gladis Ribeiro PREVI: Sergio Rosa, Luiz Carlos Aguiar and Rafael Soares Ribeiro de Castro Rio Bravo: Fabio Ohara Ishigami, Diogo Caiuby Novaes, Marcelo Romeiro and Anton Castanheira Santa Fé Portfólios: Paulo Battistella Bueno Stratus: Oren Pinsky and Carlos Kokron Sustain Capital: Luzia Hirata TriPod Investment: Luiz Maia and Elisabeth Lerner UNPRI: James Gifford, Narina Mnatsakanian and Marcela Zonis Votorantim Asset Management: Bruno Erbisti World Federation of Exchanges: Thomas Krantz, Peter Clifford and Sibel Yilmaz WRI: Virginia Barreiro and Ella Delio
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GLOSSARY OF ABBREVIATIONS ABRAPP ABVCAP ADR ANBID APIMEC ASRIA AUM BNDES CDP CES‐FGV CVM DJSI EMDP EMPEA ESG FDI FBDS FINEP GDP GP GRI HNWI IADB IBAMA IBGC ICGN IFC IGC IMF INOVAR IPO ISE LAVCA LASFF LP MDG MIF N1 N2 NAV NM OM P/E PE PREVI ROE SEC SME SRI UKSIF UNCTAD UNEPFI UNPRI VC WRI
Brazilian Association of Pension Funds Brazilian Private Equity and Venture Capital Association American Depository Receipt National Association of Investment Banks Association of Capital Markets Analysts and Investment Professionals Association for Sustainable & Responsible Investment in Asia Assets under management Brazilian Development Bank Carbon Disclosure Project Center for Sustainability Studies at the Fundaçao Getulio Vargas business school, São Paulo Brazilian Securities and Exchange Commission Dow Jones Sustainability Index Emerging Markets Disclosure Project Emerging Market Private Equity Association Environment, social and governance Foreign Direct Investment Brazilian Foundation for Sustainable Development Brazilian Innovation Agency Gross Domestic Product General partner (manager of a private equity fund) Global Reporting Initiative High Net Worth Individual Inter‐American Development Bank Brazilian Institute for the Environment and Natural Renewable Resources Brazilian Institute of Corporate Governance International Corporate Governance Network International Finance Corporation Bovespa Corporate Governance Index International Monetary Fund Venture capital development program operated by FINEP Initial Public Offering Bovespa Corporate Sustainability Index Latin American Venture Capital Association Latin American Sustainable Finance Forum Limited partner (investor in a private equity fund) Millennium Development Goals Multilateral Investment Fund (part of IADB) Nivel (Level) 1 of Bovespa’s differentiated corporate governance levels Nivel (Level) 2 of Bovespa’s differentiated corporate governance levels Net asset value Novo Mercado Opportunities for the Majority Price/earnings ratio Private equity Pension fund of Banco do Brasil Return on equity United States Securities and Exchange Commission Small and medium sized enterprises Socially Responsible Investment UK Sustainable Investment Forum United Nations Conference on Trade and Development United Nations Environment Program Finance Initiative United Nations Principles for Responsible Investment Venture Capital World Resources Institute
SUSTAINABLE INVESTMENT IN BRAZIL 2009 iii
EXECUTIVE SUMMARY This report has been prepared by TERI‐Europe for IFC to (a) provide an up‐to‐date assessment of the landscape of sustainable investment in Brazil today, and (b) stimulate discussion on the future evolution and needs of this market. “Sustainable investment” refers to portfolio equity investment in publicly listed companies, using strategies that take into account environmental, social and governance (ESG) issues and their effect on shareholder value. Brazil is the world’s tenth‐largest economy. The São Paolo stock exchange (operated by BM&F Bovespa) has a market cap of some US$585 billion, having fallen by about 50 per cent over the last year in common with most markets around the world. The stock market is dominated by the financial sector, oil & gas, mining and steel. 34 per cent of the benchmark IBOVESPA Index is concentrated in just two stocks ‐ the oil & gas company Petrobras and the mining company Vale R Doce. Domestic savings have increased significantly in recent years: the top 40 asset managers in Brazil control about US$500 billion in mutual funds and other products, whilst the country’s 278 pension funds have combined assets of about US$185 billion. Foreign portfolio investment has also become increasingly important to the economy: the total stock of such investment stood at about US$232 billion at the end of August 2008. In addition, American Depository Receipts (ADRs) issued by Brazilian companies and traded on the New York Stock Exchange have a total ownership value of a further US$110 billion. Uniquely amongst emerging economies, ESG issues have had a prominent place in the Brazilian financial and investment community for nearly a decade. Bovespa introduced its corporate governance‐themed Novo Mercado listing segment in 2001 and in the same year Banco Real launched Brazil’s first socially responsible investment (SRI) mutual fund, Fundo Ethical. A key feature in Brazil’s sustainable investment landscape is BM&F Bovespa’s Corporate Sustainability Index, the ISE. Launched in December 2005, the ISE was swiftly followed by a dramatic increase in the number and size of Brazil’s retail SRI funds and has generally matched the IBOVESPA benchmark in performance. Today, ten asset managers offer retail SRI funds with combined assets under management of about US$315 million. Several of these asset managers came together in 2006 to create the Latin American Sustainable Finance Forum (LASFF) in association with CES‐FGV, a specialist centre of excellence for sustainability studies within Brazil’s leading business school. CES‐FGV is also the data provider for the ISE and designed the index’s ESG methodology. Seed funding from IFC played a critical role in the creation of both the LASFF and the ISE. Brazil’s pension funds have taken a proactive stance on ESG issues, largely due to the leadership of their largest member, PREVI. 18 pension funds have signed the UN Principles for Responsible Investment (PRI). Together they represent combined assets of US$110 billion, or about 60 per cent of the country’s total pension fund corpus. Although implementation is still at a relatively early stage, momentum is high and is supported strongly by the UNPRI Secretariat, which has helped to establish a PRI Brazil Network aided by a part‐time in‐country coordinator. The PRI Brazil Network has now developed a well‐organised work program focusing on shareholder engagement, ESG integration and recruitment of new signatories. Shareholder engagement on ESG issues is still in its infancy, and currently focuses on labour standards in charcoal producers associated with Brazil’s iron and steel industry. This engagement involves cooperation with some international PRI signatories as well as LASFF members and Brazil’s pension funds. In general, though, foreign portfolio investors have thus far not been actively engaged in Brazil’s sustainable investment market and have shown little interest in using the ISE index, for example. However, quantitative data on this point are extremely limited; in the absence of hard facts, TERI‐Europe has used a working assumption that ESG investment styles account for about 1 per cent of foreign portfolio investment and investment in Brazilian ADRs, i.e. approximately US$2.2 billion.
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Other market participants may also be relevant for the future of Brazil’s sustainable investment market. The Brazilian Development Bank (BNDES), for example, has stakes in over 30 publicly listed Brazilian companies; this portfolio is worth about US$16 billion. BNDES follows environmental and social policies for its project finance operations, but is unclear whether or how these are applied to its equity holdings. The wealth management market may also be important: Brazil has 143,000 high net worth individuals (HNWIs) constituting a market of about US$1.4 trillion. About 16 per cent of Latin American HNWIs allocate some part of their portfolio to “green investments” such as clean technology and alternative energy. However, more detailed information is not currently available. The enabling environment for sustainable investment in Brazil is relatively strong compared to large emerging economies such as India or China, particularly in terms of voluntary non‐financial reporting by companies. About 60 per cent of companies in the IBOVESPA publish sustainability reports, many of which are based on the international good practice guidelines issued by the Global Reporting Initiative (GRI). The number and quality of corporate responses to the annual survey of the international Carbon Disclosure Project (CDP) is also improving. Nevertheless, further progress is needed on ESG related transparency and disclosure, especially in relation to regulatory filings and IPO prospectuses. Furthermore, Brazilian stocks do not receive much ESG coverage from international sustainability research firms or equity analysts. Lack of commercial demand on the domestic front also means that Brazil has not yet developed any home‐grown infrastructure in this respect, despite the capacity building efforts of organisations such as the Association of Capital Markets Analysts and Investment Professionals (APIMEC). Other Brazilian industry associations taking a proactive advocacy position on sustainable investment include the Brazilian Association of Pension Funds (ABRAPP) and the National Association of Investment Banks (ANBID). Looking to the future, sustainable investment in Brazil faces some important challenges. Many of these are essentially about adapting to success through a new phase of market evolution. The key issues include: Updating the ISE’s commercial business model Making greater use of the underlying ISE data Creating demand for the commercial provision of ESG research Developing human capital More effective outreach and engagement with international investors Investment in research and development Fostering renewed competition and innovation in the asset management industry Building on LASFF and the PRI Brazil Network to increase the effectiveness of national cooperation in the sustainable investment community. The report provides detailed analysis and recommendations on each of these issues, which are inter‐ related and largely inter‐dependent. A strategic vision is therefore required which combines the long‐ term interests of all stakeholders. One possible vehicle for “organising for success” could be the creation of a fully equipped Brazilian Sustainable Investment Forum (BRASIF) as an evolutionary replacement for LASFF. This new entity – which would complement, rather than duplicate or compete with the existing PRI Brazil Network – would serve the common needs of a range of organisations, including PRI signatories, non‐PRI signatories and other important institutions in the value chain such as BM&F Bovespa and APIMEC. It would also act as a national focal point for sustainable investment in Brazil, including promoting inward sustainable investment from overseas. Ultimately, the right way forward for Brazil must come from a bottom‐up, demand‐driven process rather than through a top‐down blueprint imposed from outside. The analysis and recommendations in this report are offered for consideration and discussion by all participants in Brazil’s sustainable investment market. The final recommendation of this report is therefore to suggest that it might be useful for relevant stakeholders to come together in some type of roundtable discussion that takes stock of the progress made over recent years, and enables debate on the strategic direction and needs of the market over the next five years or so.
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1. INTRODUCTION
Objectives Environmental, social and governance (ESG) issues have been a prominent concern and an important commercial differentiator in the Brazilian financial and investment community for nearly a decade. The commitment, depth and sophistication of this market evolution are probably unique among the world’s emerging economies, and in this way Brazil has set examples and pioneered business models that have received international attention and adaptation. Despite the progress that has been made, Brazil’s sustainable investment market is still in its relative infancy and faces continued challenges and fresh obstacles to new opportunities, especially taking into account the country’s environmental and social problems and the scale of domestic and foreign investment in what is now the world’s tenth largest economy. Against this background, this report aims to: • Determine the current state of development of sustainable investment in Brazil by measuring the market on a number of indicators; and • Stimulate discussion by all market participants and stakeholders on the future evolution and needs of the Brazilian sustainable investment market. The report has been prepared by TERI‐Europe based on comprehensive desk research, extensive interviews conducted in São Paulo and Rio de Janeiro in September 2008, and subsequent discussions with a number of organisations and individuals. The study was sponsored by the International Finance Corporation (IFC) through the Sustainable Investing Program of its Sustainability Business Innovator (a division of IFC’s Environment & Social Development Department) as part of a wider IFC project that also covers the markets of India, China and South Africa.
Scope The term “sustainable investment” can mean different things. In the interests of clarity, the scope of “sustainable investment” as covered in this report is domestic and foreign investment in Brazil’s publicly quoted companies using strategies that take environmental and social (sometimes combined with governance) issues into consideration. This includes negative screening, positive screening, best‐ in‐class, shareholder activism and similar “socially responsible investment” styles, together with “integrated” approaches such as engagement and non‐financial risk analysis. Private equity and venture capital funds investing in Brazil are a secondary focus of this study. Specifically, the report covers (a) the use of environmental/social due diligence policies and procedures by “mainstream” private equity and venture capital funds (b) private equity and venture capital funds that are based on sustainability themes such as clean technology and climate change. The report does not cover other segments of the sustainable finance and investment market such as the Equator Principles, ESG‐related banking products or microfinance. As context, however, it is essential to note that (with the possible exception of microfinance) these themes are also a strong feature of the Brazilian capital market: most leading Brazilian banks have committed to implement the Equator Principles for project finance and several have successfully introduced innovative sustainable lending products, while at the same time pioneering many of the sustainable investment initiatives captured in this report as part of the same overarching corporate strategies and ethical values.
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A snapshot in time This report must be seen in the context of the global financial crises that have unfolded during 2008 – and will continue to evolve for the foreseeable future ‐ following the emergence of problems in the US sub‐prime mortgage market in 2007. The authors have done their best to present an accurate and balanced ‘snapshot’ of Brazil’s sustainable investment market in this fast‐changing and turbulent environment and to frame conclusions and recommendations that will hold their currency for the next 6‐12 months. We have sought to use the most up‐to‐date data available, but acknowledge that some of the information and corresponding analysis contained in this report may have an unavoidably short shelf life in these exceptional circumstances.
Exchange rates used Unless otherwise stated, the exchange rate used in this report is R$2.315 to the US$ (the rate prevailing as of December 31, 2008).
Structure of the report As important context for the rest of the report, Chapter 2 begins with a brief overview of Brazil’s development profile, economy and stock market (the BM&F Bovespa), along with a summary of the key industries and companies that are traded on the stock market and a short discussion on ESG value drivers in Brazil. More detailed information on these issues is provided in Appendices A and B. One of the most important centrepieces of the sustainable investment landscape in Brazil is BM&F Bovespa’s Corporate Sustainability Index, the ISE. Detailed information on the ISE’s methodology and impact is presented in Chapter 3. Chapter 4 provides an introduction to the leading asset managers in Brazil, their market share and assets under management, and their current involvement in sustainable investment. Chapters 5 – 8 then analyse sustainable investment activity across different types of market participant, focusing primarily on Brazilian mutual funds, Brazilian pension funds and foreign institutional investors. The enabling environment for sustainable investment in Brazil is analysed in Chapter 9 and includes public policy and regulation, corporate transparency and disclosure practices, equity indices and research coverage. Chapter 9 also highlights the industry associations and similar networks that play a key role in creating the framework conditions for sustainable investment in Brazil, particularly the UN Principles for Responsible Investment (UNPRI) and the Latin American Sustainable Finance Forum (LASFF). Finally, Chapter 10 provides a forward‐looking discussion on the current status of sustainable investment in Brazil and the future opportunities and risks this market faces. A “SWOT” analysis is also presented in Appendix C. Chapter 10 concludes with a number of recommendations that stakeholders in Brazil’s sustainable investment market may wish to take forward for further consideration. Information on sustainable investment practices in Brazil’s private equity and venture capital market (a secondary focus of this report) is provided in Appendix D.
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2. COUNTRY OVERVIEW
Summary Sustainable investment trends in Brazil have to be understood in the wider context of Brazil’s overall economic and sustainable development. Appendix A provides detailed information on Brazil’s development profile, economy and stock market (the BM&F Bovespa), along with data on the key industries and companies that are traded on the stock market and a discussion on ESG value drivers in Brazil. The key points for context are summarised below.
Brazil’s economy Based on the IMF’s 2008 estimates of worldwide GDP, Brazil is today the world’s 10th largest economy. Characterized by large and well‐developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Brazil became investment grade at the end of April 2008, when Standard & Poor’s upgraded Brazil’s sovereign debt rating to BBB‐ from BB+. Economic growth in Brazil increased from 3.8 per cent in 2006 to exceed expectations at 5.4 per cent in 2007. This trend continued over the first seven months of 2008 when GDP grew by some 6.1 per cent. As with almost all countries, Brazil has subsequently been impacted by the global financial shocks that dominated the global economy since the second half of 2008. Brazil has a thriving capital market bolstered by significant domestic savings and pension fund assets. Foreign portfolio investment has also become increasingly important to the economy and Brazil’s share of net portfolio equity flows to all developing countries surged to nearly 25 per cent in 2007. Net foreign portfolio investment flows have increased dramatically in the last few years and by 2007 they reached US$34 billion, almost matching the volume of FDI. The total stock of foreign portfolio investment amounted to some US$214 billion at the end of 2007 and stood at about US$232 billion by August 2008, the latest date for which reliable data are available.
The stock market th The São Paolo stock exchange, operated by BM&F Bovespa, is the 13 largest market in the world by market capitalization, following a dramatic increase in size over the last two decades. In common with the rest of the world, Brazil’s market capitalisation has experienced a sharp decrease in the last 12 months as a result of the global economic crisis and the worldwide fall in equity prices. As of the end of November 2008, the market value of BM&F Bovespa listed companies came to R$1,355 billion (US$585 billion). Brazil’s benchmark index is the IBOVESPA. A vital feature of the São Paolo stock exchange is that it maintains different listing segments for companies, based on differentiated levels of corporate governance. In addition to the Traditional Bovespa segment, these include the Novo Mercado (NM) and two further differentiated corporate governance categories, Level (Nivel) 1 and Level (Nivel) 2. Novo Mercado companies represent about 33 per cent of total market capitalisation. Brazil has experienced a surge of IPOs and secondary public offerings in recent years. Some US$35 billion worth of new deals were completed over the period June 2007 ‐ June 2008. The majority of IPOs are now on the Novo Mercado.
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Figure 1: Sectoral breakdown of the IBOVESPA Index
Financial 21.6%
Other 16.1% Transportation 4.1% Telecom 4.8% Electric utilities 7.3%
Oil and gas 19.8%
Steel 11.1% Mining 15.2%
Key industries and companies As of the end of November 2008, 393 companies were listed on the exchange. Figure 1 shows the sectoral breakdown of the IBOVESPA index, which is dominated by the financial sector, oil & gas, mining and steel. The Brazilian stock market is highly concentrated: the top ten companies with the highest market value make up about 50 per cent of total market capitalisation. It is particularly important to understand that approximately 25 per cent of the total value of the overall market is concentrated in just two companies, Petrobras (oil & gas) and Vale R Doce (mining); these two firms also represent 34 per cent of the notional IBovespa portfolio. The capital structure of both Petrobras and Vale R Doce includes preference as well as common shares and thus neither firm is listed on the Novo Mercado.
Key environmental and social issues Corporations and their investors in Brazil face a wide and often complex range of social and environmental issues that present potentially significant risks and opportunities to shareholder value and corporate reputation. At the current time there does not appear any single source that synthesises this information into an investor‐friendly, comprehensive analysis of key sustainability‐ related business drivers in the industries that make up Brazil’s stock market. A detailed assessment is beyond the current scope of this report, but the principle issues are discussed further in Appendix A and are illustrated by examples of recent media coverage that are provided in Appendix B. One important recent development is the Brazilian Government’s National Plan on Climate Change, published in December 2008. The measures in this action plan may have potentially significant implications (both positive and negative) across a number of key Brazilian industry sectors, including oil & gas, biofuels, mining, steel, power and pulp & paper. Further information is provided in Appendix A.
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3. CORPORATE SUSTAINABILITY INDEX History Brazil’s Corporate Sustainability Index (the ISE) was created in 2005 by the São Paulo stock exchange, Bovespa (now BM&F Bovespa), in response to the country’s growing interest in sustainable investment and sustainable finance. The index was developed with technical input from CES‐FGV and with grant funding from IFC’s former Sustainable Financial Markets Facility. The index was launched in December 2005 at a major international conference on the theme of emerging market sustainable investment, organised by CES‐FGV and again sponsored by IFC. At the time, it was only the second emerging market sustainability index in the world. It is still the only index of its kind in Latin America, and has played an important role in stimulating the development of other emerging market sustainability indices in India, the Middle East, Africa and elsewhere.
Objective The ISE measures the total return on a theoretical portfolio composed by stocks issued by companies highly committed to corporate sustainability and social responsibility. The maximum number of companies that can be admitted to the ISE is 40. Their stocks are selected from among BM&F Bovespa’s most actively traded securities in terms of liquidity, weighted according to the outstanding shares’ market value. The index provides a valuable benchmark for investors and is also intended to promote good practices in the Brazilian corporate community. The ISE index is re‐balanced annually in December.
Management and governance The ISE is operated by BM&F BOVESPA, which is responsible for index calculation and technical management. BM&F BOVESPA has contracted CES‐FGV to undertake the collection and analysis of the necessary corporate sustainability data. The ISE is presided over by an independent Deliberative Board composed of representatives from the following organisations: Brazilian Association of Pension Funds (ABRAPP) National Association of Investment Banks (ANBID) Association of Capital Markets Analysts and Investment Professionals (APIMEC) BM&F BOVESPA Brazilian Institute of Corporate Governance (IBGC) IFC Ethos Institute of Social Responsibility Brazilian Ministry of the Environment United Nations Environment Programme (UNEPFI) The Ethos Institute has been temporarily suspended from the Board for leaking information to the media about the exclusion of Petrobras prior to the official announcement of the 2008/2009 portfolio.
6
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Eligibility Stocks admitted to the ISE must: be among the 150 best classified stocks in the negotiability index, measured in the twelve months preceding the beginning of the re‐evaluation process; have a trading session presence of at least 50 per cent, measured in the twelve months preceding the beginning of the re‐evaluation process; and meet the sustainability criteria approved by the ISE Board.
Sustainability criteria and methodology The ISE’s sustainability criteria and methodology were developed by CES‐FGV and approved by the ISE Board. Data for the ISE are collected by means of a detailed questionnaire (around 140 questions) sent by CES‐FGV each year to up to 150 of Brazil’s largest and most traded publicly quoted companies. CES‐FGV designed a set of criteria based on the “triple bottom line” concept i.e. the integrated analysis of environmental, social and economical aspects. In addition, the methodology takes into account general issues (for example, a company’s commitment to the UN Global Compact), the nature of the company’s product or business activity (for example, risk to consumer health) and corporate governance criteria. The environmental, social and economic criteria are divided into four groups: policies (commitment indicators); management (program, target and monitoring indicators); performance; and legal compliance. Slightly different environmental criteria are applied to companies in the financial sector. Real sector companies are weighted differently on environmental criteria depending on whether they are classified as “high impact” or “medium impact”. CES‐FGV carries out cluster analysis of the dataset to identify groups of companies with similar performance and to select a group with better general performance. Subject to the approval of the ISE Board, the companies included in the latter group are admitted to the ISE portfolio. No more than 40 companies may be included in the ISE. This process is carried out annually to re‐balance the portfolio. However, the ISE Board has the power to exclude a company from the ISE portfolio at any time if “any event alters significantly a component company’s sustainability level”. The ISE’s methodology does not use an exclusion list of “sin sectors” such as defence, tobacco, alcohol, nuclear power or gambling. In ISE’s first year of operation, companies were not required to present documents to prove their sustainability policies. In the second year, verification began to be carried out only after disclosure of the portfolio. Only companies that provided proof of their practices were selected for the ISE in the latest re‐balancing.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
7
Portfolio composition The current ISE portfolio came into effect on December 1, 2008 and is valid until November 30, 2009 (Table 1). New admissions to the ISE include Celesc, Duratex, Odontoprev, TIM, Telemar and Unibanco. Aracruz, CCR Rodovias, Copel, Iochpe‐Maxion, Petrobras and WEG were dropped from the index. Figure 2 illustrates the new ISE portfolio weightings and provides a comparison with the current IBOVESPA universe of 59 stocks. Figure 3 illustrates the changes to the new ISE portfolio, which – with the addition of Telemar and TIM – now includes telecom stocks for the first time. Figures 4 and 5 show the industry breakdown of the ISE for the 2007/2008 and 2008/2009 periods respectively. The ISE is now heavily weighted towards banking stocks and in particular towards two banks (Bradesco and Itaú) which together make up more than 40 per cent of the notional ISE portfolio. As noted on page 16, the two ‘titans’ of the Brazilian corporate sector are the oil & gas company Petrobras and mining firm Vale R Doce. Vale R Doce has never been a component of the ISE. The decision to exclude Petrobras from the ISE 2008/2009 portfolio means that the re‐balanced sustainability index now differs significantly from the IBOVESPA index. Table 1: ISE portfolio 2008/2009 (source: BM&F Bovespa) Company
Industry
AES TIETE BRADESCO (N1) BRASIL (NM) BRASKEM (N1) CELESC (N2) CEMIG (N1) CESP (N1) COELCE CPFL ENERGIA (NM) DASA (NM) DURATEX (N1) ELETROBRAS (N1) ELETROPAULO (N2) EMBRAER (NM) ENERGIAS BR (NM) GERDAU (N1) GERDAU MET (N1) ITAUBANCO (N1) LIGHT S/A (NM) NATURA (NM) ODONTOPREV (NM) PERDIGAO S/A (NM) SABESP (NM) SADIA S/A (N1) SUZANO PAPEL (N1) TELEMAR TIM PART S/A TRACTABEL (NM) UNIBANCO (N1) V C P (N1)
Electric utilities Financial intermediaries Financial intermediaries Petrochemicals Electric utilities Electric utilities Electric utilities Electric utilities Electric utilities Medical products Wood Electric utilities Electric utilities Aerospace Electric utilities Steel Steel Financial intermediaries Electric utilities Cosmetics Medical products Meat, poultry & others Water utilities Meat, poultry & others Pulp & paper Telecommunications Telecommunications Electric utilities Financial intermediaries Pulp & paper
IBovespa?
Market cap US$ million 2,236 27,966 15,969 1,207 663 6,123 1,908 708 6,191 552 773 12,379 1,704 2,791 1,536 8,584 3,430 30,708 1,908 3,486 263 2,634 2,706 1,162 1,627 5,763 3,628 5,181 15,755 1,545
ISE weight (%) 0.703 22.302 3.934 0.504 0.415 4.883 1.339 0.293 2.047 0.640 0.470 4.847 1.204 3.215 0.635 5.278 3.017 20.330 0.321 1.035 0.248 1.987 1.614 0.727 0.894 5.403 1.227 1.871 7.808 0.810
8
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 2: Comparison of current ISE and IBovespa index constituents (Source: BM&F Bovespa) PETROBRAS VALE R DOCE BMF BOVESPA ITAUSA USIMINAS SID NACIONAL AMBEV BRASIL TELEC NET BRADESPAR REDECARD LOJAS AMERIC ALL AMER LAT GOL VIVO COPEL NOSSA CAIXA P,ACUCAR-CBD CYRELA REALT CCR RODOVIAS LOJAS RENNER SOUZA CRUZ TAM S/A GAFISA JBS B2W VAREJO ULTRAPAR COSAN TRAN PAULIST KLABIN S/A ROSSI RESID ARACRUZ TELESP COMGAS ODONTOPREV COELCE LIGHT S/A CELESC DURATEX BRASKEM ENERGIAS BR DASA AES TIETE SADIA S/A VCP SUZANO PAPEL NATURA ELETROPAULO TIM PART S/A CESP SABESP TRACTEBEL PERDIGAO S/A CPFL ENERGIA EMBRAER BRASIL ELETROBRAS CEMIG TELEMAR UNIBANCO GERDAU ITAUBANCO BRADESCO
ISE IBOV
0
5
10
15
20
25 % of index
SUSTAINABLE INVESTMENT IN BRAZIL 2009
9
Figure 3: Changes in ISE 2008/2009 portfolio compared to 2007/2008 (source: BM&F Bovespa data) PETROBRAS
ARACRUZ WEG CCR RODOVIAS COPEL VCP AM INOX BR EMBRAER SADIA S/A SUZANO PAPEL IOCHP-MAXION BRASKEM SUZANO PETR CELESC LIGHT S/A DASA AES TIETE ENERGIAS BR ODONTOPREV COELCE SABESP ELETROPAULO GERDAU MET DURATEX NATURA TRACTEBEL CEMIG CPFL ENERGIA BRASIL GERDAU PERDIGAO S/A CESP TIM PART S/A ELETROBRAS BRADESCO ITAUBANCO TELEMAR UNIBANCO
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
Figure 4: ISE 2007/2008 industry breakdown (source: BM&F Bovespa) Consumer non-cyclical 3.1% Water utilities 1.3%
Electric utilities 12.4% Steel Oil and gas 25.0%
7.7%
Other 15.8%
Wood and paper 4.4%
Machines and equipment 1.2% Petrochemicals 0.8%
Financials 39.1%
Transportation 5.0%
10
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 5: ISE 2008/2009 industry breakdown (source: BM&F Bovespa)
Electric utilities 18.6%
Telecomms 6.6%
Steel 8.3%
Wood and paper 2.2%
Transportation 3.2%
Other 12.1%
Water utilities 1.6%
Petrochemicals 0.5%
Financials 54.4%
Consumer non-cyclical 4.6%
Performance
Over the three years since its launch, the performance of the ISE has closely matched that of Brazil’s main benchmark index, the IBOVESPA (Figure 6). Both indices made very strong gains in 2007 (partly as a result of several large IPOs) but have fallen sharply (by around 40 per cent) over the last six months of 2008 due to the wider effects of global economic turmoil. As a result, cumulative performance over the three years since the ISE’s launch is relatively low at around 11 per cent for the period December 2005 – December 2008. Figure 6: Performance of ISE index compared to IBOVESPA, Dec 2005 – Dec 2008 (source: Bloomberg) 140% 120% 100% 80% 60% 40% 20% 0% Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 IBOVESPA
ISE
SUSTAINABLE INVESTMENT IN BRAZIL 2009
11
Use by investors The ISE has been well received by Brazilian investors interested in sustainability issues and has led directly to a substantial increase in the number and size of SRI mutual funds available in Brazil (see Chapter 5). The managers of these funds currently use the ISE free of charge. The ISE is currently the main tool used by PREVI and other pension funds that are seeking to implement the PRI across their listed equity portfolios. PREVI has indicated that it is keen to see the development of a more sophisticated tool than the ISE, which can only be used for screening purposes and does not enable comparison or ranking of companies and industry sectors. The ISE does not appear to be well used or well known by foreign portfolio investors.
Research into an ISE ‘premium’ Even though the ISE is a relatively young index, there is already a small but growing body of academic research into the possibility that stocks admitted to the ISE trade at a premium as a result of their superior sustainability (i.e. environmental, social and governance) performance. Professor José Luiz Rossi Júnior has used the ISE to assess whether corporate social responsibility has 1 an impact on the value of Brazilian firms . Prof Rossi analyzed data from 2005 to 2007 on a sample of non‐financial Brazilian companies to assess whether corporate social responsibility (measured using ISE inclusion as a proxy) has an impact on firm value. He showed found that companies included in the ISE have a higher market value compared to other publicly traded companies, implying (but not proving) that sustainability is the causal factor for this premium. Bogéa et al conducted an event study to detect unusual changes in the share price of ISE stocks 2 following the annual announcement of index constituents in 2005, 2007 and 2007 . They found no statistically significant evidence of positive abnormal returns following the announcement of companies being included in the ISE. On the other hand, there was also no evidence of negative abnormal returns. The lack of significant results from this research on the ISE have also been found in previous work on international indices such as FTSE4Good, and does not necessarily mean an absence of a relationship between good sustainability practices and the creation of shareholder value. For context, it is relevant to note a number of studies on equivalent questions related to the more mainstream and longer‐established subject of corporate governance in Brazil. A 2003 study commissioned by BOVESPA found that companies that moved into higher corporate governance levels experienced a positive impact on their stock valuation and increased trading volume and 3 liquidity . A 2005 study by Bruno Erbisti (one of Brazil’s leading ESG investment professionals) showed that Brazil‐based firms with the best corporate governance ratings garnered 2004 P/E ratios 4 that were 20 per cent higher than firms with the worst governance ratings . The better‐rated firms were also found to have ROEs that were 45 per cent higher and net margins that were 76 per cent higher than those with below‐average governance practices. Santana et al have also commented on the impact of governance rules on stock prices in Brazil in a 5 2008 paper for the IFC’s Global Corporate Governance Forum . They noted that Bovespa’s index of shares with differentiated corporate governance (the IGC) rose 237 per cent between June 2001 and June 2006, while the IBovespa index gained 168 per cent during the same period. Novo Mercado and Level 2 companies also obtained higher multiples in their IPOs than the market average. 1
Rossi Júnior, José Luiz What is the value of corporate social responsibility? An answer from the Brazilian Sustainability Index IBMEC Working Paper WPE‐95‐2008 (2008) 2 Bogea, Felipe, Campos, Anderson LS and Camino Blasco, David Did the creation of the ISE create value to companies? (September 2008) 3 Gledson de Carvalho, Antonio Effects of migration to special corporate governance levels of Bovespa (2003) 4 Erbisti, Bruno Corporate governance in Brazil: is there a link between corporate governance and financial performance in the Brazilian Market? ABN AMRO Asset Management (July 2005) 5 Santana, Maria Helena, Ararat, Melsa, Aleandru, Petra, Yurtoglu, B. Burcin Novo Mercado and its followers: case studies in corporate governance reform Global Corporate Governance Forum (February 2008)
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Corporate buy‐in Reaction to and use of the ISE The ISE appears to have been accepted and welcomed by Brazil’s publicly quoted companies. The majority of companies admitted to the ISE make extensive use of the fact (and the ISE logo) in their websites, annual reports, sustainability reports, press releases and other external communications. The ISE has a relatively high profile on the internet. Numerous references to the ISE and companies’ inclusion in the index can also be found at Bloomberg and PR Newswire, as well as in the Brazilian media. Many ISE companies use the ISE’s “brand value” in a proactive way in their regulatory reporting as well as in their PR and investor relations. Figure 7 provides an example of one of several Petrobras filings with the US Securities & Exchange Commission that refer to the ISE; similar references to Brazil’s sustainability index can be found in the SEC filings of numerous other ISE companies. Non‐inclusion of Petrobras The fact that Petrobras has been dropped from the ISE’s 2008/2009 portfolio is a very significant development and arguably marks an important milestone in the short life of the Index to date. Petrobras’ exclusion from the ISE is linked to controversial issues concerning serious air pollution from Brazil’s diesel fleet and delays in the introduction of low‐sulphur diesel fuel necessary for low emission vehicles. The news attracted considerable attention in the Brazilian media (but little international coverage). Petrobras was unhappy about the circumstances surrounding its exclusion from the ISE and issued an angry rebuttal alleging that the existence of a defamatory campaign against the company led by the Ethos Institute, a member of the ISE Board (Petrobras also resigned its membership of the Ethos Institute). It is too early to tell what the longer‐term fall‐out of this may be in terms of future support for the Index by other Brazilian companies and relevant stakeholders. Questionnaire response rate The response rate to the annual questionnaire sent out by FGV‐CES has been falling every year since the ISE’s launch (Table 2). This contrasts sharply with the steady growth in corporate sustainability reporting by Brazilian companies, suggesting the type of “questionnaire fatigue” experienced by the SRI market in the US and Europe at a similar stage of maturity. It should also be noted that the Integration Working Group of the PRI Brazil Network is examining the ESG indicators that are most relevant and material for investors in Brazil (page 48). This will include a comparison of the most commonly used indicators in Brazil with those provided in the GRI guidelines. Based on this selection, PRI pension funds in Brazil may then develop a joint questionnaire that they will send to Brazilian companies. The relationship between this initiative and the ISE is currently unclear. Table 2: Declining company response rate to ISE questionnaire
2005
2006
2007
2008
No. of companies invited to complete questionnaire
121
120
137
137
Response rate to questionnaire
52%
50%
42%
37%
Source: CES‐FGV, BM&F Bovespa
SUSTAINABLE INVESTMENT IN BRAZIL 2009 Figure 7: Example of a company’s use of the ISE in investor relations and regulatory reporting (source: SEC)
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 6-K Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of November, 2007 Commission File Number 1-15106
PETRÓLEO BRASILEIRO S.A. - PETROBRAS (Exact name of registrant as specified in its charter)
Brazilian Petroleum Corporation - PETROBRAS (Translation of Registrant's name into English)
Avenida República do Chile, 65 20031-912 - Rio de Janeiro, RJ Federative Republic of Brazil (Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F ___X___ Form 40-F _______ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes _______ No___X____
Petrobras’ participation in BOVESPA’S Corporate Sustainability Index is renewed (Rio de Janeiro, November 27, 2007). – PETRÓLEO BRASILEIRO S/A - PETROBRAS, [Bovespa: PETR3/PETR4, NYSE: PBR/PBRA, Latibex: XPBR/XPBRA, BCBA: APBR/APBRA], a Brazilian international energy company, announces that, for the second consecutive year, it has been included in the list of companies whose shares compose Bovespa’s Corporate Sustainability Index (ISE) for their high degree of commitment to sustainability and social responsibility. Petrobras’ common and preferred shares will have the weights of 11.12% and 13.88%, respectively, totaling 25%, the ISE’s biggest individual weight. The ISE’s new portfolio will go into effect on December 01 2007 and remain valid through November 30 2008. It brings together 40 corporate stocks (common and preferred) issued by 32 companies performing in 13 sectors. These companies were selected for their policies, management practices, performance, and legal obligation fulfillment with regard to economic efficiency, environmental balance, social justice, product nature, and corporate governance. Jointly, the 32 companies’ market value is R$927 billion, or 39.6% of BOVESPA’S total capitalization, currently worth R$2.3 trillion. BOVESPA, ABRAPP, ANBID, APIMEC, IBGC, IFC, the ETHOS institute, and the Ministry of the Environment, who comprise the index’ Deliberation Board, created the ISE as a benchmark for socially responsible investments in Brazil. The Board later added PNUMA to its composition. FGV-EAESP elaborated the methodology used to assess the companies. The 141-question questionnaire was sent to the 137 outfits that issue the 150 most liquid shares traded at the BOVESPA and, ultimately, answered by 62 companies. The ISE is a pioneering initiative in Latin America, designed to create an investment environment that is compatible with sustainable development demands imposed by the contemporaneous society and to encourage ethical corporate responsibility. After undergoing a revision process which involved the participation of several stakeholders, the ISE is now in its third edition. The renewal of Petrobras’ participation in the ISE is a major victory for the company and is the outcome of its efforts to realize its strategic objectives of growing with profitability and social and environmental responsibility.
13
14
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Commercial business model All BM&F Bovespa indices, including the ISE, are made available to investors free of charge. Companies wishing to be included in the ISE pay an evaluation fee of US$2,000; companies admitted to the ISE can also purchase a license to use the ISE brand for a fee of US$7,000 per annum. These income streams are the only source of revenue to cover the ISE’s maintenance costs, which are largely incurred by CES‐FGV.
Future directions The ISE Board is currently considering the possibility of changing the ISE methodology to introduce a two‐tier system. The aim behind this concept is to encourage ‘out‐lying’ companies to improve their ESG performance (in a similar way to the exchange’s differentiated corporate governance levels) and to enhance the value of the index to investors. BM&F BOVESPA and CES‐FGV are also interested in the concept of creating a regional Latin American version of the ISE that might include Chile, Argentina and Mexico (and potentially also Peru and Colombia).
SUSTAINABLE INVESTMENT IN BRAZIL 2009
15
4. ASSET MANAGERS
Market overview Brazil has around 8,300 investment funds with over 11 million shareholders and total net assets of around US$700 billion as of Q2 2008, according to data from the Brazilian Securities and Exchange Commission (CVM). The market has grown significantly over the last decade (Figure 8). At the end of 2007, Brazilian investment funds had around 48 per cent of their total assets in equities. Due to sharp falls in the stock market in 2008, re‐allocation and net outflows, as of October 2008 this figure had fallen to around 15 per cent, with the balance represented by investments in fixed income securities. Table 3 lists the top 40 Brazilian asset managers in terms of global assets under management as of October 2008. Their client base is diversified across a wide range of investor types (Figure 9). Pension fund assets make up around 22 per cent of global assets but it should be noted that this figure may be heavily distorted by ‘captive mandates’ i.e. the pension schemes of the parent financial institutions. Between them, these 40 asset managers have equity holdings of around R$178 billion (US$77 billion); about 97 per cent of this equity corpus is managed by 20 firms, most notably Banco do Brasil (Figure 10). Figure 8: Brazilian investment funds AUM (US$ million) (source: CVM)
743
800 700
704
633
AUM US$ million
600 500
434
400
326 247
300 200 100
118
149
148
176 97
0 1999 2000 2001 2002 2003 2004 2005 2006 2007
Jul Aug 2008 2008
16
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 9: Assets under management according to type of investor, Oct 2008 (source: ANBID) Pension funds - public sector companies 10% Corporate 11%
High income retail 9% Insurers 3% Middle market 2% Others 2%
Pension plans 11%
Foreigners 5%
Other; 21%
Investment funds 1% Capitalization 1%
Pension funds - private companies 12%
Public authorities 7% Retail 13%
Private 13%
Figure 10: Top 20 asset managers according to assets under management invested in equities, Oct 2008 (source: ANBID) BANCO DO BRASIL
$21,131 $9,025
BNY MELLON ITAU
$7,188
BRADESCO
$6,072
UBS PACTUAL
$5,226
CAIXA
$3,155
CREDIT SUISSE
$2,925
HSBC
$2,677
OPPORTUNITY
$2,547
SANTANDER BRASIL
$2,448
UNIBANCO
$2,367
BNP PARIBAS
$1,929
GERACAO FUTURO CORRETORA
$1,600
BEM
$1,418
BANCO REAL
$1,299
CITIBANK
$850
ALFA
$775
VOTORANTIM ASSET
$771
BANCO SAFRA
$702
LEGG MASON
$671 $0
$5,000
$10,000
$15,000
$20,000
$25,000
US$ million
SUSTAINABLE INVESTMENT IN BRAZIL 2009
17
Table 3: Ranking of Brazilian asset managers by global assets under management CDP 2008
SRI products
102,566.70
67,410.15
146,539.50
63,300.00
69,270.20
29,922.33
SANTANDER BRASIL
60,658.90
26,202.55
6
UBS PACTUAL
59,436.80
25,674.64
7
UNIBANCO
58,792.00
25,396.11
8
HSBC
56,822.70
24,545.44
9
BNY MELLON
51,643.90
22,308.38
10
BEM
34,445.20
14,879.14
11
BANCO REAL
32,991.90
14,251.36
12
NOSSA CAIXA
27,920.90
12,060.86
13
BANCO SAFRA
21,174.00
9,146.44
14
INTRAG
20,195.80
8,723.89
15
CITIBANK
19,708.30
8,513.30
16
LEGG MASON
18,208.10
7,865.27
17
BNP PARIBAS
18,134.20
7,833.35
18
VOTORANTIM ASSET
18,011.80
7,780.48
19
CREDIT SUISSE HEDGING GRIFFO
17,337.40
7,489.16
20
SUL AMERICAN INVESTIMENTOS
11,408.10
4,927.90
21
OPPORTUNITY
9,108.30
3,934.47
22
CONCORDIA
4,059.50
1,753.56
23
ALFA
3,800.70
1,641.77
24
GERACAO FUTURO CORRETORA
3,705.40
1,600.60
25
CREDIT AGRICOLE BRASIL
3,332.50
1,439.52
26
BANCO FATOR
3,153.20
1,362.07
27
BBM
1,868.90
807.30
28
DYNAMO ADMINISTRACAO DE RECURSOS
1,043.60
450.80
29
BANESTES
979.20
422.98
30
FIBRA
976.70
421.90
31
BRB
816.20
352.57
32
MERCANTIL DO BRASIL
441.60
190.76
33
BANCO DE TOKYO MITSUBISHI UFJ BRASIL
361.80
156.29
34
PAM ‐ PARANA BANCO ASSET
246.60
106.52
35
MAGLIANO
115.40
49.85
36
PROSPER
94.90
40.99
37
COINVALORES
92.40
39.91
38
TITULO
89.60
38.70
39
BANPARA
65.40
28.25
40
PILLA
14.30
6.18
TOTAL
1,170,562.30
505,642.46
R$ million
US$ million
1 2
BANCO DO BRASIL
237,441.90
ITAU
156,054.50
3
BRADESCO
4
CAIXA
5
Source: ANBID (data as of October 2008)
PRI
18
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Status of sustainable investment The National Association of Investment Banks (ANBID) is actively engaged on sustainable investment issues on behalf of its members. It serves on the ISE Deliberative Board and has also worked with the Carbon Disclosure Project (CDP) and the UN PRI. As shown in Table 3, four of the top 40 asset management firms are signatories to the PRI: Banco Real, BNP Paribas, HSBC and Unibanco. Between them, they manage US$73 billion or around 14.5 per cent of total assets under management by all 40 firms. In terms of equity holdings, the four PRI signatories manage US$8.2 billion, which is just under 11 per cent of the total equity corpus of US$77 billion. With the exception of BNP Paribas, each of these firms currently offers retail SRI funds (Chapter 5). However, there is limited information on the extent to which these four PRI signatories are integrating ESG into their mainstream (non‐SRI branded) products and strategies. SRI mutual fund products are also offered by Banco do Brasil, Bradesco, Caixa, Itaú, Legg Mason Western Asset Management, Safra and Votorantim (Chapter 5). None of these asset managers have signed the UNPRI at the current time. Seven of the top 40 firms were signatories to CDP Brazil 2008. They represent combined assets of US$326 billion or nearly 65 per cent of total assets under management by all of the firms listed in Table 3. In terms of equity holdings, the CDP signatories manage US$44 billion or 57 per cent of the total equity corpus. None of the asset management firms employs full‐time ESG analysts. Banco Real, HSBC, Itaú, Unibanco and Votorantim each have one full‐time analyst working on ESG issues part‐time.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
19
5. RETAIL FUNDS Market overview Retail and ‘high income’ retail customers constitute around 13 per cent and 9 per cent respectively of global assets managed by the 40 firms listed in Table 3. The combined value of these assets is around US$109.7 billion; Banco do Brasil and Caixa lead the rankings for retail assets under management whilst the two leading managers of high income retail assets are Itaú and Banco Real (Bradesco has the third place in both categories) (Table 4). Table 4: Retail and high income retail investors' assets under management RETAIL INVESTORS Top 10 managers
HIGH INCOME RETAIL INVESTORS
R$ million
US$ million
Top 10 managers
R$ million
US$ million
1
BANCO DO BRASIL
45,928
19,840
1
ITAU
26,888
11,614
2
CAIXA
38,489
16,626
2
BANCO REAL
12,431
5,370
3
BRADESCO
24,661
10,653
3
BRADESCO
9,737
4,206
4
ITAU
11,335
4,896
4
SANTANDER BRASIL
8,749
3,779
5
SANTANDER BRASIL
10,522
4,545
5
BANCO DO BRASIL
7,735
3,341
6
LEGG MASON
8,249
3,564
6
HSBC
7,658
3,308
7
HSBC
5,473
2,364
7
UNIBANCO
5,833
2,520
8
UNIBANCO
5,129
2,216
8
CAIXA
4,284
1,851
9
BANCO REAL
2,517
1,087
9
BANCO SAFRA
3,440
1,486
10
NOSSA CAIXA
2,437
1,053 10
BEM
2,276
983
99,229
42,863
Total (40 managers)
154,781.5
66,860
Total (40 managers)
Source: ANBID (data as of October 2008)
Status of sustainable investment Not counting feeder funds, there are currently 10 retail SRI mutual fund products available to retail investors in Brazil, with total combined assets of approximately R$730 million (US$315 million) (Table 5). Retail SRI mutual funds therefore represent less than 0.3 per cent of the total retail/high income retail investment market of US$109.7 billion. For comparison, in the UK there are around 80 SRI products for retail investors, accounting for nearly 4 per cent (£30 billion, or US$44 billion) of the UK’s £770 billion (US$1.12 trillion) retail investment funds market. In the United States, there are approximately 180 retail SRI mutual funds, which together represent about 1.8 per cent of the US$9.3 trillion mutual funds market. The growth of retail SRI mutual fund assets over time is illustrated in Figure 11. The first Brazilian retail SRI fund was Banco Real’s Ethical Fund, launched in 2001. It was some three years before a second manager, Itaú, entered this niche market. Further SRI products did not arrive in the market until the launch of the ISE in December 2005, which raised the awareness of retail investors and prompted several other asset managers to enter the market. At the peak of the market (December 2007), the combined net asset value of the SRI products available at that time was around R$1.6 billion, equivalent to US$691 million at the current exchange rate. The dramatic contraction over the last 12 months appears to be the result of the falling stock market rather than redemptions.
20
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Despite several new entrants to the market since the launch of the ISE, market share in the SRI niche continues to be dominated by the early pioneers, Banco Real and Itaú, who each control about 40 per cent of total SRI net assets (Figure 12). Table 5: Brazil's SRI mutual funds Fund name (CNJP No.)
Launch date
NAV
BANCO REAL
REAL FUNDO DE INVESTIMENTO EM AÇÕES ETHICAL II (04.736.006/0001‐82)
Nov 01
ITAU
ITAÚ EXCELÊNCIA SOCIAL AÇÕES ‐ FUNDO DE INVESTIMENTO (06.069.957/0001‐70)
Feb 04
BANCO DO BRASIL
BB TOP AÇÕES ÍNDICE DE SUSTENTABILIDADE EMPRESARIAL FUNDO DE INVESTIMENTO EM AÇÕES (05.775.731/0001‐22)
Dec 05
BRADESCO
BRADESCO FUNDO DE INVESTIMENTO EM AÇÕES ‐ ÍNDICE DE SUSTENTABILIDADE EMPRESARIAL (07.192.379/0001‐28)
Dec 05
HSBC
HSBC FUNDO DE INVESTIMENTO AÇÕES SUSTENTABILIDADE EMPRESARIAL – ISE (07.535.827/0001‐49)
Jan 06
SAFRA
SAFRA ISE ‐ FUNDO DE INVESTIMENTO EM AÇÕES (07.470.273/0001‐49)
Jan 06
UNIBANCO
UNIBANCO SUSTENTABILIDADE FUNDO DE INVESTIMENTO EM AÇÕES (08.151.339/0001‐09)
Mar 07
LEGG MASON WESTERN ASSET
LEGG MASON AÇÕES SUSTENTABILIDADE (1) EMPRESARIAL FI (29.413.945/0001‐17)
Jun 07
CAIXA
FUNDO DE INVESTIMENTO EM AÇÕES CAIXA SUSTENTABILIDADE EMPRESARIAL – ISE (08.070.838/0001‐63)
Nov 07
VOTORANTIM
FUNDO DE INVESTIMENTO VOTORANTIM SUSTENTABILIDADE EM AÇÕES (09.343.566/0001‐90)
Sep 08
TOTAL
R$ m
5 yr
3 yr
1 yr
276.46
119.15
100.47%
12.66%
‐37.60%
235.00
101.29
‐
11.56%
‐43.76%
23.49
10.13
‐
14.97%
‐39.61%
37.56
16.19
64.39
(1)
Cumulative Performance
US$ m
‐
27.75
22.47%
‐
‐37.22%
12.66%
‐44.38%
5.04
2.17
‐
‐
‐41.98%
3.45
1.49
‐
‐
‐35.16%
76.63
33.03
‐
‐
‐43.68%
5.44
2.35
‐
‐
‐41.70%
2.29
0.99
‐
‐
‐
729.76
314.53
(1)
(1)
Source: CVM Investors Portal (www.portaldoinvestidor.gov.br). All data as of December 30, 2008. (1) The Legg Mason Western Asset Management fund was launched in 1986 and did not have any explicit sustainability strategy until it was re‐launched in June 2007 as a ‘sustainability’ fund tracking the ISE index.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
21
Figure 11: Retail SRI fund assets under management in Brazil (source: CVM) 1,800 1,600 1,400
R$ million
1,200 1,000 800 600 LAUNCH OF ISE INDEX 400 200
Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
0
Figure 12: Market share in the SRI niche by NAV (source: CVM) 100%
90%
80%
70% VOTORANTIM CAIXA
60%
LEGG MASON UNIBANCO
50%
SAFRA
40%
BRADESCO
HSBC BANCO DO BRASIL ITAÚ
30%
BANCO REAL
20%
10%
0% 2002
2003
2004
2005
2006
2007
2008
22
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 13: Cumulative Performance ‐ 3 Years (source: CVM)
BRADESCO BANCO DO BRASIL SAFRA HSBC BANCO REAL ITAÚ ISE 0%
5%
10%
15%
20%
25%
Figure 14: Cumulative Performance ‐ 1 Year (source: CVM)
UNIBANCO BRADESCO BANCO REAL BANCO DO BRASIL ISE CAIXA SAFRA LEGG MASON ITAÚ HSBC -50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
The six products with three‐year track records all show out‐performance compared to the ISE over the same period (Figure 13). The best performing SRI fund over three years is managed by Bradesco, which beat the second‐best performing fund by 750 basis points and delivered a return almost double that of the lowest performing fund, managed by Itaú. All ten funds have recorded significant negative performance over the last 12 months, reflecting the falling IBovespa index and market conditions in Brazil as a whole and globally (Figure 14). Unibanco’s SRI fund shows the ‘least worst’ performance over this period, dropping 35 per cent in value compared to a fall of 40 per cent in the ISE and beating the bottom performer, HSBC, by 940 basis points.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
23
Banco Real’s Ethical Fund is based on its own ESG research and sustainability methodology, including an independent ethical advisor on the investment committee. The fund has always differed significantly from the IBovespa and ISE due to the absence (for sustainability/ethical reasons) of Petrobras from its portfolio. All of the other SRI funds on the market use the ISE index to guide their portfolio construction. Most of these funds are passively managed with respect to ESG issues: only HSBC has an active strategy with in‐house ESG research. Shareholder engagement on ESG issues has not been a common feature of Brazil’s SRI mutual funds to date. However, several of the fund managers joined forces in September 2008 to launch a shareholder engagement campaign on labour standards (specifically, modern‐day slavery in sectors such as charcoal production) under the auspices of the Latin American Sustainable Finance Forum (LASFF). In terms of their ESG strategies and sustainability ‘selling points’, the ten funds are relatively homogeneous, especially now that the absence of Petrobras from the ISE’s 2008/2009 portfolio eliminates one of the main historical differentiators between Banco Real’s Ethical Fund and the other nine products. The ten funds represent the first generation of SRI mutual fund products in Brazil. To date, there are no ‘second generation’ products. There has been little or no product innovation (either around alpha‐ seeking ESG strategies or high environmental/social development impact strategies) since Banco Real, Itaú and the ISE index provided the ‘blueprint’ for others to follow. Similarly, retail appetite for the existing SRI products appears to have begun to level out in the middle of 2007, although this obviously coincides with the decline in retail appetite for variable income products in general following the onset of the current global economic downturn. Figure 15 provides an additional insight into the Brazilian SRI mutual fund market and the importance of this niche to the asset managers competing for business in Brazil. As noted earlier in this chapter, investment in equities represents only 15 per cent or so of total assets under management at the current time. Figure 10 presented information on the 20 asset managers who dominate this segment in terms of having the largest equity portfolios. For each of these asset managers, Figure 15 shows assets invested in equities through SRI strategies as a proportion of assets invested in equities through all strategies. Although 10 of the top 20 equity managers offer SRI products, these products are a very small (and, arguably, commercially insignificant) part of the overall equity management business at most of these firms. Even at Itaú, which has a 40 per cent share of the SRI mutual fund market, SRI accounts for less than 2 per cent of total assets in equities. The exception is Banco Real, which pioneered Brazil’s sustainable investment movement in 2001 and today also has a 40 per cent market share. The analysis shown in Figure 15 implies that SRI has a much greater commercial and strategic significance for Banco Real and is perhaps a more integral part Banco Real’s asset management business.
24
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 15: SRI funds as % of AUM in equities (source: ANBID, CVM) BANCO DO BRASIL
0.05%
BNY MELLON ITAU
1.41%
BRADESCO
0.27%
UBS PACTUAL CAIXA
0.07%
CREDIT SUISSE HSBC
1.04%
OPPORTUNITY SANTANDER BRASIL UNIBANCO
0.06%
BNP PARIBAS GERACAO FUTURO CORRETORA BEM BANCO REAL
9.19%
CITIBANK ALFA VOTORANTIM ASSET
0.13%
BANCO SAFRA
0.31%
LEGG MASON
4.93% 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
SUSTAINABLE INVESTMENT IN BRAZIL 2009
25
6. PENSION FUNDS Market overview Pension fund assets have grown significantly in recent years (Figure 16) and currently represent about 18 per cent of GDP. As of September 2008, total pension fund assets amounted to R$428 billion (US$185 billion) with around 32 per cent (R$137 billion, US$59 billion) invested in equities and equity investment funds. Table 6 lists the 25 largest pension funds, which together represent over 75 per cent of the total pension corpus. The three largest funds are: PREVI, the US$55 billion pension fund of Banco do Brasil; Petrobras’ US$17 billion pension fund, PETROS; and FUNCEF, the Caixa Economica Federal pension fund, with assets of US$14 billion. Many pension funds – including PREVI, PETROS and FUNCEF – manage their equity portfolios in‐house rather than through external managers. PREVI, the country’s largest pension fund, is widely acknowledged in the region as a setter of best practice standards across a range of fiduciary, pensions administration, investment management and corporate governance issues. It exercises considerable leadership influence over other Brazilian pension funds and in Brazil’s economy as a whole. Figure 16: Brazilian pension fund assets, 2001‐2008 (source: ABRAPP) 500
R$ million
400 300 200 100 2001
2002
2003
2004
2005
2006
2007
2008
Status of sustainable investment 18 pension funds – including 9 of the top 25 ‐ are signatories to the PRI. Together they represent combined assets of US$110 billion as of September 2008, about 60 per cent of total pension fund assets. As noted above, on average, Brazil’s pension funds allocate about 32 per cent of assets to listed equities. The total value of PRI pension fund investment on the Brazilian stock market can therefore be estimated at around US$35 billion. Further information on the PRI Brazil Network is provided on pages 47‐48. PREVI was a founding signatory to the UNPRI and the President of PREVI, Mr Sergio Rosa, is one of 11 elected representatives on the international PRI Board. PREVI is at the centre of ongoing PRI implementation efforts in Brazil’s pension fund community. Figure 17 provides an overview of PREVI’s implementation of the UNPRI.
26
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 6: The 25 largest pension funds in Brazil Rank
Pension fund
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
PREVI PETROS FUNCEF FUNDACAO CESP VALIA ITAUBANCO SISTEL BANESPREV CENTRUS FORLUZ REAL GRANDEZA FAPES FUNDACAO COPEL POSTALIS HSBC FUNDO DE PENSAO TELOS VISAO PREV FUNDACAO ATLANTICO ELETROCEEE CX EMPR USIMINAS IBM ECONOMUS FACHESF CBS FUNBEP
Total (top 25 pension funds) Total (278 pension funds)
R$ million
US$ million
128,388 40,199 32,574 15,307 9,975 9,530 9,325 8,817 8,154 7,034 6,008 4,995 4,473 4,219 3,839 3,698 3,676 3,374 3,337 3,260 3,166 3,050 2,860 2,747 2,669
55,459 17,365 14,071 6,612 4,309 4,116 4,028 3,809 3,522 3,038 2,595 2,158 1,932 1,822 1,658 1,598 1,588 1,458 1,442 1,408 1,368 1,318 1,235 1,186 1,153
324,674 427,485
140,248 184,659
PRI
CDP 2008
Source: ABRAPP, September 2008
The ISE index is currently used by PREVI as a proxy indicator for companies’ environmental and social performance, although it should be noted that the permitted investment universe extends across the entire market. PREVI has indicated that it is keen to see the development of a more sophisticated tool than the ISE, which can only be used for screening purposes and does not enable comparison or ranking of companies and industry sectors. PREVI has recently been involved in a PRI‐wide engagement campaign focusing on modern‐day slavery in the Brazilian charcoal production sector which supplies pig iron to the iron and steel industry in Brazil and abroad. PREVI is also involved in engagement at other levels, including dialogue with boards and promoting GRI to Brazilian companies under the framework of the international Emerging Markets Disclosure Project (EMDP). PREVI and other leading pension funds are increasing their portfolio allocations to private equity and are participating in several new funds in the infrastructure, ‘greentech’ and climate change arenas: unlike listed equities, these private equity mandates are managed by external firms and PREVI is actively engaging with such general partners on the incorporation of ESG factors into the investment cycle. 29 pension funds – including 11 of the top 25 – were signatories to CDP Brazil in 2008. Their combined assets are about 60 per cent of the total pension fund corpus.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
27
It is important to note that PREVI and most other pension funds use in‐house managers for their investment in listed equities. There is therefore little or no know‐how transfer between the pension funds and asset managers such as Banco Real that have pioneered SRI in Brazil and developed in‐ house research capacity. PREVI itself does not appear to have any in‐house ESG analysts and does not out‐source ESG research. Although the commitment of PREVI and other leading PRI signatories in Brazil is strong, implementation by those pioneers is still at a relatively early stage. Other pension funds that have followed PREVI’s example in a more passive way are likely to still be at the internal awareness raising stage. ABRAPP, the Brazilian Association of Pension Funds, is actively engaged on sustainable investment issues on behalf of its members. As well as serving on the ISE Deliberative Board, it acts as one of the main Brazilian partners for the Carbon Disclosure Project (CDP) and works closely with the UNPRI.
28
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 17: Responsible investment in focus: PREVI Following its signing the UNPRI in 2006, PREVI is in the process of developing a socio‐environmental responsibility policy that, alongside its corporate governance policy, will apply to all investment activities. The main elements of PREVI’s responsible investment strategy are as follows: Voting PREVI votes shareholder resolutions in accordance with its corporate governance code. It views the code as a crucial instrument in guiding the relationships among agents operating in the companies in which it has interests. The code states the behaviours and practices that PREVI expects from invested companies. Transparency, disclosure and accountability A company’s corporate governance framework must promote the timely and accurate disclosure of financial and non‐financial information to allow the interested parties to obtain a fully integrated understanding of a company’s performance. Disclosure should be in accordance with the directives presented in the Global Reporting Initiative (GRI) and Brazilian CSR groups the Ethos Institute and IBASE. In addition to financial statements, PREVI encourages companies to submit annually: A statement indicating adopted corporate governance practices. The policies applied to the management of insurance agreements and the result of systematic risk management including, but not limited to, equity, environmental, technological and regulatory risks. Performance indicators for corporate social responsibility. Policy on and the global amount of compensation paid to directors and executive officers, including variable compensation and stock option plans. Shareholder rights. A company’s corporate governance framework must guarantee the rights and interests of all shareholders and be aligned with the rights of clients, employees, suppliers, the government and community in general. Corporate ethics and social responsibility PREVI invests in profitable and socially responsible companies that, in addition to fulfilling their legal obligations, promote actions to the benefit of the communities in which they operate, offer their workers adequate safety, health and development conditions and care for environmental preservation and social and economic development. PREVI expects the boards of invested companies to engage with stakeholders to establish corporate ethics and standards of behaviour that must be then approved and implemented.
Engagement PREVI will frequently assign a representative to attend the board meetings of companies in which it has significant holdings. This practice is driven by issues relating to performance, business strategy, returns and dividends, long‐term value, corporate governance and, most recently, the management of ESG issues. PREVI will meet with board representatives to raise any concerns it might have with a company and discuss possible risks and areas for improvement. The representative’s role is to transmit PREVI’s view to the board and accordingly seek improvements in the company’s behaviour. PREVI has a process in place to assess the performance of its board representatives, and currently employs 28 people to undertake this activity internally. Employees monitor and assess the performance of 177 representatives in 90 companies. All PREVI representatives meet on an annual basis, and a training process has been put in place to better align them with ESG issues. Divestment In instances where PREVI is concerned about the impact of a company’s activities on society, it may take the decision to disassociate itself from that company, adopting a negative screening approach. External investment manager requirements PREVI is in the process of selecting five new external private equity investment managers. The consideration of ESG issues is a mandatory part of the RFP. PREVI will monitor its external investment managers on the basis of their implementation of a responsible investment strategy and it intends to participate in the investment decision‐ making process by sitting on its fund managers’ investment committees. Socio‐environmental responsibility policy PREVI is currently developing a socio‐environmental responsibility policy that will apply to all its activities. The Pension Fund intends to implement the policy in 2007. The policy will include the consideration of environmental and social issues in investment decision‐making, including engagement and corporate governance activities. PREVI’s goal is for ESG issues to be fully integrated into its stock selection process. In addition, the Pension Fund is developing methodologies and tools to measure the social and environment impact of its investments. Furthermore, PREVI will review its investment policy in an attempt to further align it with each of the Principles of the UNPRI.
www.previ.com.br
Reproduced and adapted from the 2007 report Responsible Investment in Focus by UNEPFI & UKSIF
SUSTAINABLE INVESTMENT IN BRAZIL 2009
29
7. FOREIGN INVESTMENT
Market overview Foreign portfolio investment in Brazil has increased approximately ten‐fold in the last decade. The country’s total stock of foreign portfolio investments as of the end of August 2008 stood at about US$232 billion, with around two‐thirds of this corpus (about US$120 billion) invested in publicly quoted companies (Table 7). A significant number of Brazilian companies issue American Depository Receipts (ADRs) which are traded on the NYSE or other US markets. The 25 largest such ADRs are listed in Table 8 and have a total value of US$110 billion: the leading issuers of ADRs include Petrobras, Vale, Unibanco, Bradesco and Itaú. Ten companies in this list are in the current ISE portfolio. Table 9 identifies some of the main US and non‐US investors that hold the ADRs of Brazilian companies. Investors include JP Morgan, Fidelity, BlackRock, Templeton and AllianceBernstein (the latter being one of CalPERS’ three emerging market managers).
Status of sustainable investment Possibly the most significant development in recent years has been the April 2006 launch of the ABN AMRO Asset Management Brazil Equity Fund, a Luxembourg‐incorporated vehicle for European investment in Brazilian stocks. The investment strategy included an extensive set of sustainability standards (e.g. environmental, social, ethical, corporate governance) applied to individual companies in order to assess their socially responsible characteristics and select or exclude them or their relevant sector. By May 2008, the Brazil Equity Fund had assets of nearly US$400 million. However, following the break‐up of the ABN AMRO Group and the acquisition of its investment management business by Fortis, the Brazil Equity Fund was absorbed into the Fortis L Equity Brazil Fund in November 2008. The prospectus for the Fortis fund suggests that sustainability criteria no longer form a part of the investment strategy (although it should be acknowledged that Fortis is a signatory to the UNPRI). There are insufficient data to estimate what proportion of foreign portfolio assets in Brazil are currently managed under ‘sustainable’ or ‘socially responsible’ mandates. In the absence of hard data, it may be legitimate to make a conservative educated guess that investors who take environmental, social and/or governance (ESG) issues into account in a formal way represent less than 1 per cent of the US$120 billion corpus, i.e. about US$1.2 billion. Anecdotal evidence indicates that most foreign portfolio investors are focusing on the governance element of ESG by, for example, investing only in stocks listed on the Novo Mercado and/or by shareholder engagement as illustrated by F&C’s involvement in a recent case involving the rights of owners of preference shares in relation to VCP’s acquisition of Aracruz. Nevertheless, some foreign investors have recently begun to join forces on environmental and social issues in Brazil under the auspices of the UNPRI. A recent example is the recent engagement led by the UK’s Hermes on labour standards in the iron and steel industry (see box, page 32). With regard to ADRs, some of the fund managers listed in Table 19 are signatories to the UNPRI. However, in the absence of hard facts on the actual policies of specific funds, an educated guess that ESG strategies account for less than 1 per cent of total portfolio suggests that the stock of sustainable investment in Brazilian ADRs might be in the order of US$1 billion.
30
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 7: Foreign portfolio investment in Brazil, 1999‐2008 (source: CVM) Period
Stock of Assets (US$ m)
% in Stocks
% in Fixed Income
Net Flows (US$ m)
1999
23,110
99.0
‐
1,100
2000
18,528
91.9
7.0
‐1,835
2001
15,532
88.5
9.3
‐728
2002
10,373
74.7
21.5
‐336
2003
20,120
86.8
11.6
2,421
2004
29,066
90.1
8.3
270
2005
53,439
91.0
6.8
707
2006
101,601
81.7
16.9
8,585
2007
214,111
77.4
19.0
33,878
2008 (Jan‐Aug)
232,280
67.3
29.8
12,205
Table 8: Top 25 Brazilian ADRs as of Dec 31, 2008 (source: adr.com) ADR
Ownership value (US$ million)
PETROBRAS ‐ PETROLEO BRASILEIRO SA [PBR] PETROBRAS ‐ PETROLEO BRASILEIRO SA [PBR A]
25,057.08 21,767.39
CIA VALE DO RIO DOCE [RIO PR]
13,917.62
CIA VALE DO RIO DOCE [RIO]
10,938.46
ISE
UNIBANCO ‐ UNIAO DE BANCOS BRASILEIROS SA [UBB]
6,985.41
BANCO BRADESCO SA [BBD]
5,154.56
BANCO ITAU HOLDING FINANCEIRA SA [ITU]
4,473.93
EMPRESA BRASILEIRA DE AERONAUTICA SA [ERJ]
2,846.40
VIVO PARTICIPACOES SA [VIV]
2,362.24
TELE NORTE LESTE PARTICIPACOES SA [TNE]
2,248.32
CIA DE BEBIDAS DAS AMERICAS [ABV]
2,244.69
CIA SIDERURGICA NACIONAL SA [SID]
1,864.28
GERDAU SA [GGB]
1,630.17
CIA ENERGETICA DE MINAS GERAIS [CIG]
1,458.40
ARACRUZ CELULOSE SA [ARA]
1,373.37
TAM SA [TAM]
938.73
BRASIL TELECOM PARTICIPACOES SA [BRP]
874.06
TIM PARTICIPACOES SA [TSU]
737.31
GAFISA S.A. [GFA]
736.10
CIA DE SANEAMENTO BASICO DO ESTADO DE SAO PAULO [SBS]
709.92
VOTORANTIM CELULOSE E PAPEL SA [VCP]
601.46
CIA BRASILEIRA DE DISTRIBUICAO GRUPO PAO DE ACUCAR [CBD]
478.62
SADIA SA [SDA]
304.71
NET SERVICOS DE COMUNICACAO SA [NETC]
293.55
ULTRAPAR PARTICIPACOES SA [UGP] TOTAL (top 25)
255.09
110,251.87
SUSTAINABLE INVESTMENT IN BRAZIL 2009
31
Table 9: Key investors in Brazilian ADRs (source: adr.com) TOP 10 HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
Filing date 31‐Oct‐08
PRI
Fidelity Management & Research
US
6,253.92
1.21
Barclays Global Investors, N.A.
US
5,079.43
0.86
31‐Oct‐08
Capital World Investors
US
4,097.64
1.16
30‐Sep‐08
BlackRock Investment Management (UK) Ltd.
UK
3,544.87
4.31
30‐Sep‐08
Baillie Gifford & Co.
UK
3,497.31
12.05
30‐Sep‐08
AllianceBernstein L.P.
US
3,104.38
1.33
31‐Mar‐08
T. Rowe Price Associates, Inc.
US
2,968.97
1.33
30‐Sep‐08
Wellington Management Company, LLP
US
2,897.78
1.14
31‐Oct‐08
J.P. Morgan Investment Management Inc. (New York)
US
2,879.29
2.74
31‐Oct‐08
Templeton Asset Management (Singapore) Ltd.
Singapore
2,397.09
10.54
30‐Sep‐08
TOTAL
36,720.68
TOP 10 US MUTUAL FUND HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
BGF Latin American Fund
US
2,809.84
iShares MSCI Emerging Markets Index Fund
US
2,338.97
American Funds EuroPacific Growth Fund
US
Fidelity Latin America Fund
US
American Funds Growth Fund of America
US
CGM Focus Fund
US
Fidelity Low‐Priced Stock Fund
Filing date
PRI
45.26
29‐Feb‐08
13.86
31‐Oct‐08
1,860.26
2.45
30‐Sep‐08
1,790.49
48.61
30‐Sep‐08
1,379.52
1.09
30‐Sep‐08
1,224.37
16.89
30‐Sep‐08
US
1,133.93
4.39
31‐Jul‐08
American Funds New Perspective Fund
US
1,025.25
2.73
30‐Sep‐08
Dodge & Cox International Stock Fund
US
772.11
2.09
30‐Sep‐08
iShares S&P Latin America 40 Index Fund
US
758.07
61.81
31‐Oct‐08
TOTAL
15,092.81
TOP 10 NON‐US MUTUAL FUND HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
BGF World Mining Fund
UK
1,381.70
JPMorgan Funds ‐ Emerging Markets Equity Fund
UK
1,200.75
Templeton Emerging Markets Investment Trust
Singapore
1,125.47
26.5
30‐Apr‐08
T. Rowe Price Latin America Fund
UK
906.40
40.64
30‐Sep‐08
Templeton BRIC Fund
Singapore
672.30
25.73
30‐Jun‐08
DWS Invest Bric Plus
Germany
627.08
14.81
30‐Jun‐08
Schroder Intl Selection Fd Bric
UK
584.93
23.63
30‐Jun‐08
Templeton Latin America Fund
Singapore
577.25
23.69
30‐Jun‐08
Harbor International Fund
Bermuda
568.88
2.54
30‐Sep‐08
Vanguard International Growth Fund
UK
509.04
3.17
31‐Aug‐08
TOTAL
8,153.80
Filing date
PRI
8.52
29‐Feb‐08
18.36
30‐Jun‐08
32
SUSTAINABLE INVESTMENT IN BRAZIL 2009
JOINT INVESTOR ENGAGEMENT ON SLAVE LABOUR IN THE BRAZILIAN IRON & STEEL INDUSTRY In late 2006, allegations surfaced about slave labour practices in the iron and steel industry in Brazil. The operations involved were potentially part of the supply chains of the largest manufacturers and users of iron and steel in the world, companies in which, jointly, the signatories had sizeable holdings. The allegations were that these large global users of steel were inadvertently supporting the use of forced labour at charcoal plants in Brazil. Charcoal is an important raw material used in the manufacture of pig iron. PRI signatory Hermes used the PRI Clearinghouse to bring together a group of fellow signatories (including PREVI and other Brazilian pension funds) for a collaborative engagement. The investor group identified a list of target firms, and then jointly wrote to those companies setting out their concerns, focusing on the negative impact on reputation due to any association with inappropriate labour practices. Follow up telephone calls and meetings were also conducted with the companies. There was a wide range of responses. A number of companies had already put into place an audit system to ensure they were not sourcing steel from these operations. However, there were also companies that had not considered the impact of such allegations on their business and were surprised by shareholder interest in this area. These firms undertook to examine the investors’ concerns, and the group had further conversations with these companies to ensure they had addressed the issue. Source: UNPRI
SUSTAINABLE INVESTMENT IN BRAZIL 2009
33
8. OTHER MARKET PARTICIPANTS Brazilian Development Bank Overview The Brazilian Development Bank (BNDES) plays a key role in the country’s sustainable development, including support for private sector development through its equity investment arm (BNDESPAR), infrastructure and SME financing, and management of the recently announced US$21 billion Brazil Amazon Fund. BNDESPAR owns sizeable equity stakes in many of Brazil’s leading publicly quoted companies in strategic industries such as oil & gas, railroads, mining, energy, iron & steel, pulp & paper and agribusiness. Table 10 lists these holdings as of June 30, 2008 based on BNDESPAR’s published financial statements for the first six‐month reporting period of 2008. Using these June 30, 2008 shareholding data and the average quotation by share for the January 23, 2009 trading session of the São Paolo stock exchange, the market value of BNDESPAR’s equity interest in listed shares can be estimated at R$37.4 billion (US$16.2 billion). For comparison, this is 50 times the combined net asset value BNDES SUPPORTS SETUP OF of Brazil’s SRI mutual funds and is in the same order of THE LARGEST EUCALYPTUS magnitude as PREVI’s listed equity portfolio, illustrating the PULP COMPANY IN THE WORLD relative significance of the development bank’s role as a January 20, 2009 (BNDES press release) market participant and its potential influence in corporate boardrooms. BNDES entered an Investment Agreement Status of sustainable investment BNDES has not adopted the Equator Principles (as the country’s main commercial banks have done), although projects financed by BNDES are subject to environmental and social policies and procedures including environmental impact assessment and verification of compliance with national legislation. BNDES is a long‐standing member of UNEPFI and an active participant in UNEPFI’s Latin American Task Force. Exactly how BNDES’s environmental and social policies and procedures are applied to the portfolio illustrated in Table 10 is unclear. For example, there is little or no readily available information on how BNDESPAR integrates ESG considerations into active share ownership and voting. BNDES is not a member of the ISE Advisory Board and, other than UNEPFI, does not appear to be directly involved with key sustainable investment initiatives in Brazil such as the UNPRI, CDP and LASFF. A number of the companies listed in Table 10 are constituents of the ISE. Together they represent 25 per cent of the total estimated market value of the BNDESPAR listed equity portfolio.
with Votorantim Celulose e Papel S.A. (VCP) and its controlling companies, which expect the support of BNDESPAR to the corporate reorganization in the acquisition of Aracruz Celulose S.A. by VCP, for the face value of R$ 5.4 billion. This operation will allow the incorporation of the largest short fiber pulp company in the world. BNDESPAR may invest nearly R$ 2.4 billion in the new company, of which R$ 1.8 billion represent preferred stock issued by VCP and R$ 580 million in debentures issued by Votorantim Industrial S.A. (VID – VCP’s controlling company), exchangeable into common stock issued by VCP. BNDESPAR’s interest in the new company may reach one third of the total capital stock. According to a Material Event disclosed by VCP, VCP’s acquisition of Aracruz shareholding control will depend on Arainvest, one of Aracruz’s shareholders, exercising its tag along rights. The new company will be a global leader in short fiber pulp, with production capacity of 5.8 million tons and 680 thousand hectares of planted area. It will employ 15 thousand people and will deliver estimated annual revenues of R$ 7 billion.
34
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 10: BNDESPAR equity interests in publicly listed companies
Company
ISE
BNDESPAR equity interest as of 1 June 30, 2008 (%)
Estimated market value based on average share price 2 for January 23, 2009 trading session R$ million
US$ million
ALL AMER LAT
11.4
655.50
283.15
ARACRUZ
5.51
711.58
307.38
2.52
997.21
430.76
BEMATECH
8.21
25.23
10.90
BRASIL TELECOM PART
3.51
250.00
107.99
BANCO DO BRASIL
BRASKEM
CEG
5.42
164.82
71.20
34.56
484.52
209.29
CEMIG
1.7
263.46
113.81
CESP
5.71
243.06
104.99
23.96
1,401.93
605.58
COPEL COTEMINAS
10.35
48.52
20.96
CPFL ENERGIA
5.72
825.63
356.64
ELETROBRAS
11.81
3,469.68
1,498.78
EMBRAER
5.05
365.15
157.73
GERDAU
3.38
638.39
275.76
INDUSTRIAS ROMI
6.78
37.52
16.21
13
852.23
368.13
20.25
613.34
264.94
33.69
1,535.65
663.35
MARFRIG
2.94
41.40
17.88
METALFRIO
7.59
20.68
8.93
PARANAPANEMA
7.06
42.69
18.44
PETROBRAS
7.62
16,089.01
6,949.90
JBS KLABIN LIGHT S/A
REDE ENERGIA
21.07
385.42
166.49
SID NACIONAL
3.77
1,046.39
452.00
SPRINGS GLOBAL
4.28
12.54
5.42 29.96
SUZANO PAPEL
1.89
69.37
TELEMAR
1.63
182.99
79.05
TRACTEBEL
2.8
335.18
144.79
USIMINAS VALE R DOCE VCP
TOTAL ESTIMATED MARKET VALUE
1.73
251.14
108.48
4.1
5,231.05
2,259.63
3.1
89.03 37,380.33
38.46 16,147.01
Sources: 1 BNDESPAR Financial Statements for the Six Month Periods Ended June 30, 2008 and 2007 and Independent Auditors’ Report 2 BM&F Bovespa trading data for January 23, 2009
SUSTAINABLE INVESTMENT IN BRAZIL 2009
35
High Net Worth Individuals Overview High Net Worth Individuals (HNWIs) are defined as those holding at least US$1 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences. A further distinction is often made at the upper end of this market, where Ultra‐High Net Worth Individuals (Ultra‐HNWIs) are those holding at least US$30 million in financial assets. The World Wealth Report 2008 by Cap Gemini/Merrill Lynch highlights the following headlines: Main wealth management 10.1 million individuals worldwide held at least companies operating in the US$1 million in financial assets, an increase of 6.0 Brazilian market per cent over 2006. Global HNWI wealth totalled US$40.7 trillion, a Amicorp do Brasil 9.4 per cent gain from 2006, with average HNWI Banco Alfa de Investimento wealth surpassing US$4 million for the first time. Banco Banif Primus The Ultra‐HNWI wealth band experienced the Banco BNP Paribas Brasil strongest growth, gaining 8.8 per cent in Banco Bradesco population size and 14.5 per cent in accumulated Banco Citibank wealth. Banco de Investimentos Credit Suisse Banco do Brasil Emerging markets, especially those in the Middle Banco do Estado do Rio Grande do Sol East and Latin America, scored the greatest Banco Fator regional HNWI population gains. Banco Itaú Europa International India, China and Brazil had the highest HNWI Banco Itaú population growth at the country level in 2007. Banco J Safra HNWI financial wealth is projected to reach Banco J P Morgan US$59.1 trillion by 2012, advancing at an annual Banco Safra growth rate of 7.7 per cent. Banco Santander Banespa Banco UBS Pactual BBM Gestao de Recursos The market in 2008 and outlook for the next 1‐2 years Ciano Investimentos Gestao de may not be as robust as suggested by the above Recursos observations and forecasts, given the global financial Credit Agricole Brasil crisis, market uncertainty and investors’ flight to low‐risk Deutsche Bank ‐ Banco Alemao portfolios. Fabiano Calil ‐ Gestao Financeira Pessaol Gavea Gestao de Investimentos Amongst these global headlines are some interesting GWI Consultoria Participacoes e data on Latin America and Brazil. The HNWI population Servicos in Brazil grew an impressive 19.1 per cent in 2007, up Hedging‐Griffo Corretora de Valores HSBC Bank Brasil – Banco Multiplo significantly from 10.1 per cent growth in 2006. There Itaú Private Bank are now some 143,000 HNWIs in Brazil. Forecasts in the Maua Investimentos World Wealth Report 2008 were made before the onset Merrill Lynch Representacoes of the current global financial and economic downturn, Opus Gestao de Recursos although it may still be useful to note that the HNWI Rio Bravo Investimentos forecast for Latin America by the year 2012 was US$10.3 Safdie Dristribuidora de Titulos e trillion, compared to US$6.2 trillion in 2007. Valores Votorantim Asset Management Information from Private Banking World Brasil 2009 suggests that the HNWI market in Brazil is currently worth around US$1.4 trillion. Between them, the 40 asset management firms listed in Table 3 manage assets of R$152 billion (US$66 billion on behalf of private (HNWI) clients. The ten leading firms (by size of assets) are shown in Table 11 and represent over 80 per cent of this US$66 billion corpus.
36
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 11: Private (wealth management) assets under management Top 10 managers
R$ million
US$ million
1
ITAU
33,962
14,670
2
UNIBANCO
17,387
7,510
3
CREDIT SUISSE HEDGING GRIFFO
12,552
5,422
4
UBS PACTUAL
12,430
5,369
5
BNY MELLON
11,712
5,059
6
SANTANDER BRASIL
9,458
4,086
7
BRADESCO
8,412
3,634
8
OPPORTUNITY
6,761
2,920
9
BANCO DO BRASIL
6,150
2,657
VOTORANTIM ASSET MANAGEMENT
5,178
2,237
152,058
65,684
10
Total (40 managers) Source: ANBID (data as of October 2008)
Status of sustainable investment There are no readily available data on the sustainability segment of the Brazilian wealth management industry. The Merrill Lynch/Cap Gemini survey identified that, globally, HNWIs and Ultra‐HNWIs have a large and growing interest in “green investing”. Roughly 12 per cent of HNWIs and 14 per cent of Ultra‐ HNWIs around the world allocate part of their investment portfolio to green technologies and alternative energy sources (Figure 18). Regionally, the most environmentally attuned HNWI and Ultra‐HNWI populations, as measured by the percentage of affluent investors allocating to green investing, were found in the Middle East and Europe—with participation rates ranging from around 17 per cent to 21 per cent in 2007, all exceeding global averages. Latin American participation rates were also relatively high, at 15‐17 per cent (the report does not provide more detailed data specifically on Brazil). By comparison, only 5 per cent of HNWIs and 7 per cent of Ultra‐HNWIs in North America allocated part of their portfolio holdings to green investing. Further insights can be gleaned indirectly from Eurosif’s 2008 report, High Net Worth Individuals and Sustainable Investment. Eurosif estimates that sustainable investments represent approximately 8 per cent of European HNWIs’ portfolios as of December 2007. Overall European HNWI financial wealth in 2007 was estimated at €6.7 trillion (US$8.6 trillion at current exchange rates), which translates into an EU HNWI sustainable investment market of €540 billion (US$690 billion). For context into the significance of this size, the HNWI sustainable investment segment corresponds to between 20 to 30 per cent of the European institutional SRI market. Eurosif predicts that by 2012 the share of sustainable investments in HNWIs’ portfolios will have increased to 12 per cent. Based on the above, it may be reasonable to guess that the potential stock of sustainable investment (in a variety of asset classes) by Brazilian HNWIs is about 5 per cent of the country’s total HNWI market i.e. in the order of US$70 billion.
SUSTAINABLE INVESTMENT IN BRAZIL 2009 Figure 18: HNWI investment in green technologies and alternative energy
Percentage of HNWIs who allocate part of portfolio to green technologies and alternative energy sources Percentage of Ultra-HNWIs who allocate part of portfolio to green technologies and alternative energy sources
20% 17% 14%
13%
12%
14%
20%
21%
17%
15%
7% 5%
Global
North America
Asia-Pacific
Latin America
Source: Capgemini/Merrill Lynch Financial Advisor Survey, April 2008
Europe
Middle East
37
38
SUSTAINABLE INVESTMENT IN BRAZIL 2009
9. ENABLING ENVIRONMENT
Regulatory and policy frameworks Environmental legislation and enforcement Brazil has an advanced framework of environmental legislation and inspection at both the federal and state levels (see box). However, enforcement standards vary from state to state and between federal and state agencies for reasons ranging from lack of resources to the influence of corruption. In addition to federal and state environmental protection agencies, federal and state public prosecutors are able to take independent action to deal with environmental problems, and do so frequently and effectively. ENVIRONMENTAL LAW IN BRAZIL Under the Federal Constitution, the federal government and the states have the power to legislate concurrently on (i) the protection of the natural environment, which includes forests, hunting, fishing, wildlife, conservation of nature, protection of the soil and natural resources and pollution control; (ii) the protection of the cultural environment, involving protection of historical, artistic, touristic and landscape heritage; and (iii) liabilities for damages to the environment. Those public bodies and institutions responsible for protecting and improving the quality of the environment make up the National Environmental System (SISNAMA). Some of the most important components of SISNAMA are: (i) the National Council for the Environment (CONAMA), a decision‐making and consultative body empowered to establish environmental rules and standards; (ii) the Brazilian Institute for the Environment and Natural Renewable Resources (IBAMA), whose purpose is to execute governmental policy and directives aimed at the environment, to impose the penalties set forth by law on those that violate federal environmental legislation and to license activities that could cause environmental damages on a regional or national level or in areas under federal domain; (iii) state environmental agencies; and (iv) local environmental inspection and control agencies. Although they are not part of SISNAMA, the Federal and State Ministries of Public Prosecution have institutional powers under the Federal Constitution to initiate civil inquiries and to bring public civil actions with respect to environmental damages, as well as penal actions for crimes against the environment. Public prosecutors (Ministério Público) file enforcement lawsuits independently of environmental agencies based on civil and criminal investigations of environmental harms. In addition to enforcing environmental laws, public prosecutors have become a primary actor in other areas of public interest law such as disability rights, consumer protection, and anti‐corruption. Under the Federal Constitution, environmental liability may occur in civil, administrative and criminal levels. Civil liability for environmental damages is strict (i.e. it occurs irrespective of fault or intent by those that have caused the damage) and the law also provides for joint and several liability. Penalties for administrative violations can include fines of up to R$50 million (approximately US$20 million). Criminal liability extends to both individuals and legal entities with penalties including fines, imprisonment and facility closure. Environmental licensing requirements and procedures include Environmental Impact Assessment (EIA) for major developments and conditions and restrictions for the installation and operation of licensed activities and facilities.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
39
Pension fund transparency Internationally, a number of countries have taken public policy measures to promote sustainable investment thorough government legislation on pension fund transparency. For example, a July 2000 amendment to the UK Pensions Act now requires UK occupational pension funds to disclose the extent to which they take account of social, environmental or ethical issues in their investment decisions. Many other countries in Europe and the Asia‐Pacific region have followed the example set by the UK. Brazil has not taken steps in this direction. However, it should be noted that 60 per cent of the country’s pension fund assets are already managed by UNPRI signatories. Non‐financial disclosure requirements At the international level, policy‐makers, regulators, institutional investors and other key stakeholders in many countries are placing an increasing emphasis on non‐financial information in management reports (including, where relevant, environmental issues such as climate change). In December 2008, for example, the International Corporate Governance Network (ICGN) ratified the ICGN Statement and Guidance on Non‐financial Business Reporting, which encourages companies to disclosure information on potentially material issues such as climate change; matters affecting employees, customers, suppliers and host communities; and ethics. In some cases, the approach has included legislative measures in addition to voluntary momentum. Denmark, for example, has recently amended its Financial Statements Act to require an estimated 1,100 of the largest Danish companies, both listed and state owned, to include information on their corporate responsibility policies and practices in their annual financial reports. Sweden, China, Malaysia and South Africa are among other countries that have introduced similar regulations and directives, often referencing the GRI guidelines. Brazilian companies have a relatively long tradition of non‐financial disclosure. The current emphasis in Brazil is on voluntary GRI reporting (see overleaf). Mandatory sustainability reporting is not on the political or legislative agenda. Brazil does not currently have any legislation specifically concerned with non‐financial reporting and assurance related to potentially material environmental and social issues. Arguably, a sound framework for sustainable investment includes disclosure and discussion of potentially material sustainability issues in IPO prospectuses. There is no published research on the extent and quality of this kind of disclosure in recent Brazilian IPOs. However, it is probable that, in common with the rest of the world, this is an important gap in Brazil. Around 35 of Brazil’s largest companies – including Vale R Doce and Petrobras – are listed in New York with the US Securities & Exchange Commission (SEC) and are subject to the SEC’s transparency and disclosure rules. Items 101 and 103 of SEC Regulation S‐K require disclosure of relevant environmental issues. Again, there is no published research on the extent and quality of this kind of disclosure by Brazilian companies. However, selective sampling of Form 6‐K filings suggests that Brazilian companies are proactive in filing positive environmental news (such as winning awards or being included in sustainability indices); but rather less forthcoming with information on issues such as environment‐related law suits, major pollution incidents, plant closure or project delays due to community protests, and major capital expenditure to meet environmental standards for production facilities and end‐products. Developments in the US are increasing pressure for climate change disclosure under SEC regulations. Actions over the last several years by the New York State Attorney General and by coalitions of institutional investors, environmental groups and state government agencies with regard to climate change disclosure have received considerable media coverage. Other recent developments in the US include the issuance of draft standards for climate change disclosure by ASTM International and proposed revisions by the Financial Accounting Standards Board (FASB) to its FAS 5, Accounting for Contingencies.
40
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Changes in the interpretation or letter of SEC regulations and/or financial accounting standards in the US could therefore have important implications for Brazilian firms listed in New York; in turn this could also have implications for sustainability disclosure in general in Brazil. Listing rules and guidelines It is important to note that, like most of the world’s stock exchanges, BM&F Bovespa is not a regulator. The regulator in Brazil is CVM, together with other government agencies and departments dealing with matters such as company law. Nevertheless, exchanges can and do play an important role in improving company standards and increasing access to information, either by issuing guidelines to companies and/or by setting listing rules that go beyond the regulatory baseline. A powerful example of the latter in Brazil is provided by the 2001 introduction of the Novo Mercado, which has been very successful in raising corporate governance standards, market profile and investor confidence. Internationally, a small but growing number of exchanges are taking measures to improve non‐ financial disclosure, including disclosure of environment‐ and social‐related business issues such as climate change and community relations. In rare cases – such as the Johannesburg Stock Exchange (JSE) – this is being done though listing rules. The majority of exchanges that are leading such improvements are doing so via corporate governance guidelines, which are strongly promoted and monitored, often on a “comply or explain” basis as in the case of the Australian Securities Exchange (ASX). BM&F Bovespa’s listing rules do not expressly mention non‐financial reporting or sustainability issues, and the exchange has not currently issued formal guidance on these matters.
Voluntary non‐financial reporting Sustainability reporting A growing number of Brazilian companies are producing annual sustainability reports, many using the Global Reporting Initiative (GRI) guidelines (Figure 19). Publicly listed companies account for over half the sustainability reports published in Brazil in 2007 (the latest year for which a reasonably complete dataset is available). This increase in sustainability reporting in recent years coincides with the 2005 launch of the Bovespa ISE Index; adoption of the Equator Principles by Brazil’s banks and the Principles for Responsible Investment (PRI) by Brazil’s pension funds; the extension of the Carbon Disclosure Project (CDP) to Brazil; and the on‐going efforts of numerous non‐governmental organisations and other advocates including GRI, the Ethos Institute, FGV‐CES and several consulting firms. Overall, the supply of awareness raising and capacity building initiatives for sustainability reporting, along with the local availability of consulting expertise on this topic, appears to at least match the current level of demand from companies. About 60 per cent of the 59 companies in the current IBovespa Index publish sustainability reports (Table 12). Almost all of these reports are available in English as well as Portuguese. Most companies produce stand‐alone sustainability reports, although a sizeable minority are integrating this information into their annual reports. 18 companies make use of the GRI guidelines (including the latest G3 guidelines). Seven IBovespa companies publish sustainability reports that are subject to some form of external assurance. Outside of the IBovespa index, few listed companies currently publish sustainability reports.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
41
Table 12: Sustainability reporting by IBOVESPA companies Company
Industry
ALL AMER LAT (N2)
Railroads
AMBEV ARACRUZ (N1) B2W VAREJO (NM)
Retail
BMF BOVESPA (NM)
Diversified financial services
BRADESCO (N1)
Financial intermediaries
BRADESPAR (N1)
Holdings ‐ diversified
BRASIL (NM)
Financial intermediaries
BRASIL T PAR (N1)
Telecommunications
BRASIL TELEC (N1)
Telecommunications
BRASKEM (N1)
Petrochemicals
CCR RODOVIAS (NM)
Toll roads & highways
CELESC (N2)
Electric utilities
CEMIG (N1)
Electric utilities
CESP (N1)
Electric utilities
COMGAS COPEL (N1) COSAN (NM)
Sugar ‐ alcohol
CPFL ENERGIA (NM)
Electric utilities
DURATEX (N1)
Residential building construction Wood
ELETROBRAS (N1)
Electric utilities
ELETROPAULO (N2)
Electric utilities
EMBRAER (NM)
Aerospace
GAFISA (NM)
Residential construction
GERDAU (N1)
Steel
GERDAU MET (N1)
Steel
GOL (N2)
Airlines
ITAUBANCO (N1)
Financial intermediaries
ITAUSA (N1)
Financial intermediaries
JBS (NM)
Meat, poultry & others
KLABIN S/A (N1)
Pulp & paper
LIGHT S/A (NM)
Electric utilities
LOJAS AMERIC
Retail
LOJAS RENNER (NM)
Retail
NATURA (NM)
Cosmetics
NET (N2)
Cable TV
NOSSA CAIXA (NM)
Financial intermediaries
P.ACUCAR‐CBD (N1)
Retail
PERDIGAO S/A (NM)
Meat, poultry & others
PETROBRAS
Oil, gas & biofuels
REDECARD (NM)
Diversified financial services
ROSSI RESID (NM)
Residential construction
SABESP (NM)
Water utilities
SADIA S/A (N1)
Meat, poultry & others
SID NACIONAL SOUZA CRUZ TAM S/A (N2)
Airlines
TELEMAR
Telecommunications
TELEMAR N L
Telecommunications
TELESP
Telecommunications
TIM PART S/A
Telecommunications
TRAN PAULIST (N1)
Electric utilities
ULTRAPAR (N1)
Holdings ‐ diversified
UNIBANCO (N1)
Financial intermediaries
USIMINAS (N1)
Steel
V C P (N1)
Pulp & paper
VALE R DOCE (N1)
Mining
VIVO
Telecommunications
CYRELA REALT (NM)
ISE
Report
English
GRI
Beer & soft drinks
Pulp & paper
Gas utilities
Electric utilities
Verification
(see GERDAU)
(see ITAUBANCO)
Steel
Tobacco
42
SUSTAINABLE INVESTMENT IN BRAZIL 2009
The consulting firm SustainAbility has recently published independent research on sustainability 6 reporting by Brazilian corporations . This included a ranking of ten leading reports using a standardised scoring methodology, the results of which are reproduced in Table 13. They identified several areas for improvement. In particular, the report concluded that Brazilian companies need to deepen the strategic value of reporting and demonstrate how sustainability is being embedded throughout the business. Weaknesses in reporting include a lack of information on: Governance: Board level leadership and governance structures to deliver on sustainability aspirations Materiality: Methods to identify and prioritize material issues being used to help focus reports on priority topics Targets: Specific, measurable and comparable targets (rather than qualitative statements of intent). ©
Figure 19: Corporate sustainability reports in Brazil (source: CorporateRegister.com)
Number of companies reporting
100 90 80 70 60 50 40 30 20 10 0 1997
1998
1999
2000
2001
LISTED
2002
2003
2004
2005
NON-LISTED
2006
2007
Table 13: Top 10 sustainability reports (SustainAbility/FBDS survey) Rank
Company
Industry
Year
1
Natura
Personal care products
2007
2
Suzano Petroquimica
Chemicals
2006
3
Ampla
Electric utilities
2007
Coelce
Electric utilities
2007
5
Banco Real
Financial services
2007
6
Energias do Brasil
Electric utilities
2007
7
Sabesp
Water utilities
2007
8
Bunge
Food processing
2007
Celulose Irani
Forestry & paper
2007
10
Banco Itaú
Financial services
2007
Source: The Road to Credibility: a survey of sustainability reporting in Brazil SustainAbility, FBDS & UNEPFI (2008)
6
The Road to Credibility: a survey of sustainability reporting in Brazil SustainAbility (2008)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
43
Table 14: CDP6 disclosure by IBOVESPA companies (omits companies not included in CDP6) Company
Industry
Response
GHG data disclosed
ALL AMER LAT (N2)
Railroads
ISE
AQ
AMBEV
Beer & soft drinks
AQ
ARACRUZ (N1)
Pulp & paper
AQ
B2W VAREJO (NM)
Retail
AQ
BRADESCO (N1)
Financial intermediaries
BRADESPAR (N1)
Holdings – diversified
BRASIL (NM)
Financial intermediaries
BRASIL T PAR (N1)
Telecommunications
BRASIL TELEC (N1)
Telecommunications
BRASKEM (N1)
Petrochemicals
CCR RODOVIAS (NM)
Toll roads & highways
CELESC (N2)
Electric utilities
AQ
CEMIG (N1)
Electric utilities
AQ
CESP (N1)
Electric utilities
AQ
COMGAS
Gas utilities
AQ
COPEL (N1)
Electric utilities
AQ
COSAN (NM)
Sugar – alcohol
CPFL ENERGIA (NM)
Electric utilities
CYRELA REALT (NM)
Residential building construction
DURATEX (N1)
Wood
AQ
ELETROBRAS (N1)
Electric utilities
AQ
ELETROPAULO (N2)
Electric utilities
EMBRAER (NM)
Aerospace
GAFISA (NM)
Residential building construction
GERDAU (N1)
Steel
GERDAU MET (N1)
Steel
GOL (N2)
Airlines
ITAUBANCO (N1)
Financial intermediaries
ITAUSA (N1)
Financial intermediaries
KLABIN S/A (N1)
Pulp & paper
LIGHT S/A (NM)
Electric utilities
LOJAS AMERIC
Retail
LOJAS RENNER (NM)
Retail
NATURA (NM)
Cosmetics
NET (N2)
Cable TV
PERDIGAO S/A (NM)
Meat, poultry & others
PETROBRAS
Oil, gas & biofuels
NP
ROSSI RESID (NM)
Residential building construction
DP
SABESP (NM)
Water utilities
AQ
SADIA S/A (N1)
Meat, poultry & others
AQ
SID NACIONAL
Steel
DP
SOUZA CRUZ
Tobacco
AQ
TAM S/A (N2)
Airlines
NP
TELEMAR
Telecommunications
TELEMAR N L
Telecommunications
TELESP
Telecommunications
TIM PART S/A
Telecommunications
TRAN PAULIST (N1)
Electric utilities
ULTRAPAR (N1)
Holdings – diversified
UNIBANCO (N1)
Financial intermediaries
USIMINAS (N1)
Steel
V C P (N1)
Pulp & paper
VALE R DOCE (N1)
Mining
AQ
VIVO
Telecommunications
AQ
AQ
(see CPFL ENERGIA)
AQ (see BRASIL TELEC) AQ
AQ AQ
NP
AQ
AQ (see AES) NP DP AQ
(see GERDAU)
NP
AQ
(see ITAUBANCO)
NP
NR AQ DP
AQ
AQ
NP
AQ AQ NP
AQ AQ NP
AQ
AQ
DP
AQ – answered questionnaire; NP – answered questionnaire but response not made publicly available; DP – declined to participate; NR – no response
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Carbon Disclosure Project The international Carbon Disclosure Project (CDP) has been increasing its focus on Brazil in recent 7,8 years with the support of its local partners, ABRAPP and Banco Real . The CDP questionnaire went to 50 of Brazil’s largest quoted companies in 2006 (CDP4). In 2007 (CDP5) this increased to 60 companies, and 75 companies were surveyed in 2008 (CDP6). The response rate of Brazilian companies is high (Figure 20). Nevertheless, 27 per cent of companies in the current IBovespa index that were surveyed by CDP 2008 either did not respond, declined to participate or answered the questionnaire but withheld permission for their responses to be made publicly available. In terms of index weighting, this gap in public disclosure represents about 33 per cent of the current IBovespa notional portfolio and notably includes companies such as Petrobras, Klabin and Usiminas, where climate change business issues might be expected to be important factors. A detailed breakdown is provided in Table 14. Figure 21 summarises some of the key trends picked out by CDP’s analysis of the 2008 survey. Overall, the results paint a largely encouraging picture of corporate activity and management quality in relation to climate change, although further progress is needed. Areas identified by CDP for further improvement and development in 2009 include: Improving the extent of qualitatitive information in companies’ responses, particularly in relation to supply chains Formulation of emission reduction targets Maturing climate change governance among Brazilian companies Inclusion of climate change policy in short, medium and long‐term sustainability strategies. Figure 20: CDP response rates 100% 90% 80% 70% 60% CDP4 (2006)
50%
CDP5 (2007)
40%
CDP6 (2008)
30% 20% 10% 0% Brazil
India
China
Global
7 8
Carbon Disclosure Project Report 2008 – Brasil CDP (2008) Carbon Disclosure Project Report 2008 – Global 500 CDP (2008)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
45
Figure 21: Trends revealed by company responses to CDP6 (Brazil)
See regulatory risks
49%
See physical risks
77%
See regulatory opportunities
83%
See physical opportunities
57%
Disclose GHG emissions data
49%
GHG emissions data externally verified
19%
GHG emissions reduction plan
43%
Board Committee for climate change
60% 21%
Participation in emissions trading 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Global Compact Communications on Progress Many pension funds and asset managers that are members of the PRI are now communicating their expectation that the companies they invest in should be committed to the Global Compact principles. One of the explicit commitments that a company makes when it participates in the Global Compact is to produce an annual Communication on Progress (COP). In 2000, the year when the UN Global Compact was launched, over 600 Brazilian companies signed on to the initiative. Today, the Global Compact lists 110 business signatories in Brazil (excluding SMEs); only six companies submitted COPS in 2008, according the Compact’s online database.
Indices, equity research and ratings Specialised indices in addition to the ISE Apart from the ISE and BM&F Bovespa’s corporate governance index (the IGC), there are no other sustainability or similar indices focusing specifically on Brazilian or Latin American stocks. As noted on page 14, BM&F Bovespa is considering the possibility of changing the ISE by introducing a two‐tier system that would bring more Brazilian companies into the scope of the Index. Consideration is also being given to the concept of a regional sustainability index modelled on the ISE but covering countries such as Chile and Mexico as well. Both of these concepts are at an early stage of discussion. Dow Jones Sustainability Index A small number of Brazilian companies are included in the international Dow Jones Sustainabilty Index (DJSI). For the 2007/08 period, these companies were Aracruz Celusose; Banco Bradesco; Banco Itaú; Itausa; CEMIG; and Petrobras. The DJSI was re‐balanced in Q4 2008 for the 2008/09 period. No Brazilian companies were dropped from the index; Usiminas and VCP were admitted for the first time. It is noteworthy that Petrobras kept its place in the DJSI while being dropped from the ISE at the same time.
46
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Independent sustainability research and rating products None of the US or European sustainable investment research firms have a permanent presence or full‐time research capability in Brazil. Although coverage of Brazilian stocks is relatively limited, firms such as Innovest Strategic Value Advisors and KLD Research & Analytics Inc. (amongst others) do provide some research on approximately 25 of Brazil’s leading companies. Innovest has also undertaken research for the IADB on the extent to which selected Latin American companies participate in markets at the “base of the pyramid”, also referred to as Opportunities for the Majority (OM). This study included 26 Brazilian companies ranging from Banco Bradesco and 9 Unibanco to Natura, CEMIG and GOL . Brazil’s sustainable investment market has not yet led to the establishment of an indigenous SRI research and rating industry. The expertise exists in Brazil but has not been formed into a commercial offering due to the lack of commercial demand from the buy‐side, who thus far have limited themselves to using the publicly‐available ISE index, supplemented in a few cases by one or two in‐ house, part‐time sustainability analysts. Similarly, there are no solicited ‘sustainability’ rating services in Brazil, suggesting there is little or no demand for such solutions in Brazil’s corporate community. One exception to this may be the Brazilian firm Serasa, a credit rating and business information firm recently acquired by Experian. Serasa has apparently been offering an “Environmental Responsibility Report” product on Brazilian firms since 2006 and reportedly introduced a “Social Responsibility Report” product in 2007. However, beyond a short statement to this effect, the company’s website does not provide any further information on these products. The Serasa products do not appear to have a high profile with the asset managers, pension funds and other stakeholders contacted during this project. Sell‐side equity research on sustainability issues Brazilian sell‐side broker/dealers do not produce any equity research focusing on environmental and social sustainability issues. This is despite the efforts of the LASFF, which developed analytical methodologies for three sectors in 2007/08 and disseminated them through APIMEC, the Brazilian equity analysts association. Again, the primary barrier is not a lack of expertise, but a lack of commercial demand from the buy‐side. Although international investment firms such as HSBC have recently begun to produce sustainability research on emerging markets such as India, emerging markets like Brazil are still under‐researched and certainly have not received any coverage of the kind being promoted in Europe and the US under programmes such as the Enhanced Analytics Initiative (EAI). Some Brazilian companies are covered by global sector research: for example, Petrobras is covered by Goldman Sachs’ recent research on sustainability issues in the energy sector.
Networks and associations Industry bodies As noted throughout this report, many of Brazil’s investment industry associations and professional bodies are involved in sustainable investment issues of behalf of their members. This includes participation in the ISE Advisory Board, awareness‐raising activities, and involvement in initiatives such as CDP. The key organisations that are active in this respect are the Brazilian Association of Pension Funds (ABRAPP); the National Association of Investment Banks (ANBID); and the Association of Capital Markets Analysts and Investment Professionals (APIMEC). 9
Innovest Strategic Value Advisors Opportunities for the Majority Index: Analysis of Corporate Performance in Latin America and the Caribbean Inter‐American Development Bank (December 2007)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
47
UNEPFI Brazilian financial institutions are very active members of UNEPFI’s Latin America Task Force. The Task Force focuses mainly on the banking sector and on building awareness and capacity for sustainable banking outside Brazil, and is therefore not considered further in this chapter. It should be noted that UNEPFI’s Geneva‐based Emerging Markets Responsible Investment Project is closely involved in the PRI Brazil Network (see below) and that UNEPFI itself is a member of the ISE Advisory Board. LASFF The LASFF (www.lasff.org) was formed in 2006 by CES‐FGV with seed funding from IFC and is currently supported by FEBRABAN. Members include BM&F Bovespa, APIMEC, Banco Real, Banco Itaú, Banco Bradesco, Unibanco, Citi and HSBC. The Forum was created to: Support opportunity‐detection and investment strategies on regional level; Influence policy‐making and public sector awareness of the financial industry’s potential role in the promotion of sustainable development; Create an on‐line system (or clearing house) containing a thorough database on SF to be used for research, professional education and exchange; Foster the development of high quality products and services as well as training and research; Promote career opportunities in sustainable finance as a field for professional development through training, communication and networking; Coordinate efforts to enlarge sustainable finance markets regionally, through global networking with key global market makers. The LASFF Capital Markets Working Group is comprised of the main asset managers who currently run retail SRI funds (Chapter 5) and deals with the type of issues covered by this report. Other thematic working groups exist for topics such as the Equator Principles, microfinance and reporting. The Working Group’s activities include collaboration with APIMEC to provide sustainability training for analysts (see previous page), and a recent sign‐on campaign urging listed companies to remove forced labour from their supply chains. CES‐FGV hosts an LASFF web site which is available in both English and Portuguese, although the majority of materials and downloads are in Portuguese only. The Forum is essentially a project of the CES‐FGV and is not constituted as a separate legal entity with its own staff, membership structure or budget. The LASFF does not have a full‐time coordinator or director. The Forum cannot be considered to be analogous to sustainable investment professional membership bodies such as the US Social Investment Forum (SIF), the UK Sustainable Investment Forum (UKSIF) or the Association for Sustainable & Responsible Investment in Asia (ASrIA). UNPRI The PRI Brazil Network was launched in late 2008 and is emerging as a major force for sustainable investment in Brazil. The Network benefits from a part‐time co‐ordinator based in São Paolo and strong support from the PRI Secretariat and UNEPFI’s Emerging Markets Responsible Investment project. A summary of the PRI Brazil Network’s organisation and work programme is provided in the box overleaf. Initial efforts focused on gaining more Brazilian signatories in both the asset owner and asset manager categories. The emphasis is now on support for implementation. PREVI and other Brazilian UNPRI signatories are also able to draw on PRI’s centralised services including the PRI Engagement Clearinghouse and the PRI Enhanced Research Portal.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
PRI BRAZIL NETWORK
Background The PRI Brazil Network was launched in November 2008 in response to strong signatory demand for a local Portuguese language platform. PREVI, the largest pension fund in Brazil, was leading this with support from the PRI Secretariat. The purpose of the PRI Brazil Network is to facilitate implementation of the Principles in Brazil and to promote collaboration among signatories on a range of material ESG issues in the local Brazilian context. The PRI Secretariat employs a part time coordinator in Sao Paolo who supports key network activities and translates PRI materials into Portuguese. The Network has monthly calls chaired by PREVI. During the first call signatories set up three working groups Engagement, Recruitment and Integration, which all currently have monthly calls.
Engagement In 2009 the focus of the Engagement Group is on promoting disclosure and improving quality of sustainability reports in Brazil. This is done in the context of the Emerging Markets Disclosure project and the group is working closely with the Global Reporting Initiative (GRI) in Brazil. In order to select companies with which to engage, the group is planning to analyse corporate sustainability reports for the 2008 financial year and identify companies that need to improve reporting quality and those companies that do not report at all. Signatories will then collectively engage in dialogue with these companies to improve the quality of disclosure. In addition to the disclosure focus, there are several other potential engagements being considered, including the elimination of slave labour in the supply chain, and engagements in construction and in agribusiness sectors. Banco Real Asset Management coordinates the Engagement group. Active participants include Luz Engenharia, Funcef, Unibanco Asset Management, Astra Investimentos, HSBC Global Asset Management, Valia, Sustain Capital, PREVI, ARUS, Santa Fé Portfólios and NSG Capital.
Integration of ESG issues into investment analysis Members of the Integration group plan to share methodologies for ESG integration into investment analysis. The goal is to compare different methodologies and to create a common methodology for integrating ESG issues into valuations, which can be used by all PRI signatories in Brazil. The group would also like to identify and select ESG indicators that are most relevant and material for investors in Brazil. Based on this selection, the group plans to create a questionnaire to send to companies. The group will also compare the most commonly used indicators in Brazil with the GRI indicators. The group is coordinated by Astra Investimentos and its participants include Funcef, Infraprev, Unibanco Asset Management, Banco Real Asset Management, Valia, Sustain Capital, Centrus, PREVI, Santa Fé Portfólios and NSG Capital.
Recruitment This working group aims to promote PRI among investors that are not yet signatories. To facilitate recruitment and implementation, the PRI Secretariat is working on overcoming the language barrier by making key PRI materials available in Portuguese. For example a ‘sign up kit’ has been developed, with all key information about the PRI and a description of the sign up process in Portuguese. The Recruitment group is coordinated by Infraprev and has participants from Luz Engenharia, Banco Real Asset Management, Funcef, Unibanco Asset Management, PREVI, Mauá Investimentos, Santa Fé Portfólios and NSG Capital.
Source: UNPRI
SUSTAINABLE INVESTMENT IN BRAZIL 2009
49
Development finance institutions IFC has helped to develop the sustainable investment market in Brazil since 2002. In addition to the current report, IFC’s technical assistance and advisory services have included support for: a CES‐FGV market intelligence briefing (2003) a major São Paulo conference on emerging market sustainable investment (2004) the development of the ISE index (2005) the creation of the LASFF (2006) GRI reporting by corporations (2008) In addition, IFC has been providing occasional training courses on sustainable investment for private equity funds in Latin America since the late 1990s. The IADB also runs sustainable investment training courses for private equity funds and plays a key role in the INOVAR program discussed in Appendix D. BNDES’ role in building Brazil’s venture capital industry (including “cleantech” funds such as those launched recently by Stratus and Sustain Capital) is also discussed in Appendix D. BNDES has US$16 billion worth of investments in publicly listed companies but is not involved in Brazil’s sustainable investment movement (see page 33).
Language barriers The availability of information, reports, conference materials and training programs in both Portuguese and English (and, ideally, Spanish) is an important factor in the operation and further development of Brazil’s sustainable investment market and its interaction with foreign investors. It is widely agreed that the language barrier can be a significant problem. There is a large body of English‐language sustainable investment material that is relevant to Brazilian professionals. Much of this is now being translated by the PRI Brazil Network. Similarly, there is a substantial body of Brazilian material is relevant to international investors and analysts. Although most corporate sustainability reports are available in English as well as Portuguese, other key materials (such as statistical data and information on legislation) are difficult for a non‐Portuguese speaker to access. This is an unnecessary impediment to engaging with foreign portfolio investors on sustainability issues in Brazil’s capital market.
Green consumerism According to research conducted by the National Geographic Society and the international polling firm GlobeScan, consumers in Brazil are amongst the “greenest” in the world in terms of sustainable 10 consumption and ethical consumer choices . GlobeScan conducted Internet surveys of consumers in 14 countries to compare the behaviours of individuals in four key areas: housing, transportation, food, and consumer goods. The index measures both discretionary and essential consumption. Consumers in Brazil and India tied as most "green," with each scoring 60 on the 100‐point sustainable‐consumption scale. Those in the United States scored lowest, or most wasteful (Figure 22). Although the survey does not cover consumer attitudes and behaviour with respect to financial products and investment services, the results suggest a favourable retail environment for sustainable investment in Brazil. 10
Greendex 2008: Consumer Choice and the Environment—A Worldwide Tracking Survey National Geographic/GlobeScan (May 2008)
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 22: Green consumerism in Brazil (source: National Geographic/GlobeScan)
India (1)
60.0
Brazil (1)
60.0 56.1
China (3) Mexico (4)
54.3
Hungary (5)
53.2
Russia (6) Australia (7)
50.2
Germany (7)
50.2
Great Britain (7)
50.2
Spain (10)
50.0
Japan (11)
49.1
France (12)
48.7
Canada (13)
48.5
USA (14)
52.4
44.9
SUSTAINABLE INVESTMENT IN BRAZIL 2009
51
10. BUILDING ON SUCCESS
Overall market size Consolidated estimates of SRI assets under management Table 15 aggregates the various data, estimates and educated guesses from Chapters 4‐9 on the stock of sustainable investment in Brazil at the current time. It should be emphasised that this exercise is based on numerous assumptions and estimates as stated in the report, as well as data from different sources and time periods: it provides only a rough approximation but one which may nevertheless be useful. Overall, the total stock of investment that may be classifiable as “sustainable” could be in the order of US$75 billion. The total domestic market capitalisation of the São Paulo stock exchange at the end of October 2008 was US$585 billion. “Sustainable” investment could therefore be at least 10 per cent of market cap. Taking a conservative approach, TERI‐Europe believes an estimate of US$40 billion (<7 per cent of total market cap) may be more useful for comparative and decision‐making purposes. Table 15: TERI‐Europe’s estimates of the stock of sustainable investment (SI) in Brazil Segment Asset manager signatories to UNPRI (excluding NAV of SRI funds, below)
Percentage of segment total
Basis for % comparison
11%
ANBID data (Oct 2008); estimating 15% allocation to equities; assuming UNPRI implementation
US$0.3
2%
ANBID data (Oct 2008) and CVM data (Jan 2009); estimating that 15% of total retail AUM are allocated to equities
US$35.0
60%
ABRAPP data (Sep 2008); estimating 32% allocation to equities; assuming UNPRI implementation
Unknown
Unknown
BNDESPAR holdings as of June 30, 2008; Bovespa trading data as of Jan 23, 2009
Foreign investment under SI management
US$1.2
<1%
CVM data (Aug 2008); guessing that 1% of total stock is SI
ADR investment under SI management
US$1.0
<1%
ADR data as of Jan 2009; guessing that 1% of total stock is SI
US$24.5
<5%
Independent estimates of HNWI wealth; guessing that allocation to equities is 35% and SI could be 5% of this
TOTAL excluding BNDES
US$70 billion
12%
TOTAL including BNDES
US$86 billion
15%
Retail SRI mutual funds
Pension fund signatories to UNPRI BNDES (US$16 billion in listed equities)
HWNI assets available for sustainable investment
Estimated stock of SI (US$ billion) US$7.9
Percentage of total domestic market cap (US$585 billion as of Oct 2008) (World Federation of Exchanges data)
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Brazilian SRI in a global context Europe and the US provide useful international benchmarks. Eurosif estimates that SRI assets 11 represent over 17 per cent of the asset management industry in Europe . According to the US Social Investment Forum, roughly 11 per cent of assets under professional management in the US are now 12 involved in SRI .
Strengths and weaknesses Appendix B provides a detailed analysis of the strengths and weaknesses identified by TERI‐Europe across the overall “ecosystem” of sustainable investment in Brazil. Strong commitment Brazil has made significant progress in developing a sustainable investment market over the last decade and rightly deserves its reputation as the leader among emerging economies in this regard. These achievements are attributable to the long‐term vision and commitment of a relatively small number of individuals and organisations in Brazil (particularly BM&F Bovespa, Banco Real, PREVI, CES‐ FGV and the Ethos Institute), supported at key moments by external change agents such as IFC, CDP, GRI and UNPRI. In addition to what has been achieved for the country itself, the evolution of a sustainable investment market by Brazil has led other emerging markets to focus on the same issues and goals. Strong business case Taken in combination, the many positive trends described in this report add up to a strong prima facie case for the mainstream importance of sustainability in business and investment in Brazil today, even if the current body of empirical data does not yet allow the business case to be proved by impeccable quantitative evidence. Contribution to sustainable development Brazil’s sustainable investment movement is now just beginning to move into the evolutionary phase where its development impact can start to go deeper as a result of efficient capital allocation to private enterprises that create real, on‐the‐ground, benefits to people’s livelihoods and the environment. For example: the ISE index is gradually becoming more rigorous and assertive in holding companies to account; shareholder engagement is (slowly) beginning to evolve from an emphasis on sustainability reporting to direct pressure on issues such as forced labour in the supply chain; there are opportunities to create new investment products with high development impact themes such as climate change, SME finance, blended value investment, biodiversity and indigenous peoples. 11 12
2008 European SRI Study (Eurosif, 2008) 2007 Report on Socially Responsible investing trends in the United States (Social Investment Forum, 2007)
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Strategic challenges and risks Despite the many positive things that can be said about Brazil’s sustainable investment market, the movement is still relatively small and somewhat fragile, especially given current market conditions. Economic turmoil aside, the main challenges that lie in front of Brazil with respect to sustainable investment over the next two to three years are: Stagnation (especially relevant to asset managers competing in the non‐institutional investor market) Fragmentation (especially between the LASFF/ANBID and UNPRI/ABRAPP “cliques”) Possible corporate push‐back (especially in relation to a more assertive ISE and early efforts at shareholder engagement) Excessive risk aversion, reluctance to deviate from the IBovespa benchmark and internal resistance to new concepts and practices Internalising the costs of sustainability research as well as the benefits Meeting raised expectations (especially relevant to UNPRI pension funds) Planning and adapting market architecture to meet evolving needs, including investment in human capital
Issues on the horizon The ISE paradox The ISE index has been very successful. Amongst other things, it has: significantly increased the amount of SRI assets under management; increased choice for retail investors; stimulated competition between asset management firms; raised companies’ awareness and influenced their behaviour; shown that sustainable investment strategies can match the performance of conventional benchmarks; encouraged BM&F Bovespa to introduce other sustainability services; and prompted the creation of similar indices in other countries. Going forward, however, the ISE also presents some complex challenges that have critical implications. If these issues are not resolved, Brazil’s sustainable investment market could potentially end up in an evolutionary cul‐de‐sac. They basically boil down to the commercial business model adopted for the index. As discussed in Chapter 3, all BM&F Bovespa indices, including the ISE, are made available to investors free of charge. Companies wishing to be included in the ISE pay an evaluation fee of US$2,000; companies admitted to the ISE can also purchase a license to use the ISE brand for a fee of US$7,000 per annum. These income streams are the only source of revenue to cover the ISE’s maintenance costs, which are largely incurred by CES‐FGV. Assuming that CES‐FGV analyses 50 companies a year (see Table 2, page 12) and that all of the 40 companies admitted to the ISE pay for a license to use the brand image, annual gross income is likely to be in the region of US$300,000. By comparison, assuming that management fees on the ten SRI funds listed in Table 5 (page 20) are a conservative 1 per cent, gross income on those ISE‐based funds could be about US$3 million per annum at the bottom of the market. At the height of the market in December 2007, this figure may have been closer to US$7 million per annum. Although these are “back of the envelope” calculations, it should also be noted that they do not take into account the economic value of the ISE to beneficiaries such as PREVI and other Brazilian pension funds, for whom the ISE is currently one of the main tools available for implementation of the PRI across a total equity portfolio of around US$35 billion (page 25).
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
The long‐term durability and equitability of ISE’s business model therefore deserves particular attention, especially given the need to support further innovation and capacity building in this field. The key points for consideration are as follows: The entities that benefit most from the index (the SRI fund managers and – to a less extent ‐ the UNPRI pension funds) do not remunerate those who provide the service and carry the risk (BM&F Bovespa and especially CES‐FGV). The entities that do pay for the index are the companies that apply to join it and the companies that are ultimately admitted. This could pose a potential or actual conflict of interest. Gross income earned by the index (i.e. by CES‐FGV) is effectively capped by the ISE regulations on the number of companies that can be included in the notional portfolio, regardless of how successful the index is in terms of adding value to its customers (the SRI fund managers and pension funds). Not only is this basically unfair and commercially irrational, it also creates the theoretical risk that regulations might be changed to expand the portfolio simply to increase revenue at the expense of quality. CES‐FGV’s overheads as data provider to the ISE are not a topic for this study but it may be reasonable to assume that net income is not large and leaves little scope for human capital development, investor education, corporate outreach, marketing or research & development. The underlying data collected and maintained by CES‐FGV are potentially very useful to investors, analysts and other organisations and could generate additional revenues that could be used for strategic development. However there is no commercial or even not‐for‐ profit outlet for this data. This may be partly attributable to confidentiality agreements between CES‐FGV and companies responding to the ISE questionnaire. Investors can use the ISE free of charge and it meets their basic needs at the current time. This may create a disincentive for investors to pay for the development or purchase of more advanced sustainable investment tools. Arguably, it also seriously distorts the potential market for the commercial provision of more advanced tools. In a worst case scenario, a monopoly situation then develops with no incentive or financial means for innovation in a marketplace that has become accustomed to subsidised externalisation of the costs of investing responsibly. A related issue is the fact the ISE methodology (and cost/revenue structure) relies on collecting data by means of a questionnaire and the response rate to this questionnaire has fallen every year since the ISE’s launch in 2005 (Table 2, page 12). Given the success of the index and the increase in sustainability reporting (Figure 19, page 42), the response rate trend should be strongly positive. Questionnaire fatigue is a well‐known facet of the sustainable investment industry around the world and requires prompt mitigation or adaptation. Falling company interest in or cooperation with the ISE is a matter of concern that should be given priority attention as soon as possible. The matter is further complicated by the possibility that PRI pension funds in Brazil may develop their own ESG questionnaire that they would jointly send to Brazilian companies (see pages 12 and 48). Limited research coverage As discussed on page 46, ESG research on Brazilian equities is relatively limited at the current time. In particular, Brazilian sell‐side analysts do not produce ESG research (despite initiatives by LASFF and APIMEC) and Brazil does not have any local sustainable investment research firms.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
55
Brazil has proven that it has expertise to produce such ‘advanced’ sustainable investment tools, or at least the capability to create or acquire such expertise. Although corporate sustainability reporting is still far from perfect, it provides a reasonably good dataset for such research and is improving. Moreover, CES‐FGV collects and maintains an extensive database of relevant information, as a result of its work on the ISE index: this knowledge bank could be made available to commercial research providers, for example through licensing agreements or some form of commercial partnership. The expertise and information exists in Brazil but has not been formed into a commercial offering for a simple reason: there is little or no commercial demand from the buy‐side. In turn, this is attributable to four factors: The disincentive created by a “free” ISE index, as discussed above. Investors like PREVI are only just beginning to work out what their needs are for the kind of “advanced” analytical tools that require good quality ESG research. Moreover, pension funds and asset managers in Brazil have a relatively strong ethos of developing and using in‐house expertise – out‐sourcing is not a strong part of the culture. The Brazilian sustainable investment community as a whole has not leveraged the purchasing power of foreign portfolio investors by sensitizing them to the advantages (and potential availability of) good quality ESG research provided by in‐country experts with deep local insight. Stagnation in the asset management sector Chapter 5 describes the remarkable emergence of SRI mutual funds in Brazil, beginning with Banco Real’s Ethical Fund in 2001 and expanding over the 2005‐2007 boom years. Several issues suggest that there is a risk of stagnation in this small but important section of the Brazilian sustainable investment market. At US$315 million, the ten SRI funds still represent a very small proportion of total assets under management. For example, Banco do Brasil dominates the market in terms of assets under management that are invested in equities, with more than twice the business of its two closest competitors put together (see Figure 10, page 16): SRI is only 0.05 per cent of this business (Figure 15, page 24). Amongst those asset management firms with SRI funds, the “mainstreaming” of sustainable investment practices across “conventional” strategies and products appears to be rather limited (page 18). Several firms that manage SRI funds are not yet signatories to the UNPRI. None of the asset management firms employs full‐time ESG analysts, and five do not even have part‐time ESG analysts. Despite several new entrants to the market since the launch of the ISE, market share in the SRI niche continues to be dominated by the early pioneers, Banco Real and Itaú, who each control about 40 per cent of total SRI net assets (Figure 12, page 21). The ten SRI funds are all “first generation” products that are similar to one another in terms of their sustainability features (page 23) and financial performance (Figures 13 and 14). There has been almost no product innovation (either around alpha‐ seeking ESG strategies or high environmental/ social development impact strategies) since Banco Real, Itaú and the ISE index provided the “blueprint” for others to follow. Retail appetite for these somewhat homogenous sustainability products appears to have begun to level out in the middle of 2007, although this obviously coincides with the recent decline in retail appetite for variable income products in general. This potential stagnation is exacerbated by the asset managers’ relative isolation from the main driving force for sustainable investment in Brazil today, i.e. PREVI and the other pension fund signatories to the UNPRI.
56
SUSTAINABLE INVESTMENT IN BRAZIL 2009
The pension funds largely manage their equity portfolios in‐house and until recently there has therefore been little or no know‐how transfer or cross‐fertilization of ideas between the pension funds and asset managers such as Banco Real that have pioneered SRI in Brazil and developed in‐ house research capacity. Limited involvement of foreign portfolio investors The ISE index and Brazil’s sustainable investment movement in general do not yet seem to have captured the imagination of foreign portfolio investors or investors in Brazilian ADRs (page 11). With some exceptions (such as collaborative engagement on the issue of forced labour) (page 32), foreign portfolio investors have had relatively little active involvement in Brazil’s sustainable investment activities, especially since the “loss” of ABN AMRO’s Luxembourg‐registered Brazil Equity Fund (page 29). In part, this reflects the fact that sustainable investment is only just now beginning to mature in Brazil and is still a relatively new concept for the majority of foreign investors in emerging markets. However, it also highlights the absence of a coordinated international marketing strategy by all those involved in Brazil’s sustainable investment community. Fragmentation and overlap in market leadership Unibanco, Banco Real and HSBC are members of both the LASFF and PRI Brazil Network, with the latter two firms playing a particularly active role. Other than this, there is little or no membership overlap or interaction between LASFF and the UNPRI network in Brazil. Until very recently, the two networks appear to have had relatively little to do with one another and to some extent they compete for members and influence. At the current time the PRI Brazil Network appears to have significantly more momentum than the LASFF.
Recommendations Update the ISE’s commercial business model BM&F Bovespa and CES‐FGV should consider changes to the ISE’s commercial business model that would: encourage sustainability investors (asset managers and pension funds) to begin to internalise the costs of sustainable investment; and provide stronger foundations for continuous improvement to the ISE’s regulations and methodology, for international marketing and promotion, and for the possible later development of new products such as the idea of a regional index. The rationale for changing the ISE’s commercial business model would be as follows: Reduce the index’s financial reliance on companies, in order to eliminate the risk of conflicts of interest. Create income that is linked to the value that the index provides to investors, not the number of companies in the index basket. Allocate more resources for marketing and promotion, especially at the international level (thus enhancing the brand value of the ISE for companies). Create incentives to find commercial outlets for the underlying database and knowledge bank held by CES‐FGV.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
57
Remove the risk that the index could be inadvertently holding back progress by distorting the commercial market for complementary research and rating services.
The assessment fee currently paid by companies ‘applying’ for admission to the index could be reduced or phased out completely (the license fee paid by ISE companies for the right to use the ISE logo should probably be maintained). The names and weightings of ISE portfolio companies have always been in the public domain, as with all BM&F Bovespa indices. Changing this may be counter‐productive as well as impractical. However, some type of fee structure could be phased in for those asset managers who currently use the ISE to manage and market existing SRI products. At the simplest level, this could be a license fee for the right to use the ISE name and logo in fund prospectuses, fact‐sheets and related marketing materials, perhaps with a simple sliding scale based on NAV. For existing ISE‐based funds (and given current market conditions), it may be appropriate to make this a voluntary arrangement in 2009‐2010 on the understanding that their contributions will be passed on to BRASIF (see pages 61‐64). More robust arrangements could be developed as and when asset managers start to develop new SRI funds under more favourable economic conditions. Make greater use of ISE data There are probably various ways to create commercial outlets for the ISE database held by CES‐FGV, as well as a number of potential barriers to market entry. The best way to explore and test these possibilities is to put the concept to the test of entrepreneurialism, whilst also looking at the lessons that can be learned from other markets. The options could include: A solicited ESG or CSR rating product, i.e. companies pay to be rated by an independent firm and are then able to use this rating/report in their investor relations and public relations. Examples include Reputex’s recent work in China, and the European solicited ratings business of the French firm, Vigeo. An on‐line database of historical GRI‐type indicator data. In theory, companies would pay to have their information on this database (as a way to deal with questionnaire fatigue) and investment analysts would pay to access it. The London Stock Exchange developed a similar product (the Corporate Responsibility Exchange) several years ago. Although their particular business format did not find commercial success at the time, it may provide useful lessons and ideas. A joint venture or similar arrangement between CES‐FGV and an established SRI research house in Europe or North America. CES‐FGV could license its database to the research house, which would then be able to offer much better coverage of Brazilian stocks for its off‐the‐shelf products and customised research. The Johannesburg Stock Exchange’s Socially Responsible Investment (SRI) Index (where the data provider is the UK‐based firm EIRIS) may provide some useful lessons and ideas in this regard. PREVI has commented that it needs tools that go beyond the in/out screening represented by the ISE (pages 11 and 26). It needs to be able to drill down into companies based on ESG issues and carry out horizontal comparisons between companies and sectors. In light of this, the UNPRI pension funds may be the main initial audience for new information products based on the underlying database and knowledge bank that CES‐FGV has built up by being the data provider for the ISE since 2005. As discussed on page 12, the PRI Brazil Network’s Integration Working Group is examining the ESG indicators that are most relevant and material for investors in Brazil and consideration is being given to developing a joint questionnaire that the PRI pension funds will send to Brazilian companies. The relationship between this initiative and the ISE index is currently unclear. Clarifying this issue will also be important in taking forward the idea that greater use can be made of the ISE database.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Create a commercial market for ESG research The key mechanism for creating a business environment that favours commercial ESG and SRI research providers consists of updating ISE’s commercial business model and exploiting the latent value of the underlying ISE database, as discussed above. This involves a major but necessary change in mind‐set: the costs of investing sustainably should be internalized in order to drive the next phase of progress. These costs should be regarded as an investment in the future, not just an overhead. Willingness to make this shift in mind‐set and practice is an important test of Brazil’s commitment to sustainable investment, especially in relation to the possibility of new support from DFIs. Consideration should also be given to complementary initiatives that would help to encourage ESG research and rating providers. For example, competitive forums could be created to showcase good research. The Enhanced Analytics Initiative (recently absorbed into the UNPRI) and UNEPFI’s 2004‐ 2005 “Materiality” project provide models that might be adapted in this regard. Develop human capital There are probably fewer than a dozen individuals in Brazil at the current time with substantial hands‐ on experience in ESG analysis and SRI portfolio management. These experts are located mainly in the asset management arms of organisations like Banco Real, Votorantim and HSBC. These organisations also have relevant expertise in their corporate banking and project finance business units as a result of initiatives such as the Equator Principles. There is therefore a great deal of asymmetry between human and financial capital for sustainable investment. The human capital is mainly located in asset managers, the financial capital is mainly located in pension funds; there is not a lot of interaction, and the human capital is spread thinly. This report has already emphasised the need for closer cooperation on sustainable investment between Brazil’s pension funds and leading asset managers. Human capital development can be part of this, for example through joint workshops or even secondment of staff. This could be done on a domestic only basis (between Brazilian organisations) or a mutually beneficial international basis (for example, with European and North American counterparts and/or with DFIs such as IFC). It may be useful to prepare an inventory of existing human capital and survey key organisations about their current and future needs. Training and employment opportunities could be advertised on relevant websites, and appropriate plans for training and qualifications could be developed with organisations such as the FGV business school, APIMEC and other bodies. Human capital development with other market actors may also be useful. For example, there may be value in holding workshops or seminars with CVM officials, the Brazilian Institute of Investor Relations (IBRI) and similar stakeholders. Implement an international strategy Brazil’s sustainable investment community should develop an international communications and technical cooperation strategy with the following main objectives: Raise the international profile of the ISE Index and ISE companies (in cooperation with BM&F Bovespa) Help “mainstream” international investors in Brazil to understand the importance of ESG issues and the resources that are available to assist them. Encourage international sustainability investors to invest in Brazil and to develop products similar to the former ABN AMRO Brazil Equity Fund discussed on page 29. Import and export of news, information, new research and market intelligence.
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59
Such a strategy should focus on a targeted range of foreign stakeholders including institutional investors, investment consultants, asset managers and SRI research houses. The strategy should address the language barriers discussed on page 49 and help to provide a single focal point for international access to relevant information from multiple Brazilian sources and organisations. Apart from a good quality website and a bi‐lingual communications officer, this strategy could include: Blogging. Monthly or quarterly newletters/e‐mail bulletins. Annual or biennial reports on the state of sustainable investment in Brazil (similar to the annual Eurosif reports on SRI in Europe, and perhaps taking this TERI‐Europe report as a starting point for future updates). Participation in relevant international networks in addition to the UNPRI and regular attendance at appropriate overseas conferences. Capital markets events/analyst presentations on sustainable investment in Brazil. Annual or biennial surveys of foreign institutional investors’ views and/or activities in relation to sustainable investment in Brazil. Invest in research and development This report identifies several areas where there are significant and important data gaps. In order of likely priority, the four main topics that merit further investigation are: 1. ESG Issues Mapping At the current time, there is no single source that provides (and updates) an investor‐friendly synthesis of key ESG issues relevant to shareholder value in Brazil’s main industry sectors (page 4). These sectors are financial services; oil & gas; mining; steel; utilities; telecommunications and transportation (see Figure 1). Pulp & paper and biofuels should probably also be added to the list. IFC is currently sponsoring a similar mapping exercise on the Indian market by WRI, and this could provide a model for the kind of research that is suggested here. LASFF and APIMEC have already developed relevant materials on three sectors (page 46) and these may also provide a valuable foundation for this activity. Amongst other things, such an ESG mapping exercise should pay special attention to climate change, particularly the economic and commercial implications of Brazil’s recently published National Plan on Climate Change (see Appendix A). 2. ESG Footprint of Foreign Institutional Investors It is currently difficult to form an accurate picture of the foreign portfolio investors who are the main investors in Brazilian stocks, although good data are publicly available in relation to ADRs. In both cases, information on the extent to which such investors take ESG considerations into account in one way or another is mainly anecdotal (Chapter 7). Further studies to answer these types of questions would probably have synergy with the work of the UNPRI, as well as a forthcoming Mercer Investment Consultants report (commissioned by IFC) on ESG practices in the world’s leading asset managers for the emerging markets asset class. Together with the suggested “ESG Mapping” project, this research would be valuable for the international strategy described earlier. 3. Non‐financial disclosure practices As discussed in Chapter 9, Brazilian companies have a good and continually improving record of voluntary non‐financial disclosure, in the form of annual sustainability reports (largely following GRI guidelines) and the number (if not necessarily the quality) of responses to the Carbon Disclosure Project.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
On the other hand, these activities still appear to be coloured by public relations objectives rather than the governance of material ESG‐related risks (for example, see SustainAbility’s observations on page 43). This impression is reinforced by a cursory review of IPO prospectuses and Form 6‐K filings with the US SEC (pages 39‐40). Arguably, it may now make sense to capitalise on the strengths of current practice and make progress on remaining gaps by institutionalising non‐financial disclosure through some type of formal code. This would reinforce the kind of corporate governance leadership represented by the Novo Mercado, and would need to take into account: emerging best practice as illustrated by the recent ICGN statement (page 39) and related measures being taken by exchanges in other markets such as Australia (page 40); possible developments in relation to climate change disclosure under US SEC rules (page 39); expectations for an eventual recovery in Brazilian IPO activity (see Appendix A for information on capital raising prior to the current global economic downturn). However, further research on the current baseline is needed in order to weigh up the potential business case for such an initiative. The starting point should probably be a detailed review of the treatment of ESG risk issues in regulatory filings and recent IPO prospectuses, perhaps in conjunction with research into Brazilian and international buy‐side views on this subject. 4. HNW Opportunities Brazil’s rapidly growing HNW population forms a wealth management market of over US$1 trillion. Although “green investment” trends in the HNW market have been researched at a global level (by CapGemini and Merrill Lynch), there is no detailed information on this market niche in Brazil (page 36). An educated guess is that the potential stock of HNW sustainable investment in Brazil could be roughly US$70 billion. For comparison, the total stock of retail assets under management is about US$110 billion (page 19), and the sustainability component of this is only US$315 million and appears to be stagnating (page 23). Given that the Brazilian pension funds with the most interest in sustainable investment tend to use in‐ house equities managers (page 25), the HNW market probably represents the best opportunity for Brazil’s asset managers to expand their sustainable investment product range and market share. To stimulate competitive thinking on this theme, it may be useful to carry out market research into this area along the lines of EUROSIF’s assessment of the European market (page 36). This might even be combined with a targeted public opinion survey on “green financial consumerism”, building on the National Geographic/GlobeScan survey (page 49). Foster competition and innovation In addition to the market research outlined above, other measures can be taken to stimulate renewed competition and innovation among Brazil’s asset managers in the SRI field once economic conditions improve. One of the most obvious possibilities is to encourage better differentiation between the rival products in relation to their sustainability credentials as well as their financial performance. For example, Trucost, the London‐based international environmental research organisation, calculates an annual ranking of UK investment funds based on their carbon emissions, enabling 13 investors and others to compare investments on an environmental basis . The firm has also recently extended this kind of analysis to Australian funds and, with the support of IFC, to emerging Asian funds. Research of this kind on Brazil could produce some very interesting and useful results. 13
Carbon Counts 2007: The Carbon Footprint Ranking of UK Investment Funds (Trucost, 2007)
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61
Another possible route that might be suitable for Brazil in the medium term is illustrated by the Eurosif Transparency Guidelines. These focus on retail SRI funds in order to increase accountability to consumers. Launched in November 2004 with support from the European Commission, as of April 2008, there were about 50 signatories, representing more than 140 SRI funds. Eurosif has created a logo specific to the Transparency Guidelines that can be used by signatories once their responses to the Guidelines have been updated and reviewed by their national Social Investment Forum. Signatories are expected to disclose information on a number of questions, including: How does the fund define SRI? What are the SRI criteria of the fund? What is the SRI research methodology and process? How are the results of research integrated into the investment process? What is the policy and procedure for divestment on SRI grounds? What methods of engagement are employed? What engagement activity has been carried out on behalf of the fund during the past year? Does the fund have a voting policy and are voting practices disclosed? What voting actions occurred that were related to the SRI fund criteria? Fostering “second generation” sustainability products and strategies through competition and innovation among Brazil’s asset managers would arguably also have significant benefits for pension funds implementing PRI. As previously noted, PREVI and other leading UNPRI signatories have historically relied on in‐house analysts and portfolio managers, and there have been few opportunities to harness the SRI experience of external asset managers. By working together under a more collaborative framework, however, creative partnerships could be developed. For example, a pension fund (or consortium of pension funds) might consider putting a relatively small mandate (say US$100 million) into the hands of an external manager as a “one‐off” strategic learning exercise that can then be internalized. The RFP would invite asset managers to come forward with innovative, “second generation” SRI strategies (for example, based on engagement, carbon optimisation or sustainability leaders). Such a unique, prestigious and strategically important mandate is likely to stimulate a high level of competition and innovation, both among the asset management firms and internally among in‐house portfolio managers.
Organising for success For a number of reasons, 2009 is probably a milestone year in the development and evolution of Brazil’s sustainable investment market. The last ten years or so have seen a number of building blocks fall into place and the market has attained a new level of maturity and mainstream acceptance. New risks and opportunities lie ahead. The way that the sustainable investment community adapts to these risks and opportunities over 2009‐2010, through difficult economic conditions, is likely to shape its market for at least the next five years. The issues that need to be addressed (and their potential solutions) are inter‐related and, to a large extent, inter‐dependent. A strategic vision is therefore required. The ideal development path involves a series of linked and mutually reinforcing actions that, in combination, will: help Brazil’s pension funds to meet their UNPRI objectives in a cost‐effective manner; encourage and enable Brazil’s asset managers to develop “second generation” sustainable investment products for their clients, especially in the retail and HNW market; unlock the latent potential of sustainable foreign investment. The recommendations in this report form the main elements of such a strategic development concept. Such a strategic vision underlines the need for Brazil’s sustainable investment community to improve the way it is organised.
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The Latin American Sustainable Finance Forum (LASFF) has played an important role since its creation in 2006 and its significant contribution deserves acknowledgement. However, LASFF was not designed as an analogue to organisations such as the UK Social Investment Forum (UKSIF) or Eurosif that are vital to mature sustainable investment markets in other parts of the world. The time may now be right to create such an organisation to represent and support Brazil’s multi‐billion dollar sustainable investment industry. One option might be to create a Brazilian Sustainable Investment Forum (BRASIF). This concept is outlined in the box below and would need to unify the interests of the PRI Brazil Network, the retail SRI fund managers and the ISE. Possible concept for a Brazilian Sustainable Investment Association (BRASIF) The geographic focus should be firmly on Brazil, not the region. Other economies in the region are too far behind Brazil in relation to sustainable investment; given the important needs of Brazil itself, other organisations such as UNEPFI and IFC should take the lead in sowing the seeds for sustainable investment in those countries. Brazil should, of course, continue to support regional awareness raising and capacity building on this subject to the extent possible, especially in relation to sustainable investment issues that have a cross‐border significance such as climate change, regional infrastructure development and Brazilian multinationals. The industry focus should be firmly on institutional, retail and HNW portfolio investment in listed equities, expanding as and when appropriate to include other assets classes that are important for institutional investors (such as private equity, real estate and corporate bonds). Sustainable banking and the Equator Principles are already well served by organisations like FEBRABAN, UNEPFI and IFC. BRASIF could be a separate legal entity constituted as a not‐for‐profit membership organisation with an elected board of directors and a full‐time executive director; ideally it would also have its own office premises and a small staff handling administration and communications. The US Social Investment Forum, UKSIF and ASrIA all provide good models for BRASIF to adapt. “Twinning” with an organisation like UKSIF or the US Social Investment Forum could be very valuable. This approach would help to ensure that BRASIF’s learns from the successes (and mistakes) of other sustainable investment membership organisations. In addition, it would provide an excellent mechanism for raising Brazil’s profile with foreign sustainability investors. Importantly, BRASIF would need to be a coming together of Brazil’s pension funds and leading asset managers, who have thus far mainly moved in separate circles as far as sustainable investment is concerned. PRI would be a very important part of BRASIF’s agenda and there should be a close working relationship with the UNPRI Brazil Network. UNPRI and UNEPFI have recruited a part‐time PRI coordinator based in Brazil, and co‐location could be considered. BRASIF would continue the goals set out for LASFF and be the main driving force and monitor of the strategic development vision that evolves from the proposals in this report. Specific priorities and possible projects would include: Fostering a commercial market for ESG research; Human capital development; A strategy for international engagement and marketing Brazil overseas; Research and development on issues of common interest to members; and Fostering “second generation” sustainability products and strategies through competition and innovation among Brazil’s asset managers. The moral support (and possibly financial support) of development finance institutions such as IFC, IADB and BNDES would help to refine and implement this strategic development vision. In BNDES’s case, involvement is also relevant in view of BNDESPAR’s own significant investments in publicly quoted companies. One option could be for BRASIF to have some type of DFI Liaison Group, composed of the development banks and key BRASIF members, to provide an informal framework for such interaction and potential support.
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63
Figure 23: Possible framework for funding BRASIF >
Membership fees (low)
Fees
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One possible disadvantage of the BRASIF concept is that it could dilute the momentum of the PRI Brazil Network and, in particular, lead to competition for membership fees. Weighing against this, however, are the significant benefits of having an organisation such as BRASIF that combines the PRI Brazil Network with other Brazilian organisations that are not currently PRI signatories (or, in the case of industry associations such as APIMEC, are not eligible to become signatories) in order to have one body representing Brazil’s national interests in sustainable investment. Work‐around solutions may be possible to avoid competition for membership fees in a way that also provides organisational clarity and win‐win benefits for all stakeholders. One such possible solution is illustrated in Figure 23. This takes into account a number of related recommendations made earlier in this chapter, including updating the ISE’s business model and exploring opportunities for CES‐FGV to make greater commercial use of the underlying data. The concept involves increasing ISE fee revenues to BM&F Bovespa; the stock exchange could then use net ISE fee income to sponsor BRASIF. Whilst it may still be appropriate for BRASIF members to pay a membership fee (to discourage ‘free‐loaders’), this fee could be relatively low.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Ultimately, the right way forward for Brazil must come from a bottom‐up, demand‐driven process rather than through a top‐down blueprint imposed from outside. The analysis and recommendations in this report are offered for consideration and discussion by all participants in Brazil’s sustainable investment market. The final recommendation of this report is therefore to suggest that it might be useful for relevant stakeholders to come together in some type of roundtable discussion that takes stock on the progress made over the last five years and enables debate on the strategic direction and needs of the market over the next five years or so. Hopefully, this report will add value to such a process. Whether and how this happens will depend on the right people taking the initiative for convening and shaping the discussion going forward. Given the quality of leadership for sustainable investment in Brazil, there is an encouraging number of candidates for this role. TERI‐Europe and the authors of the report look forward to feedback with great interest and will be pleased to lend their ongoing support.
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65
APPENDIX A: COUNTRY PROFILE
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Profile Table 16 provides information on selected development indicators for Brazil. Based on the IMF’s 2008 estimates of worldwide GDP, Brazil is today the world’s 10th largest economy (Figure 24). Characterized by large and well‐developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Brazil became investment grade at the end of April 2008, when Standard & Poor’s upgraded Brazil’s sovereign debt rating to BBB‐ from BB+. The World Bank/IFC annual Doing Business survey of 181 countries worldwide provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, th enforcing contracts and closing a business. Brazil ranked 124 out of 181 economies in the 2008 th survey (Table 17). By comparison, the other BRIC economies of Russia, India and China ranked 120 , nd rd 122 and 83 respectively. (The top three ranked countries globally were Singapore, New Zealand and the US). Figure 25 illustrates Brazil’s ranking in the Doing Business Survey and in several other commonly used international benchmarks covering issues such as corruption, human development and competitiveness. Figure 24: The world's 20 largest economies (source: IMF) United States Japan China Germany France UK Italy Russia Spain Brazil Canada India Mexico Australia Korea Netherlands Turkey Poland Belgium Saudi Arabia 16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
GDP, current prices, US$ billions, 2008 estimates
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Table 16: Brazil ‐ selected development indicators WORLD VIEW Population, total (millions) Population growth (annual %) Surface area (sq. km) (thousands) Poverty headcount ratio at national poverty line (% of population) GNI, Atlas method (current US$) (billions) GNI per capita, Atlas method (current US$) GNI, PPP (current international $) (billions) GNI per capita, PPP (current international $) PEOPLE Income share held by lowest 20% Life expectancy at birth, total (years) Mortality rate, under‐5 (per 1,000) Immunization, measles (% of children ages 12‐23 months) School enrolment, primary (% net) Prevalence of HIV, total (% of population ages 15‐49) ENVIRONMENT Forest area (sq. km) (thousands) Agricultural land (% of land area) Improved water source (% of population with access) Improved sanitation facilities, urban (% of urban population with access) Energy use (kg of oil equivalent per capita) CO2 emissions (metric tons per capita) Electric power consumption (kWh per capita) ECONOMY GDP (current US$) (billions) GDP growth (annual %) Inflation, GDP deflator (annual %) Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Gross capital formation (% of GDP) STATES AND MARKETS Time required to start a business (days) Market capitalization of listed companies (% of GDP) Military expenditure (% of GDP) Fixed line and mobile phone subscribers (per 100 people) Internet users (per 100 people) High‐technology exports (% of manufactured exports) GLOBAL LINKS Merchandise trade (% of GDP) Net barter terms of trade (2000 = 100) External debt, total (DOD, current US$) (millions) Short‐term debt outstanding (DOD, current US$) (millions) Total debt service (% of exports of goods, services and income) Foreign direct investment, net inflows (BoP, current US$) (millions) Workers' remittances and compensation of employees, received (US$) (millions) Official development assistance and official aid (current US$) (millions) Source: World Bank – World Development Indicators database
2007 2007 2007 2006 2007 2007 2007 2007 2005 2006 2006 2006 2005 2007 2005 2005 2006 2006 2005 2005 2005 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2006
191.60 1.2 8,514.9 25.6 1,133.03 5,910 1,795.65 9,370 2.9 72 20 99 94 0.6 4,777.0 31.2 91 84 1,122 1.8001 2,008 1,314.17 5.4 4.5 5 31 64 13 11 22 152 104.3 1.6 84 26.1 12.0
2007 2006 2006 2006 2006 2006
22.0 104 194,150 20,325 37.3 18,782
2007
4,382
2006
82
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 17: Doing Business 2009 – Brazil’s profile Doing Business rank (out of 181 countries)
Ease of… Doing Business
2009
2008
Change in rank
125
126
+1
Starting a business
127
125
‐2
Dealing with construction permits
108
105
‐3
Employing workers
121
120
‐1
Registering property
111
115
+4
Getting credit
84
79
‐5
Protecting investors
70
66
‐4
Paying taxes
145
138
‐7
Trading across borders
92
98
+6
Enforcing contracts
100
103
+3
Closing a business
127
134
+7
Source: Doing Business 2009 (World Bank/IFC)
Figure 25: International benchmarking
UNDP: Human Development Report 2007/08
HUMAN DEVELOPMENT INDEX Brazil’s ranking: 70/177
Transparency International: Corruption Perception Index 2008
CORRUPTION PERCEPTIONS INDEX Brazil’s ranking: 80/180
World Bank: Doing Business 2009
EASE OF DOING BUSINESS INDEX Brazil’s ranking: 125/181
World Economic Forum: Global Competitiveness Report 2008-09
GLOBAL COMPETITIVENESS INDEX Brazil’s ranking: 64/134
A T Kearney/Foreign Policy magazine: Globalization Index 2007
GLOBALIZATION INDEX Brazil’s ranking: 67/72
World Economic Forum: Financial Development Report 2008
FINANCIAL DEVELOPMENT INDEX Brazil’s ranking: 40/52
Lower performers
Better performers
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Millennium Development Goals Brazil’s progress towards achieving the Millennium Development Goals (MDGs) is summarised in Table 18. The Government of Brazil has attached great importance to achieving the MDGs and has produced three National Monitoring Reports (2004, 2005 and 2007), based on detailed official data. In addition to the measurement of indicators, these reports also include a presentation of the most relevant public policies and analysis of the prospect of achievement. During the past decade, the results show significant improvement in most indicators and clearly show that Brazil has already accomplished some targets and is close to achieving others. However, important challenges still remain primarily due to the great levels of inequality and disparity in Brazilian society and among geographic regions. Income inequality has been decreasing since 2001 and reached its lowest level in 2005. Table 18: Millennium Development Goals ‐ summary profile for Brazil MDG 1: Eradicate extreme poverty and hunger
Brazil has already fulfilled its commitment to this Goal.
MDG 2: Achieve universal primary education
Significant improvements have been registered in access to education, resulting in nearly universal coverage for elementary school. But the quality of basic education still lacks, since a large number of children finish grade 4 without adequate reading and writing skills.
MDG 3: Promote gender equality and the empowerment of women
Women have reached a higher schooling level than men in Brazil. However, discrimination is revealed in high levels of domestic violence, women’s participation in the labour market and their presence among political leaders. The indicators show a slight improvement but challenges still remain.
MDG 4: Reduce child mortality
Child mortality and infant mortality have been decreasing at an escalating pace. At the national level Brazil is likely to reach the Goal if present trend continues.
MDG 5: Improve maternal health
Maternal mortality rate fell from 61.2 to 53.4 per 10,000 babies born between 1997 and 2005, which indicates that Brazil is on track to achieve this Goal. But a close monitoring of maternal mortality is still difficult because of poor information and underreporting of cases.
MDG 6: Halt the spread of HIV/AIDS, malaria and other diseases
The number of people living with HIV/AIDS has remained steady since 2000 and the number of AIDS‐caused deaths has fallen among men and women. This indicates a reversal of the trend of growing death rate, resulting in fulfilment of this Goal. Similarly, after 3 years of increase, the incidence rate for malaria dropped in 2006.
MDG 7: Ensure environmental sustainability
Brazil has reduced its deforestation index, reduced the CFC consumption and increased its energy efficiency by relying on renewable energy sources. Expanding water supply indicates that Brazil will reach this indicator by 2015. However, improving urban and rural sanitation depends on the criterion used for its gauging and on the volume of investments. Data show that progress has already been achieved in many Brazilian cities – the proportion of urban domiciles with adequate housing conditions increased from 49.4% in 1992 to 61.5% in 2005. To rapidly improve the situation, the Government has introduced this issue as a national priority in its recently approved Accelerating Growth Plan for the next four years.
MDG 8: Develop a global partnership for development
Brazil has had a leading role in striving to achieve fairer trading rules and is making considerable efforts towards achieving universal access to AIDS medicines. The Government of Brazil has been very proactive and innovative in promoting global partnerships using South‐South Cooperation as a vehicle. Therefore, Brazil is very likely to achieve this Goal.
Source: UN MDG Monitor (Brazil profile last updated January 2008)
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Economy GDP growth Economic growth in Brazil increased from 3.8 per cent in 2006 to exceed expectations at 5.4 per cent in 2007 (Figure 26). This trend continued over the first seven months of 2008 when GDP grew by some 6.1 per cent. Growth has subsequently been impacted by the global financial shocks that have dominated the second half of the year, and the final figure for 2008 is expected to be 5.2 per cent. The outlook for 2009 is rather more pessimistic, with the IMF’s latest estimates suggesting that GDP growth will decline to 3.0 per cent in 2009, reflecting global economic conditions. Brazil’s economy is nevertheless expected to be relatively strong compared to the world’s advanced economies: for example, US ‘growth’ is expected to be ‐0.7 per cent in 2009 whilst the forecast for the UK is even worse at ‐1.3 per cent. Figure 26: Brazil GDP growth trends (source: IMF) 7 6
GDP growth %
5 4 3 2 1
e
e
13
12
20
20
e 11 e 20
e
10
20
e
09
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
20
19
19
98
0
Value‐added The services sector contributes around two‐thirds of the value added to Brazil’s GDP. Industry accounts for 31 per cent; Brazil’s main industries include textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts and other machinery and equipment. Agricultural production – which consists of coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus and beef – accounts for about 5 per cent of GDP. Foreign trade Brazil’s main trade partners are the US, Argentina, China, Germany, the Netherlands and Nigeria (Table 19). Strong external demand, high commodity prices and a more active export policy have contributed to booming export earnings since 2003, leading the trade surplus to swell and transforming the current account from a deficit of 4.6 per cent of GDP in 2001 to a surplus for several years. However, this surplus has been steadily declining and the current account is expected to be in deficit in 2008.
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Table 19: Brazil ‐ main import and export markets (2007 data) Major exports
% of total
Major imports
% of total
Transport equipment & parts
12.5
Machinery & electrical equipment
26.1
Metallurgical products
11.6
Chemical products
15.4
Soybeans, meal & oils
8.2
Oil & derivatives
16.6
Chemicals
1.9
Transport equipment & parts
Leading markets US
% of total
12.0 % of total
US
15.7
Argentina
9.2
China
10.5
China
6.8
Argentina
8.6
Netherlands
5.6
Nigeria
4.4
Germany
4.6
Netherlands
Export earnings (est)
16.1
Leading suppliers
US$161 billion
Import bill (est)
0.9 US$121 billion
Sources: Economist Intelligence Unit, CIA World Factbook
Private capital flows International context Net debt and equity inflows to developing countries increased by US$269 billion in 2007 to reach a record US$1.03 trillion, according to the World Bank’s Global Development Finance 2008 report. This marks five consecutive years of strong gains in net private flows, which averaged over 44 per cent a year (however, much of the increase in dollar terms reflects the depreciation of the US$ against most other currencies). The rapid expansion in private flows reflects strong gains in both equity and debt components. Net (foreign direct and portfolio) equity inflows reached an estimated US$616 billion in 2007 (Figure 27), equal to a record 4.5 percent of GDP, up from 4.1 per cent in 2006. Figure 27 also illustrates how portfolio equity inflows have become increasingly important since the turn of the millennium. Brazil Foreign direct investment (FDI) into Brazil has averaged at just over US$22 billion a year over the last decade, and reached a high of US$35.5 billion at the end of 2007. Net foreign portfolio investment flows have increased dramatically in the last few years and by 2007 they reached US$34 billion, almost matching the volume of FDI (Figure 28). Data from CVM indicates that the total stock of foreign portfolio investment amounted to some US$214 billion at the end of 2007 and by the end of August 2008 stood at US$232 billion (Figure 29). Brazil’s share of total FDI flows to emerging markets has been in decline since 1998 and is estimated at just under 6 per cent for 2007 (Figure 30). Over the last three to four years, foreign portfolio investment has become increasingly important to Brazil’s economy; Brazil’s share of net portfolio equity flows to all developing countries surged to nearly 25 per cent in 2007 (Figure 31).
72
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 27: Net equity flows to developing countries (source: World Bank Global Development Finance 2008) 500 450 400
US$ billion
350 300 250
Net portfolio equity inflows
200
Net FDI inflows
150 100 50 1999
2000
2001
2002
2003
2004
2005
2006
2007
Figure 28: FDI and foreign portfolio investment in Brazil: flows (sources: CVM, UNCTAD) 40,000 35,000
US$ million
30,000 25,000 20,000
FDI
15,000
Foreign portfolio investment (net)
10,000 5,000 (5,000) 1997
1999
2001
2003
2005
2007
Figure 29: FDI and foreign portfolio investment in Brazil: stock (sources: CVM, UNCTAD)
350,000
US$ millions
300,000 250,000 200,000 FDI
150,000
Foreign portfolio investment
100,000 50,000 0 1997
1999
2001
2003
2005
2007
SUSTAINABLE INVESTMENT IN BRAZIL 2009
73
Figure 30: Brazil's share of total FDI flows to emerging markets (source: UNCTAD) 35% 30% 25% Brazil
20%
Russia 15%
India China
10% 5% 0% 1994
1996
1998
2000
2002
2004
2006
Figure 31: Brazil's share of net portfolio equity flows to developing countries (sources: CVM; World Bank Global Development Finance 2008) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 1999
2000
2001
2002
2003
2004
2005
2006
2007
The stock market Market size th The São Paolo stock exchange, operated by BM&F Bovespa, is the 13 largest market in the world by market capitalization (Figure 32), following a dramatic increase in size over the last two decades (Figure 33). In common with almost all other markets, Brazil’s market capitalisation has experienced a sharp decrease in the last 12 months as a result of the global economic crisis and the worldwide fall in equity prices. As of the end of November 2008, the market value of BM&F Bovespa listed companies came to R$1,355 billion (US$585 billion).
74
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 32: Domestic market capitalisation of the world's 20 largest exchanges (USD millions) (source: World Federation of Exchanges) NYSE Group Tokyo SE Nasdaq Euronext London SE Shanghai SE Hong Kong Exchanges TSX Group Deutsche Börse BME Spanish Exchanges Swiss Exchange Australian SE BM&FBOVESPA Bombay SE OMX Nordic Exchange National Stock Exchange India Borsa Italiana Korea Exchange JSE Taiwan SE Corp. 0
5,000,000 end Oct 2008
10,000,000
15,000,000
20,000,000
end Oct 2007
Domestic market cap US$ millions
Figure 33: BM&F Bovespa domestic market capitalisation (source: World Federation of Exchanges)
1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000
October 2008
End 2007
End 2006
End 2005
End 2004
End 2003
End 2002
End 2001
End 2000
End 1999
End 1998
End 1997
End 1996
End 1995
End 1994
End 1993
End 1992
End 1991
End 1990
0
SUSTAINABLE INVESTMENT IN BRAZIL 2009
75
Table 20 shows the country weighting for Brazil in the three main emerging market indices published by FTSE, MSCI and Standard & Poor’s. The table includes data for India for comparison. Table 20: Country weighting in key emerging market indices Index
BRAZIL
INDIA
Reporting date
FTSE All‐World Emerging Index
14.59%
9.97%
Jan 14, 2009
MSCI Emerging Market Index
13.36%
6.65%
Jan 14, 2009
S&P/IFCI Composite Index
12.78%
7.13%
Nov 30, 2008
Corporate governance segments There are different listing segments for companies traded on the stock exchange. In addition to the Traditional Bovespa segment, these include the Novo Mercado and two further differentiated corporate governance categories, Level (Nivel) 1 and Level (Nivel) 2. The key features of these corporate governance segments are summarised in Table 21. Table 21: Novo Mercado and corporate governance levels Requirements
Disclosure of Information
Protection to minority shareholders
Management Requirements
Level 1
Level 2
Novo Mercado
Information sharing standards
Minimum required by CVM
IFRS or US GAAP
IFRS or US GAAP
Other requirements
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Stocks without voting rights permitted?
Yes
Yes
No
Minimum free floats
25%
25%
25%
Tag along for stocks with voting rights
No
100%
100%
Tag along for stocks without voting rights
No
80%
N/A
Conflict solving via arbitration chamber
Optional
Obligatory
Obligatory
Requirements regarding the Board of Directors
No
Minimum: 5 members and 2 year mandate
Minimum: 5 members and 2 year mandate
76
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Key companies and industries As of the end of November 2008, 393 companies were listed on the exchange with a combined market capitalisation of R$1,355 billion (US$570 billion). Figure 34 shows the share of market capitalisation between the different listing segments: Novo Mercado companies represent about 33 per cent of total market cap. Table 22 lists the companies in the IBovespa, the market’s main benchmark index. The five industrial sectors with the highest market value are financial institutions (22 per cent); oil, gas and biofuel (20 per cent); mining (15 per cent); steel and metallurgy (11 per cent); and electric power (7 per cent) (Figure 35). The market is highly concentrated: the top ten companies with the highest market value make up about 50 per cent of total market capitalisation. Approximately 25 per cent of the total value of the market is concentrated in just two companies, Petrobras and Vale R Doce; these two firms represent 34 per cent of the notional IBovespa portfolio. The capital structure of both Petrobras and Vale R Doce includes preference as well as common shares; neither firm is listed on the Novo Mercado. Figure 34: Market capitalisation by listing segment NOVO MERCADO (32.6%)
TRADITIONAL BOVESPA (32.6%)
NIVEL 2 (2.1%)
NIVEL 1 (47.2%)
Source: BM&F BOVESPA (data as of end Nov 08)
Figure 35: Industry breakdown of IBovespa index constituents
Financial 21.6%
Other 16.1% Transportation 4.1% Telecom 4.8% Electric utilities 7.3%
Oil and gas 19.8%
Steel 11.1% Mining 15.2%
SUSTAINABLE INVESTMENT IN BRAZIL 2009
77
Table 22: Companies in the IBovespa index Company
Industry
ALL AMER LAT (N2)
Railroads
AMBEV ARACRUZ (N1)
Beer & soft drinks Pulp & paper
B2W VAREJO (NM) BMF BOVESPA (NM)
Retail Diversified financial services
BRADESCO (N1) BRADESPAR (N1)
Financial intermediaries Holdings ‐ diversified
BRASIL (NM) BRASIL T PAR (N1)
Financial intermediaries Telecommunications
BRASIL TELEC (N1) BRASKEM (N1)
Telecommunications Petrochemicals
CCR RODOVIAS (NM) CELESC (N2)
ISE ?
Market cap US$ million
IBovespa weight (%)
2,868
1.415
24,219 1,409
1.122 0.777
1,156 5,265
0.904 4.360
27,966 2,834
3.700 1.199
15,969 5,091
2.404 0.721
7,745 1,207
0.420 0.545
Toll roads & highways Electric utilities
4,076 663
0.611 0.121
CEMIG (N1) CESP (N1)
Electric utilities Electric utilities
6,123 1,908
1.642 1.215
COMGAS COPEL (N1)
Gas utilities Electric utilities
1,652 2,686
0.114 0.651
COSAN (NM)
Sugar ‐ alcohol
1,575
0.603
CPFL ENERGIA (NM) CYRELA REALT (NM)
Electric utilities Residential building construction
6,191 1,400
0.522 1.257
DURATEX (N1) ELETROBRAS (N1)
Wood Electric utilities
773 12,379
0.551 1.903
ELETROPAULO (N2) EMBRAER (NM)
Electric utilities Aerospace
1,704 2,791
0.691 0.656
GAFISA (NM) GERDAU (N1)
Residential building construction Steel
597 8,584
0.930 3.100
GERDAU MET (N1) GOL (N2)
Steel Airlines
3,430 858
0.916 0.737
ITAUBANCO (N1) ITAUSA (N1)
Financial intermediaries Financial intermediaries
30,708 15,437
3.471 2.238
JBS (NM) KLABIN S/A (N1)
Meat, poultry & others Pulp & paper
3,034 1,530
0.658 0.355
LIGHT S/A (NM) LOJAS AMERIC
Electric utilities Retail
1,908 1,915
0.203 1.200
LOJAS RENNER (NM) NATURA (NM)
Retail Cosmetics
815 3,486
0.858 0.638
NET (N2) NOSSA CAIXA (NM)
Cable TV Financial intermediaries
2,372 3,124
0.946 0.397
P.ACUCAR‐CBD (N1) PERDIGAO S/A (NM)
Retail Meat, poultry & others
3,249 2,634
0.553 0.887
PETROBRAS
Oil, gas & biofuels
95,846
19.776
REDECARD (NM) ROSSI RESID (NM)
Diversified financial services Residential building construction
7,401 311
0.933 0.569
SABESP (NM) SADIA S/A (N1)
Water utilities Meat, poultry & others
2,706 1,162
0.403 1.139
SID NACIONAL SOUZA CRUZ
Steel Tobacco
9,845 5,768
3.454 0.487
TAM S/A (N2) TELEMAR
Airlines Telecommunications
1,145 5,763
0.711 1.511
TELEMAR N L TELESP
Telecommunications Telecommunications
5,773 9,272
0.296 0.191
TIM PART S/A TRAN PAULIST (N1)
Telecommunications Electric utilities
3,628 2,766
0.955 0.371
ULTRAPAR (N1) UNIBANCO (N1)
Holdings ‐ diversified Financial intermediaries
3,103 15,755
0.437 2.417
USIMINAS (N1) V C P (N1)
Steel Pulp & paper
5,677 1,545
3.667 0.618
VALE R DOCE (N1) VIVO
Mining Telecommunications
60,142 4,457
15.154 0.722
78
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Capital raising The amount of capital raised on the stock exchange by Brazilian companies through the issuance of new and secondary equity offerings has increased significantly over the last three to four years (Figures 36 and 37). Although the number of IPOs has increased since 2005 and reached a record high in 2007, the longer term trend is dominated by secondary public offerings. Table 23 provides details of Brazilian IPO and secondary public offerings from June 2007 to June 2008 (new deals since June 2008 have all but dried up as a consequence of wider economic conditions). Some US$35 billion of new deals were completed during this period. Key IPOs have included Bovespa (US$3.7 billion in October 2007); the commodities exchange BM&F (US$3.3 billion in November 2007); the electricity generation and distribution firm MPX Energia (US$1.3 billion in December 2007); and the oil & gas company OGX (US$4.1 billion in June 2008). The majority of IPOs in recent years have been on the Novo Mercado. Figure 36: Capital raised by share issues on BM&FBOVESPA (US$ millions) (source: World Federation of Exchanges) $45,000 $40,000 $35,000 US$ millions
$30,000 $25,000 Secondary public offerings
$20,000
Initial public offerings
$15,000 $10,000 $5,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 37: Number of IPOs on BM&FBOVESPA (source: World Federation of Exchanges)
Number of newly listed companies
80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
SUSTAINABLE INVESTMENT IN BRAZIL 2009
79
Table 23: Main deals completed in Brazil since June 2007 Company
Industry
Date
OGX PETRÓLEO GERDAU LE LIS BLANC COPASA METALURGICA GERDAU ANHANGUERA EDUC HYPERMARCAS GLOBAL VILLAGE GP INVESTMENTS NUTRIPLANT TEMPO PERDIGAO MPX ENERGIA BOLSA BM&F BANCO PANAMERICANO LAEP INVESTMENTS AMIL BRASIL BROKERS BOVESPA HOLDINGS HELBOR AGRENCO PDG REALTY MARISA BR MALLS PARTIC SEB EDUCAC TRISUL CONSTRUTORA TENDA BANCO INDUSTRIAL E COMER SATIPEL INDUSTRIAL GENERAL SHOPPING BRASIL SPRINGS GLOBAL PARTIC MULTIPLAN EMP IMOBIL COMPANHIA PROVIDENCIA BANCO DO RIO GRANDE SUL BANCO ABC BRASIL AÇUCAR GUARANI MRV ENGENHARIA E PARTIC CIA HERING TRIUNFO PARTIC E INVEST KROTON EDUC MINERVA S/A INVEST TUR BRASIL BANCO INDUSVAL DROGASIL BANCO DAYCOVAL MARFRIG FRIGORIFICOS BANCO CRUZEIRO DO SUL EZ TEC TOTAL COUNT
Oil & gas Materials Consumer Staples Utilities Materials Consumer Discretionary Consumer Staples Telecommunications Financials Materials Financials Consumer Staples Utilities Financials Financials Financials Financials Real Estate/Construction Financials Real Estate/Construction Industrial Real Estate/Construction Consumer Discretionary Real Estate/Construction Consumer Discretionary Real Estate/Construction Real Estate/Construction Financials Real Estate/Construction Real Estate/Construction Industrial Real Estate/Construction Industrial Financials Financials Consumer Staples Real Estate/Construction Consumer Staples Industrial Consumer Discretionary Consumer Staples Real Estate/Construction Financials Healthcare/Pharma Financials Financials Financials Real Estate/Construction
Jun 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Feb 08 Feb 08 Feb 08 Dec 07 Dec 07 Dec 07 Nov 07 Nov 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Sep 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jun 07 Jun 07 Jun 07 Jun 07
Source: Citigroup Global Markets Equity Research; BM&F Bovespa
Primary 4,100.0 600.3 76.9 239.8 601.0 266.6 367.0 156.8 186.5 11.8 217.7 507.3 1,080.3 2,890.7 391.3 286.8 457.5 171.3 3,218.6 129.9 370.0 277.7 245.0 332.1 159.2 176.5 333.6 310.6 114.4 143.2 189.5 360.8 246.1 428.8 328.7 357.8 540.2 123.2 163.7 191.7 199.7 450.6 120.4 106.8 486.4 305.2 222.1 245.9 27,845 79%
Size (US$ million) Secondary ‐ ‐ ‐ 36.0 ‐ 39.2 55.0 11.7 557.2 1.8 47.1 94.9 215.6 433.6 55.9 42.9 331.7 224.8 482.9 30.3 55.5 41.7 ‐ ‐ 68.2 ‐ ‐ 139.7 99.1 7.2 109.7 124.7 ‐ 690.5 5.1 ‐ 30.1 44.4 112.1 65.0 39.9 59.0 17.2 97.8 81.2 218.3 67.6 36.9 7,216 21%
Total 4,100.0 600.3 76.9 275.8 601.0 305.8 422.0 168.4 743.7 13.5 264.8 602.1 1,295.9 3,324.2 447.2 329.7 789.2 396.1 3,701.5 160.2 425.6 319.4 245.0 332.1 227.5 176.5 336.6 450.2 213.5 150.4 299.2 485.4 246.1 1,119.2 333.8 357.8 570.3 167.5 275.8 256.7 239.6 509.6 137.6 204.6 567.6 523.5 289.7 282.7 35,061 100%
80
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Performance Figure 38 compares the performance of Brazil’s benchmark index, the IBOVESPA, with that of the MSCI Emerging Market Index (MSCI EM) over the last five years. The IBOVESPA steadily gained in value over the 2005‐2007 period and began to outperform the MSCI EM in Q3 2007 as the “sub‐prime” problem began to make its effects felt beyond the US. Both the MSCI EM and IBOVESPA have fallen sharply since Q2 2008 as the international credit crunch crisis evolved into a severe global financial and economic downturn. The IBOVESPA, while falling dramatically, continues to be ahead of the MSCI EM. Figure 38: IBOVESPA performance compared to MSCI Emerging Market Index, 5 years (source: Bloomberg) 250% 200% 150% 100% 50% 0%
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
-50%
IBOVESPA
MSCI EM
Market participants Figure 39 illustrates trading on BM&F Bovespa by different classes of market participants: individuals (including investment clubs), institutional investors, international investors, companies and financial institutions. Trading by companies has declined over time relative to other types of market participants, whilst trading by Brazilian institutional investors and international investors has increased, reflecting the increase in domestic savings and foreign portfolio investment. Figure 39 also shows how individual investors and investor clubs have continually been a very important component of the buy‐side in Brazil.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
81
Figure 39: Evolution of investors’ participation on BOVESPA's Total Trade Value (%) (source: BM&F Bovespa)
Jun-08
24.4
26.3
37.2
2007
23
29.7
34.5
2.4
10.4
2006
24.6
27.2
35.5
2.3
10.4
2005
25.4
2004
27.5
2003
26
27.5
16.5
2001
21.7
16
20.2 Individuals
26
3.5
25.1
15.8 Institutional
24.3
22 International
3.2 5.3 Financial Institutions
8.8
2.6
27.3
27.6
21.9
2000
32.8
28.1
2002
3.3
3.4 4.1
11.7 13.8 18
32.1 34 36.7 Companies
Key environmental and social issues Corporations and their investors in Brazil face a wide and often complex range of social and environmental issues that present potentially significant risks and opportunities to shareholder value and corporate reputation. At the current time there does not appear any single source that synthesises this information into an investor‐friendly, comprehensive analysis of key sustainability‐ related business drivers in the industries that make up Brazil’s stock market. A detailed assessment is beyond the current scope of this report. Principal issues The main environmental and social issues that influence business and investor risk in Brazil include: Poverty and inequality Access to finance at the ‘base of the pyramid’ Land distribution and landless workers Food security Child labour Forced labour Indigenous peoples and associated land rights Urban air pollution Biodiversity protection Deforestation and land use change Greenhouse gas emissions Water and sanitation Energy (including oil & gas, hydroelectricity and biofuels) Climate change adaptation Regional (cross‐border) infrastructure development Appendix B provides a selection of recent press articles illustrating the relevance of these issues to Brazil’s leading industries and corporations.
82
SUSTAINABLE INVESTMENT IN BRAZIL 2009
New national plan on climate change One important recent development is the Brazilian Government’s National Plan on Climate Change, published in December 2008. The measures in this action plan may have potentially significant implications (both positive and negative) across a number of key Brazilian industry sectors, including oil & gas, biofuels, mining, steel, power and pulp & paper. Some of the key principles and actions in the National Plan on Climate Change are summarised in the box below.
NATIONAL PLAN ON CLIMATE CHANGE (DECEMBER 2008) SELECTED MEASURES INCREASE ENERGY AND CARBON EFFICIENCY IN THE PRODUCTIVE SECTOR: Achieve gradual energy savings up to 106 TWh/year by 2030, avoiding emissions of around 30 million tons of CO2 in that year. Increase use of sustainable charcoal to replace coal in steel plants, mainly through the encouragement of forestation in degraded areas. Encourage use of water solar power heating systems, reducing electricity consumption in 2,200 GWh per year by 2015. Phase out use of fire for clearing and cutting of sugarcane in areas where harvesting mechanization can take place. Integrated agricultural and cattle raising systems including carbon sinks via crop‐livestock integration and agro‐forestry. MAINTAIN RENEWABLE ENERGY’S HIGH SHARE IN THE ELECTRIC MATRIX: Increase electricity supply from cogeneration, mainly from sugarcane bagasse, to 11.4 per cent of the total supply in the country, in 2030, corresponding to 136 TWh. Reduce non‐technical losses in the electricity distribution at a rate of 1,000 GWh per year over the next ten years. 34,460 MW from new hydropower plants to be added to the system in accordance with the schedule of works of the Ten Year Energy Plan (2007‐2016). Increase the energy matrix share of renewable energy from wind and sugarcane bagasse through specific auctions of renewable energy. More than 7,000 MW of renewable sources will be implemented by 2010. Expand national solar photovoltaic industry and the use of this energy source in systems that are isolated and connected to the grid. INCREASE BIOFUEL USE AND WORK TOWARDS AN INTERNATIONAL MARKET OF SUSTAINABLE BIOFUELS: Encourage industry to achieve an average annual ethanol consumption increase of 11 per cent in the next ten years. Stimulate an international ethanol market through technical cooperation with other countries with a high potential for growing sugarcane. ACHIEVE ZERO ILLEGAL DEFORESTATION: Amazon Fund: created in 2008, the Amazon Fund aims to raise financial resources nationally and internationally from governments and the private sector for the reduction of deforestation, sustainable forest use and conservation. Climate Fund: submitted to the National Congress, amongst other purposes it aims to finance actions concerned with preventing deforestation. Minimum price policies for non‐timber forest produces (linked to traditional communities and peoples). ELIMINATE NET LOSS OF FOREST COVERAGE BY 2015: Revision of current banking requirements to make forestation and reforestation activities more attractive, including areas for charcoal production. Development of forest products for fuel applications. Prevention of the use of illegal timber in the building industry – starting in January 2009, the legal origin of timber will have to be proved by building companies and companies from the real estate sector.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
APPENDIX B: EXAMPLES OF ESG ISSUES IN THE INTERNATIONAL MEDIA
83
84
SUSTAINABLE INVESTMENT IN BRAZIL 2009
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87
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!
88
SUSTAINABLE INVESTMENT IN BRAZIL 2009
APPENDIX C: SWOT ANALYSIS
SUSTAINABLE INVESTMENT IN BRAZIL 2009
89
STRENGTHS/OPPORTUNITIES
WEAKNESSES/THREATS
BM&F Bovespa is a proactive and innovative stock exchange with respect to ESG investment concepts and solutions
Many other initiatives and challenges compete for management attention
The Brazilian investment and corporate community puts a strong emphasis on corporate governance, including pioneering initiatives such as the Novo Mercado
Corporate governance culture has not yet evolved to fully include governance of environment and social risks – emphasis remains on ‘core’ CG issues such as minority shareholder rights No listing rules or stock exchange guidance in relation to non‐ financial reporting or ESG disclosure Risk of falling behind emerging best practices (e.g. ICGN Statement and Guidance on Non‐financial Business Reporting)
Strong environmental legislation
Variable environmental enforcement
The complexity and significance of environmental and social issues in Brazil mean that there is a strong business case for corporate sustainability, and therefore a strong value‐added argument in favour of sustainable investment strategies
The complexity and significance of environmental and social issues presents important information and management challenges, as well as decision‐making dilemmas and difficult judgement calls. Failure to deal adequately with ESG issues in investment can lead to very real social and environmental damage and put value at risk
Through its Center for Sustainability Studies, Brazil’s leading business school (FGV) is an active and catalytic participant in the development of Brazil’s sustainable investment market
CES‐FGV’s resources may sometimes be spread too thinly
The ISE Index has matured into a successful and important element in the Brazilian investment and corporate responsibility landscape, and appears to be able to operate on a break‐even basis
The ISE business model may not provide sufficient revenue for R&D, marketing, etc and arguably distorts the marketplace for commercial ESG research The ESG investment needs of Brazilian institutional investors like PREVI are evolving beyond what the ISE can currently provide The company response rate to the annual ISE survey is low and falling steadily and the ISE has a low profile with foreign portfolio investors
Many of Brazil’s leading asset managers participate in sustainable investment and have built up experience via SRI mutual funds that have proved they can deliver respectable financial returns compared to relevant benchmarks
Currently, no asset manager employs full‐time ESG analysts: human capital development is likely to emerge as an issue for the future Lack of ESG research out‐sourcing hinders the development of a commercial ESG research services Relatively few asset managers have signed the UNPRI and there seems to be limited interaction and know‐how exchange with Brazil’s UNPRI pension funds and the UNPRI as a whole The competing SRI mutual funds are all similar to one another in terms of ESG features and financial performance The asset managers’ SRI business lines appear to be stagnating (no recent product innovation, static/falling consumer appetite) Since the ‘loss’ of the ABN AMRO Brazil Fund, Brazilian asset managers no longer offer off‐shore ESG funds suitable for foreign investors Shareholder engagement is in its infancy.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Brazilian pension funds were among the founding signatories of the UNPRI and are currently the main driving force behind sustainable investment in Brazil under the leadership of the influential leadership of PREVI, by far the country’s largest pension fund Public policy measures to promote sustainable investment (e.g. pension fund transparency rules) have not been necessary
Implementation is at a relatively early stage and is mainly concentrated in PREVI Currently, no pension fund employs full‐time ESG analysts: human capital development is likely to emerge as an issue for the future Lack of ESG research out‐sourcing hinders the development of a commercial ESG research services By itself, the ISE is currently insufficient for the ESG investment needs of PREVI and other UNPRI signatories – however, developing additional tools and methodologies is a significant challenge In‐house management of equities isolates the UNPRI pension funds from the sustainable investment expertise built up by asset managers in the SRI mutual fund niche Shareholder engagement is in its infancy.
IFC has played a catalytic role by supporting a number of strategic initiatives in this field, including the development of the ISE Index IADB and BNDES both play key roles in helping to develop Brazil’s hi‐tech and ‘greentech’ venture capital industry IADB has commissioned interesting research from Innovest on the “Opportunities for the Majority” strategies of several Latin American corporations, including a number of Brazilian firms
Other emerging markets/advisory needs compete for IFC’s management attention and finite grant funding resources BNDES and IADB do not appear to be engaged in Brazil’s networks and initiatives for sustainable portfolio investment in Brazil It is not clear whether or how BNDES handles ESG issues with respect to its ownership of significant stakes in Brazil’s leading listed companies There is little or no interaction between IFC, IADB and BNDES on DFI support for the development of Brazil’s sustainable investment market
Brazil’s HNWI population is growing rapidly and may represent a potential stock of sustainable investment assets of roughly US$70 billion
There is no published market research on sustainable HNWI investment in Brazil
As a general observation, foreign portfolio investors are increasingly focusing on ESG issues when investing in Brazil and other emerging and frontier markets
There is relatively little data on the ESG “footprint” of Brazil’s foreign portfolio investors and investors in Brazilian ADRs listed in New York
Brazil has emerged as the main centre of PE/VC activity in the region, including a number of “greentech” funds and deals Institutional investors such as PREVI are promoting sustainable private equity investment in Brazil through the UNPRI IPOs have become an attractive exit route, creating synergies between sustainable PE and the ISE Index WRI’s New Ventures programme plays a key role in developing VC opportunities in sustainable SMEs
GPs with formal ESG policies and procedures are still the exception rather than the rule Biofuels have become a significant part of PE/VC activity in Brazil and this sector poses complex environmental and social issues and challenges New tools, standards and capacity building programmes are needed to support further progress towards mainstream integration of ESG investment in the PE/VC sector At some point in the future WRI is likely to need an effective “exit” mechanism for New Ventures Brazil, possibly involving commercial spin‐out
Brazil’s leading listed companies are relatively good at voluntary non‐financial reporting in the form of GRI sustainability reporting and responses to the Carbon Disclosure Project Brazil has a strong body of consultants, not‐for‐profit organisations and other entities that provide expertise and advocacy for sustainability reporting etc.
Further progress is needed in terms of coverage and quality Sustainability reporting still has a strong PR flavour Non‐financial reporting of potentially material ESG risks does not appear to be widely practiced in relation to IPO prospectuses and regulatory filings Many of Brazil’s leading listed companies are listed in New York and are therefore potentially vulnerable to regulatory changes that are currently being discussed in the US in relation to e.g. SEC rules on climate change disclosure
SUSTAINABLE INVESTMENT IN BRAZIL 2009
91
A small number of international sustainable investment research firms cover some of Brazil’s leading companies Brazil has the human capital to develop its own sustainable investment research providers
Coverage by international firms is still relatively limited and is largely conducted by non‐Brazilians located abroad Brazil has not developed its own sustainable investment research industry, due to lack of commercial demand from the buy‐side
Some international sell‐side firms are producing sector‐specific sustainability research which includes a small number of Brazilian companies that are globally significant in their sector
International sell‐side research on the ESG aspects of Brazilian stocks is extremely limited Brazilian sell‐side analysts do not produce ESG research due to lack of commercial demand from the buy‐side
Organisations such as the Brazilian Association of Pension Funds, the National Association of Investment Banks and the Association of Capital Market Analysts and Investment Professionals play an active part in promoting sustainable investment in Brazil
Language barriers (English‐Portuguese and Portuguese‐English translations of key reports, guidance materials and other relevant information are rare and often of poor quality)
Several of Brazil’s asset managers are active in CES‐FGV’s Latin American Sustainable Finance Forum (LASFF) The UNPRI is becoming increasingly active in Brazil and intends to recruit a full‐time Brazil‐based coordinator to expand membership and support implementation
The LASFF does not have a wide membership base in the asset management community, and does not fulfil the crucial role played by industry organisations in other regions as UKSIF in the UK or ASrIA in Asia Despite having almost identical strategic and technical interests, there is little membership overlap between the LASFF and UNPRI, and technical cooperation has begun only recently. LASFF and UNPRI both have limited human and budget resources
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
APPENDIX D: SUSTAINABILITY IN BRAZIL’S PRIVATE EQUITY AND VENTURE CAPITAL MARKET
SUSTAINABLE INVESTMENT IN BRAZIL 2009
93
Market overview The Emerging Market Private Equity Association (EMPEA) provides extensive and authoritative 14 information on private equity and venture capital in Brazil and Latin America , as do the Brazilian Private Equity and Venture Capital Association (ABVCAP) and the Latin American Venture Capital Association (LAVCA). Brazil has implemented a series of reforms in recent years to attract and promote private equity and venture capital, and is now the leading center for PE/VC activity in the region. These reforms have included stronger laws on fund formation and operation, better protection of intellectual property rights, and lower restrictions on institutional investors. In addition, the corporate governance segments created by Bovespa in 2001 have opened new opportunities for exits on public markets. Prior to the global economic crisis, Brazil led a resurgence of investor interest in private equity in Latin America in general, and drew nearly 60 per cent of the private equity capital raised for Latin America PE funds in 2007. Investment volumes recorded unprecedented heights—at US$4.7 billion, 2007 volumes were roughly 10 times that of 2005, and double the peak of the 1990s boom years. As a result, 53 firms commenced private equity operations in Brazil between 2001 and 2007, and 89 PE/VC firms currently manage 153 funds in Brazil (Table 24). Brazilian private equity managers also built a solid record of exits, contributing to the explosion in IPO activity in 2006 and 2007. Brazil’s 2007 aggregate exit values surpassed dollar volumes across the entire region from 2003 to 2005. Brazilian institutional investors are becoming increasingly active in private equity. Insurance companies may invest up to 50 per cent of reserves in variable‐income instruments such as shares. The insurance sector remains underdeveloped in Brazil, though it is expanding. The participation of pension funds in PE/VC activity is larger than that of insurers, and pension funds have become major players in the industry by regional standards. ‘Open’ pension funds (i.e, those not limited to employees and retirees from specific companies) may invest 60 per cent of reserves in stocks. Many pension funds insist in participating on the investment committees of funds in which they invest. Fundraising Activity Until the recent economic downturn, the funds universe in Brazil was in a period of dramatic growth, both in the amount of capital being raised and the diversity of funds tapping the market (Figure 40). This growth spans the buyouts end of the spectrum, the middle market and the venture capital segment. Overall, funds focused on Brazil raised more than US$1 billion between April 2007 and April 2008. Additionally, at least 10 funds are raising upwards of US$4.6 billion, translating to a potential doubling in capital focused on Brazilian opportunities in 2008 relative to the US$2.5 billion raised in 2007. The financial crisis will undoubtedly have an impact on international fund‐raising. However, the impact on the Brazilian venture capital and private equity industry is likely to be cushioned because Brazilian pension funds such as PREVI are becoming increasingly active in this asset class. 14
Insight Brazil: An Overview of Trends in Select Sectors and Markets EMPEA (May 2008)
94
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 24: Brazil ‐ recent private equity funds (source: EMPEA)
PE Firm
Fund
Sector Focus
Actis
Actis Latin America 3 LP (US$132m)
Generalist
Advent International
Latin America Private Equity Fund IV (2007, US$1.3b)
Generalist
AIG Capital Partners
AIG Brazil Special Situations Fund II (2008, US$692m)
Generalist
Angra Partners
AG Angra Infrastructure Fund (2006, US$397m)
Infrastructure
Artesia Gestao de Recursos
Artesia Exclusive II (2007, US$98m)
‐
Axxon Group
Natixis Mercosul Fund (2001, US$100m)
‐
Banco Pactual
Fundo Brasil Energia (2004, US$255m)
Energy
Banco Santander
ASCET I‐FIP (2007, US$31m) BRASOIL FIP (2007, US$31m)
Generalist
Capitania Gestores
Private Equity Brazil Multi‐strategy I (2007, US$260m)
Generalist
CRP
CRP VI Venture (2006, US$28m)
Generalist
Darby Overseas Investments
Darby BBVA Latin America (2005, US$175m)
Agribusiness/Infrastructure
DGF
FIPAC (2006, R$80m)
Technology, Pharma
Dynamo
Puma II (2004, US$208m)
‐
FIR Capital Partners
Fundo Tec II (2007, US$45m) DFJ FIR Brazil Fund II (2007, US$100m)
Technology, life sciences
Gavea Investimentos
Fund II (2007, US$480m)
Generalist
GG Investimentos
Governança & Gestão Fund I (2006, US$140m)
‐
GP Investments
GP Capital Partners IV (2007, US$1.3b)
Generalist
Infinity
Infinity Bioenergy Fund I (2006, US$516m)
Cleantech
Investidor Profissional Gestão de Recursos
Gibraltar Fundo de Investimento em Participacoes II (2007, US$78m)
Technology
JB Partners
JBVC I Fund (2007, US$57m)
Generalist
Mellon Global Investments Brazil
Rio Agribusiness FIP (2007, US$13m) Polaris Fundo de Investimento em Participacoes (2007)
Agribusiness/Generalist
Mercatto Venture Partners
MVP Tech Fund (2002, R$23m)
Technology
Patriã Private Equity
Fundo de Terceirização de Serviços para o Brasil (2006)
Outsourcing
PTZ/Biomass Technology Group
PTZ/Biomass Technology Fund I (2006, US$63m)
Cleantech
Rio Bravo
RB Nordeste II (2006, US$46m)
Generalist
Southern Cross Group Brazil
Southern Cross Latin American Private Equity Fund III (2007, US$751m)
Generalist
Stratus Investimentos
Stratus VC Fund III (2006, US$31m)
Cleantec
Temple Capital Partners
Clean Energy Brazil (2006, US$197m)
Cleantech
Vision Brazil
Vision Agro Fundo de Investimento em Participacoes II (2007, US$78m)
‐
Votorantim Ventures
Votorantim New Business (US$300m)
IT, life sciences
SUSTAINABLE INVESTMENT IN BRAZIL 2009
95
Figure 40: PE funds raised 2002‐2007 (source: EMPEA) May 2008
by PriceWaterhouse Coo-
food and beverage retailers Grupo RA and La Mansion,
110 transactions involving
and duty-free retailer Brasif. GP Investments is building an
mpleted in 2007, 57 were
integrated human resources company through acquisitions
ortfolio companies. Fund
of Grupo Suma, Top Service, and People Domus. Equity
ts of consolidation plays
International and GP Investments are building a portfolio
ich has been investing in
of shopping center developments through their 2006 co-
e region, such as Brazilian
investment in BR Malls.
f Brazilian GPs is a critical
Figure 41: Number of PE‐backed Public Offerings in Brazil (source: EMPEA) ÕLiÀÊvÊ* L>Vi`Ê*ÕLVÊ"vviÀ}Ã
ery.
25
cial sponsors) account for
21
hirds of the exits in 2007.
20
s with strategic sponsors
16
path to exit in Brazil. Re-
15 12
International’s exit from
adora (JMS) in exchange
10
9
umer credit bank Parana
ealized a US$12.5 million
5
h a sale to US protective Industries. In November
0
nts realized its investment
2004
2005
2006
2007
Source: ABVCAP, Bovespa.
Investing Trends ÕÊ6 É* Ê ÝÌÃ]ÊÓääÈÊÊÓääÇ Net Revenues 2006 (USD million)
Association
393 1746 161 308 305 3374 793 517 n/a 122 n/a
Private equity firms are bullish on Brazilian agricultural investments, in spite of the tight credit Investment Time to exit Estimated IRRs (USD million) (years) in US$ markets. Investors with cash say the current market turmoil will create opportunities in Brazil’s fast 11 2 481% growing agricultural sector, especially in the heavily leveraged sugar and ethanol sector, where 26 1 242% analysts expect a wave of mergers and acquisitions. Fuel production and energy drew the majority of 16 <1 199% investment in 2007. The attractiveness of sugarcane‐based ethanol production projects is being 100 5 40% driven by strong demand in Brazil (where 87 per cent of all new light vehicle sales are flex‐fuel cars) 78 9 36% and by global energy security concerns. Investors are also active in beef, coffee, bioenergy and 77 8 26% infrastructure, logistics and retail. 202 7 22% 49
8
9%
Exit Trends n/a 4 130% 2.5 7 32% 7 6 12% Trade sales (to strategic or financial sponsors) accounted for roughly two‐thirds of exits in 2007. Among trade sales, transactions with strategic sponsors continue to be the predominant path to exit in Brazil. Although rare during private equity’s early years in Brazil, IPOs became an attractive exit route prior to the current economic crisis. Of the 176 IPOs on the São Paulo Stock Exchange over 2004 – 2007, 30 per cent were companies backed by private equity or venture capital (Figure 41). Examples of private equity‐backed IPOs are shown in Table 25 and include DASA (now a component of the ISE index), TAM and GOL. 5
96
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 25: Examples of successful VC/PE exits, 2006 ‐ 2007 Exit Type
Company
Net revenues 2006 (US$ million)
Investment (US$ million)
Time to exit (years)
Estimated IRRs in US$
Equatorial
393
11
2
481%
1,746
26
1
242%
TOTVS
161
16
<1
199%
DASA
308
100
5
40%
Gafisa
305
78
9
36%
3,374
77
8
26%
ALL
793
202
7
22%
Localiza
517
49
8
9%
Akwan
n/a
n/a
4
130%
Autotrac
122
2.5
7
32%
Microsiga
n/a
7
8
12%
GOL
IPO
TAM
Trade Sale
Source: EMPEA (ABVCAP, Bovespa)
Developing Brazil’s venture capital industry The government‐owned Brazilian Innovation Agency (FINEP) (part of the Ministry of Science and Technology) has played a key role in building Brazil’s venture capital industry. The INOVAR Project was created by FINEP in 2000 in conjunction with financing from the Multilateral Investment Fund (MIF) (part of the InterAmerican Development Bank, IADB) as a financial mechanism to support small high‐tech start ups through venture capital funds. The project has since established 24 funds, half of which have been invested in by the MIF, and has also created the Inovar Seed Money program (Inovar Semente) to stimulate the generation of seed and early stage funds for small entrepreneurs. The INOVAR Project includes: INOVAR Fund Incubator; Brazil Innovation Forum; Brazil Venture Capital website; INOVAR Business Prospecting and Development Network; Development of capacity building and training programs for venture capital agents. BNDES has also played an important strategic role in the Brazilian PE/VC industry by emphasizing the development of venture capital in general and investments in PE in priority sectors.
Status of sustainable investment An analysis of sustainable investment practices in the Brazilian private equity/venture capital market can be broken down into three main (but overlapping) topics: Integration of ESG issues (primarily risks) into the investment policies of ‘mainstream’ private equity funds (i.e. funds that are not specifically focused on sustainability‐related investment themes).
SUSTAINABLE INVESTMENT IN BRAZIL 2009
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‘Themed’ private equity and venture capital funds whose investment strategy is focused on ESG and sustainability‐related opportunities such as clean technology, biofuels, etc. In recent years, the bio‐ethanol industry has been a large part of PE/VC activity in Brazil. The environmental and social pros and cons of this industry are complex and are the subject of much debate. A more detailed discussion of these issues is beyond the ambitions and scope of this report.
Venture capital funds and related technical assistance programs focusing on social enterprises and sustainable entrepreneurs towards the ‘base of the pyramid’.
Mainstream private equity At the ‘mainstream’ end of the spectrum, few GPs and private equity funds in Brazil have formal ESG policies and procedures dealing with sustainability‐related risks and/or responsible investment values. There are a few exceptions particularly amongst funds whose LPs include multilateral/bilateral development finance institutions (DFIs). Such DFIs include IFC, the Inter‐American Investment Corporation (IIC), MIF, the US Overseas Private Investment Corporation (OPIC) and CDC. Table 26 lists examples of DFI‐backed funds. The policies of IFC and many other such DFIs stipulate that private equity funds in which they invest must follow certain social and environmental procedures, including negative screening on issues such as child labour and compliance with applicable national and World Bank standards and guidelines. DFIs such as IFC provide guidance on their environmental and social requirements and occasionally run training programs for their GPs. The UK‐based firm Actis, which has raised close to US$130 million for its Latin America Fund 3, has a well‐defined and comprehensive management system for incorporating environmental, social and governance issues into the investment process. This integration occurs at all stages of investment decision making, from origination through to investment appraisal and management of portfolio companies. Most other mainstream PE firms investing in Brazil concentrate more or less exclusively on corporate governance issues and have no systematic procedures for identifying environmental or social impacts or for subsequently engaging with the investee companies to improve environmental and social standards. Discussions with several Brazilian PE firms revealed that there has been little or no pressure from the majority of their LPs to conform to higher environmental and social standards. However, this situation is slowly changing: Brazilian pension funds are becoming more active in the PE/VC market and are seeking to implement the UNPRI in the asset class. PREVI, for example, has recently run workshops for GPs on the integration of ESG issues into PE/VC term sheets, and has expressed interest in developing additional sustainable investment standards and tools specific to PE in Brazil. Three PE firms – NSG Capital, Stratus and Sustain Capital – have signed the UNPRI. Other notable exceptions include DGF Investimentos, which has a strong framework of documented ESG policies and procedures, and a management team with impressive expertise in sustainability‐related risks and opportunities.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 26: Examples of Latin American and Brazilian PE funds backed by development finance institutions Inception year
DFI LPs include
Advent Latin American Private Equity Fund II
2002
IFC, IIC
Darby/BBVA
Darby‐BBVA Latin America Private Equity Fund
2003
IFC
Dynamo
Dynamo Puma II International
2003
IFC
GP
GP Capital Partners III
2005
IFC
Advent International
Advent Latin American Private Equity Fund III
2005
IFC
Paladin Realty
Paladin Realty Latin America Investors II
2005
IFC
GP
New GP Capital Partner B
2002
IFC
Actis
Actis Latin American Private Equity Fund III
2008
CDC
Patria
Patria Brazilian Private Equity Fund III
2008
CDC
Advent International
Advent Latin American Private Equity Fund IV
2008
CDC
Conduit Capital Partners
Latin Power III
2005
OPIC
PE Firm
Fund
Advent International
Clean technology and venture capital Venture capital and early stage start‐ups are especially suited to investments in environmental and clean technology sectors. According to New Energy Finance (NEF), by the end of 2007, worldwide venture capital/private equity (VC/PE) investments in clean energy companies was US$9.8 billion with VC investments reaching an all time high of US$3.5 billion. Despite the recent correction in public markets, NEF believes that the underlying fundamentals driving investments in clean energy remain strong, although deal sizes may become smaller. EMPEA provides extensive market intelligence on 15 cleantech investment in Brazil and other emerging markets . Brazil is the world’s second largest producer of ethanol as an alternative fuel, and is expected to surpass the US and Europe in production volumes by 2015. Given the high level of development of its biofuels sector (92 per cent of all gas stations sell ethanol), Brazil is extremely well positioned for continued strong profitable growth of its cleantech industry as energy security concerns grow and global demand for biofuels and corresponding technology such as flex‐fuel cars boom. In January 2008, the government mandated that all diesel fuel contain at least 2 per cent biodiesel, rising to 5 per cent by 2013. Seven biofuels deals accounted for nearly US$600 million (as much as 20 per cent) of private equity investment in 2006–2007. Notable deals in 2007 included Brenco, a new holding company investing in Brazilian bioethanol production, which raised US$240 million from a consortium of high profile investors including Vinod Khosla, James Wolfensen, Steven Bing and Steve Case. In March 2007, the Carlyle Group and Riverstone Holdings invested US$240 million in four ethanol mills. Clean Energy Brazil paid US$130 million for 49 per cent of ethanol producer Usaciga and in October 2007, Goldman Sachs invested US$221 million in Santelisa Vale, Brazil’s number two sugar and ethanol producer. Notable biofuels IPOs have included the US$200 million IPO of Sao Martinho, a sugar and ethanol producer, on the São Paulo Stock Exchange in February 2007. More than half its shares were acquired by foreign investors. Cosan Ltd, Brazil’s largest sugar ethanol producer, raised US$1 billion on the New York and São Paulo exchanges in August 2007. In addition to ethanol production, Brazil has also seen investments in timber, wind energy, and renewable plastics. Dow Chemical and Brazil’s Crystalsev announced plans to build the world’s largest polyethylene from sugar cane plant in July 2007, and Econergy International announced the purchase of the Pedra do Sal wind project. 15
Insight Cleantech: An overview of trends in select sectors and markets EMPEA (April 2008)
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Local PE firms investing selectively in ‘sustainable’ markets include Rio Bravo, whose portfolio includes Hortus (organic vegetable production), Agira (gas station compressors for fueling natural gas powered vehicles), Ecoluz (an energy service company), ADESPEC (an award‐winning supplier of environmentally friendly adhesive solutions) and Perenne (water and effluent treatment technology for industries such as ethanol and pulp & paper). A number of “greentech” PE/VC funds have been launched by local managers over the last year, most of which have evolved from FINEP’s highly successful INOVAR program and respond to innovative RFPs issued by BNDESPAR. Stratus closed its US$60 million Stratus VC III Fund in 2006 and started investing in 2007. The fund invests in biomass, biotechnology/biodiversity, and environmental technologies companies in Brazil. The portfolio includes Ecosorb (an oil spill pollution response firm) and Brazil Timber (FSC‐certified sustainably managed native forests). LPs include BNDES, FINEP, PETROS and MIF. DGF has raised US$140 million for its Terra Viva Equity Fund. The firm is primarily targeting Brazilian players for its fund, which will invest in the entire ethanol chain including raw material producers, manufacturers and transport logistic operators during its 10 year life cycle. The fund’s investment strategy places a strong emphasis on labour standards and does not permit investment in sugar cane in the Amazon. Sustain Capital and its controlling shareholder Latour Capital have been selected by BNDES to manage BRASIL SUSTENTABILIDADE, the first private equity fund incorporated in Brazil associated with the Clean Development Mechanism (CDM) of the Kyoto Protocal. The fund is unique in that it invests only in companies that have CDM projects, but does not take the carbon revenue. BNDES is the cornerstone investor with US$100M and the GP is now capital raising with other investors. The pipeline consists of three‐four expansion investments and one‐two greenfield investments. The fund’s primary focus is renewable energy. It will also seek investments in forestry projects (mainly charcoal), where the strategy is based on replacing use of native forests with use of eucalyptus, combined with more efficient kilns that fix more carbon in the charcoal. Sustain Capital has developed a comprehensive sustainability screening tool covering environmental, social and governance issues. Sustainable entrepreneurs Brazil is one the main hubs of the New Ventures program, an initiative of the World Resources Institute (WRI) that aims to promote sustainable growth in emerging markets by supporting and accelerating the transfer of capital to businesses that deliver social and environmental benefits at the base of the economic pyramid. New Ventures focuses on small and medium sized enterprises in fast‐ growth, environmental and base‐of‐the‐pyramid (BoP) sectors such as ecotourism, renewable energy, clean technologies and water management. Each New Ventures country program releases an annual Call for Business Plans from businesses in target sectors seeking investment from US$100,000 to US$5 million. New Ventures screens businesses for financial outlook, innovation, market potential, and social and environmental benefits. Once selected into the New Ventures Portfolio, SMEs receive intensive business consulting services that improve their business plans, help increase sales, and better prepare them to move into new markets. Investors have an opportunity to interact with the New Ventures companies at an annual New Ventures Investor Forum. New Ventures Brazil is run in partnership with CES‐FGV and is sponsored by Banco Real and Natura amongst others; the program also works with other Brazilian organisations such as FINEP, ABVCAP and BNDES. The Brazilian portfolio currently consists of over 40 SMEs, ranging from ethical clothing and organic baby food to sustainable aquaculture and fuel cell technology. New Ventures’ November 2008 investor forum in São Paulo was hosted by BM&F Bovespa and attracted over 180 participants. To date, New Ventures’ Brazilian program has helped five enterprises to attract investment of R$13.5 million (US$5.8 million). Venture capital funds specialising in this segment of the market in Brazil include Axial PAR and E+Co.
Sustainable Investment in Brazil 2009
Final Report April 2009
www.terieurope.org
IFC Sustainable Investment Country Reports:
Sustainable Investment in Brazil 2009 FINAL REPORT APRIL 2009
Prepared for International Finance Corporation (IFC) A Member of the World Bank Group www.ifc.org IFC Task Manager Brunno Maradei, Project Officer, Environment & Social Development Department Prepared by TERI‐Europe www.terieurope.org Written and edited by Ritu Kumar and Dan Siddy Copyright © 2009 International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 All rights reserved. The findings, interpretations, and conclusions expressed in this publication should not be attributed in any manner to the International Finance Corporation, to its affiliated organizations, or to members of its board of Executive Directors or the countries they represent. Neither the International Finance Corporation nor TERI‐Europe guarantee the data included in this publication and neither party accepts responsibility for any consequence of their use. The material in this work is protected by copyright. Copying and/or transmitting portions or all of this work may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and hereby grants permission to the user of this work to copy portions for their personal, noncommercial use, without any right to resell, redistribute, or create derivative works there from. Any other copying or use of this work requires the express written permission of the International Finance Corporation. For permission to photocopy or reprint, please send a request with complete information to: International Finance Corporation, c/o the World Bank Permissions Desk , Office of the Publisher , 1818 H Street NW, Washington, DC 20433 All queries on rights and licenses including subsidiary rights should be addressed to: International Finance Corporation, c/o the Office of the Publisher, World Bank , 1818 H Street, NW , Washington, DC 20433, Fax: +1 202‐522‐2422
TERI‐Europe TERI‐Europe is a not‐for‐profit organisation specialising in the links between sustainable development in emerging markets and the role of business and investment. TERI‐Europe’s partners and sponsors include IFC, the European Commission, the UK Foreign & Commonwealth Office, the UK Department for International Development, Unilever and the Association of British Insurers. TERI‐Europe is based in London. www.terieurope.org
The authors Ritu Kumar is director of TERI‐Europe and a sustainable investment advisor with the emerging market private equity firm, Actis: [email protected] www.act.is Dan Siddy is an associate fellow at TERI‐Europe and director of Delsus Limited, a specialist advisory firm on ESG investment in emerging markets: [email protected] www.delsus.com
About IFC
IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. Our new investments totalled US$16.2 billion in fiscal 2008, a 34 percent increase over the previous year. For more information, visit www.ifc.org. IFC’s Sustainable Investing Team For the past four years, IFC's Sustainable Investing team has delivered technical and financial support for projects that aim to mobilize sustainable capital flows into emerging markets. The goal is to increase the volume of mainstream investment that uses ESG analysis as a standard practice in their investment decision. IFC’s approach is twofold: To catalyze capital market flows into sustainable investment, IFC works to (a) promote the business case for sustainable investment by drawing lessons from IFC’s own portfolio, (b) establish frameworks to identify and assess new sustainable investment opportunities, and (c) develop new financial products (e.g. Sustainability indices); and To support fund managers investing in sustainable companies, IFC works (a) with private equity funds in IFC’s portfolio to assist them to establish ESG analytical processes, and (b) with capital market actors to improve the enabling environment for the market to recognize and value sustainability in corporate valuation. IFC is committed to continue its work in partnership with key market actors to improve the enabling environment and address barriers to sustainable investment in emerging markets. In order to do this, IFC’s work is centered in three areas: policies and standards, knowledge management and investment vehicles. The Sustainable Investing team is part of IFC’s Environment and Social Development Department, and benefits from the generous financial support of IFC and the Governments of Japan, the Netherlands, Norway, Canada, South Africa and Switzerland. For more information, please visit the Sustainable Investing website at www.ifc.org/sustainableinvesting.
Table of Contents ACKNOWLEDGMENTS....................................................................................................................... i GLOSSARY OF ABBREVIATIONS .........................................................................................................ii EXECUTIVE SUMMARY .....................................................................................................................iii 1. INTRODUCTION........................................................................................................................... 1 Objectives ................................................................................................................................................ 1 Scope ....................................................................................................................................................... 1 A snapshot in time................................................................................................................................... 2 Exchange rates used ................................................................................................................................ 2 Structure of the report ............................................................................................................................ 2 2. COUNTRY OVERVIEW .................................................................................................................. 3 Summary.................................................................................................................................................. 3 Brazil’s economy...................................................................................................................................... 3 The stock market ..................................................................................................................................... 3 Key industries and companies ................................................................................................................. 4 Key environmental and social issues ....................................................................................................... 4 3. CORPORATE SUSTAINABILITY INDEX ........................................................................................... 5 History ..................................................................................................................................................... 5 Objective.................................................................................................................................................. 5 Management and governance................................................................................................................. 5 Eligibility .................................................................................................................................................. 6 Sustainability criteria and methodology.................................................................................................. 6 Portfolio composition .............................................................................................................................. 7 Use by investors .................................................................................................................................... 11 Research into an ISE ‘premium’............................................................................................................. 11 Corporate buy‐in ................................................................................................................................... 12 Reaction to and use of the ISE ........................................................................................................... 12 Non‐inclusion of Petrobras ................................................................................................................ 12 Questionnaire response rate.............................................................................................................. 12 Commercial business model.................................................................................................................. 14 Future directions ................................................................................................................................... 14 4. ASSET MANAGERS......................................................................................................................15 Market overview ................................................................................................................................... 15 Status of sustainable investment .......................................................................................................... 18 5. RETAIL FUNDS ............................................................................................................................19 Market overview ................................................................................................................................... 19 Status of sustainable investment .......................................................................................................... 19 6. PENSION FUNDS.........................................................................................................................25 Market overview ................................................................................................................................... 25 Status of sustainable investment .......................................................................................................... 25 7. FOREIGN INVESTMENT...............................................................................................................29 Market overview ................................................................................................................................... 29 Status of sustainable investment .......................................................................................................... 29 8. OTHER MARKET PARTICIPANTS ..................................................................................................33 Brazilian Development Bank.................................................................................................................. 33 Overview ............................................................................................................................................ 33 Status of sustainable investment....................................................................................................... 33 High Net Worth Individuals ................................................................................................................... 35
Overview ............................................................................................................................................ 35 Status of sustainable investment....................................................................................................... 36 9. ENABLING ENVIRONMENT .........................................................................................................38 Regulatory and policy frameworks ........................................................................................................ 38 Environmental legislation and enforcement...................................................................................... 38 Pension fund transparency ................................................................................................................ 39 Non‐financial disclosure requirements .............................................................................................. 39 Listing rules and guidelines................................................................................................................ 40 Voluntary non‐financial reporting ......................................................................................................... 40 Sustainability reporting ..................................................................................................................... 40 Carbon Disclosure Project .................................................................................................................. 44 Global Compact Communications on Progress.................................................................................. 45 Indices, equity research and ratings ...................................................................................................... 45 Specialised indices in addition to the ISE ........................................................................................... 45 Dow Jones Sustainability Index .......................................................................................................... 45 Independent sustainability research and rating products ................................................................. 46 Sell‐side equity research on sustainability issues............................................................................... 46 Networks and associations .................................................................................................................... 46 Industry bodies .................................................................................................................................. 46 UNEPFI ............................................................................................................................................... 47 LASFF ................................................................................................................................................. 47 UNPRI................................................................................................................................................. 47 Development finance institutions ......................................................................................................... 49 Language barriers .................................................................................................................................. 49 Green consumerism .............................................................................................................................. 49 10. BUILDING ON SUCCESS.............................................................................................................51 Overall market size ................................................................................................................................ 51 Consolidated estimates of SRI assets under management ................................................................ 51 Brazilian SRI in a global context......................................................................................................... 52 Strengths and weaknesses .................................................................................................................... 52 Strong commitment........................................................................................................................... 52 Strong business case.......................................................................................................................... 52 Contribution to sustainable development ......................................................................................... 52 Strategic challenges and risks............................................................................................................ 53 Issues on the horizon............................................................................................................................. 53 The ISE paradox ................................................................................................................................. 53 Limited research coverage................................................................................................................. 54 Stagnation in the asset management sector ..................................................................................... 55 Limited involvement of foreign portfolio investors ............................................................................ 56 Fragmentation and overlap in market leadership ............................................................................. 56 Recommendations................................................................................................................................. 56 Update the ISE’s commercial business model.................................................................................... 56 Make greater use of ISE data............................................................................................................. 57 Create a commercial market for ESG research .................................................................................. 58 Develop human capital ...................................................................................................................... 58 Implement an international strategy................................................................................................. 58 Invest in research and development .................................................................................................. 59 Foster competition and innovation.................................................................................................... 60 Organising for success ........................................................................................................................... 61 APPENDIX A: COUNTRY PROFILE .....................................................................................................65 Profile .................................................................................................................................................... 66 Millennium Development Goals ............................................................................................................ 69 Economy ................................................................................................................................................ 70 GDP growth ....................................................................................................................................... 70 Value‐added....................................................................................................................................... 70
Foreign trade ..................................................................................................................................... 70 Private capital flows .............................................................................................................................. 71 International context ......................................................................................................................... 71 Brazil .................................................................................................................................................. 71 The stock market ................................................................................................................................... 73 Market size ........................................................................................................................................ 73 Corporate governance segments....................................................................................................... 75 Key companies and industries............................................................................................................ 76 Capital raising.................................................................................................................................... 78 Performance ...................................................................................................................................... 80 Market participants ........................................................................................................................... 80 Key environmental and social issues ..................................................................................................... 81 Principal issues................................................................................................................................... 81 New national plan on climate change ............................................................................................... 82 APPENDIX B: EXAMPLES OF ESG ISSUES IN THE INTERNATIONAL MEDIA.........................................83 APPENDIX C: SWOT ANALYSIS.........................................................................................................88 APPENDIX D: SUSTAINABILITY IN BRAZIL'S PRIVATE EQUITY MARKET ............................................92 Market overview ................................................................................................................................... 93 Fundraising Activity ........................................................................................................................... 93 Investing Trends................................................................................................................................. 95 Exit Trends ......................................................................................................................................... 95 Developing Brazil’s venture capital industry...................................................................................... 96 Status of sustainable investment .......................................................................................................... 96 Mainstream private equity ................................................................................................................ 97 Clean technology and venture capital ............................................................................................... 98 Sustainable entrepreneurs................................................................................................................. 99
SUSTAINABLE INVESTMENT IN BRAZIL 2009 i
ACKNOWLEDGMENTS Particular thanks are due to Brunno Maradei at IFC for his patient and effective management of this study, and to Bruno Erbisti (Votorantim), Luiz Maia (TriPod) and Gladis Ribeiro (Pereni) in Brazil who provided wise counsel and opened many doors. Actis: Beatriz Amary and Donald Peck AIG Capital: Cristiano Gioia Amazonia: Gustavo Pimental Banco Real: Pedro Villani and Eugenia dos Santos Buosi BM&F Bovespa: Izalco Sardenberg, Murilo Robotton Filho, Ivan Wedekin, Alvaro Affonso Mendonça and Rogério Marques CES‐FGV: Mario Monzoni and Patricia Berardi CVM: Sergio Weguelin Delsus Ltd: Rachel Mew, Joe Roland, Colin Hedges and Dougal Benson DGF Investimentos: Sidney Chameh, Antônio José Duarte, Humberto Casagrande and Frederico Greve Ecoinvest: Carlos Martins EcoSecurities Brasil: Mauricio de Moura Costa Greenvest: Marco Galhardo HSBC: Paula Peirão de Oliveira IADB: Luiz Ros IFC: Euan Marshall, Brunno Maradei, Cecilia Bjerborn, Berit Lauridsen, Maria Delores Hermosillo and Miguel Martins Mercer Limited: Danyelle Guyatt and Helga Birgden New Carbon Finance: Camilo Terranova Pereni Soluções Sustentáveis: Gladis Ribeiro PREVI: Sergio Rosa, Luiz Carlos Aguiar and Rafael Soares Ribeiro de Castro Rio Bravo: Fabio Ohara Ishigami, Diogo Caiuby Novaes, Marcelo Romeiro and Anton Castanheira Santa Fé Portfólios: Paulo Battistella Bueno Stratus: Oren Pinsky and Carlos Kokron Sustain Capital: Luzia Hirata TriPod Investment: Luiz Maia and Elisabeth Lerner UNPRI: James Gifford, Narina Mnatsakanian and Marcela Zonis Votorantim Asset Management: Bruno Erbisti World Federation of Exchanges: Thomas Krantz, Peter Clifford and Sibel Yilmaz WRI: Virginia Barreiro and Ella Delio
ii
SUSTAINABLE INVESTMENT IN BRAZIL 2009
GLOSSARY OF ABBREVIATIONS ABRAPP ABVCAP ADR ANBID APIMEC ASRIA AUM BNDES CDP CES‐FGV CVM DJSI EMDP EMPEA ESG FDI FBDS FINEP GDP GP GRI HNWI IADB IBAMA IBGC ICGN IFC IGC IMF INOVAR IPO ISE LAVCA LASFF LP MDG MIF N1 N2 NAV NM OM P/E PE PREVI ROE SEC SME SRI UKSIF UNCTAD UNEPFI UNPRI VC WRI
Brazilian Association of Pension Funds Brazilian Private Equity and Venture Capital Association American Depository Receipt National Association of Investment Banks Association of Capital Markets Analysts and Investment Professionals Association for Sustainable & Responsible Investment in Asia Assets under management Brazilian Development Bank Carbon Disclosure Project Center for Sustainability Studies at the Fundaçao Getulio Vargas business school, São Paulo Brazilian Securities and Exchange Commission Dow Jones Sustainability Index Emerging Markets Disclosure Project Emerging Market Private Equity Association Environment, social and governance Foreign Direct Investment Brazilian Foundation for Sustainable Development Brazilian Innovation Agency Gross Domestic Product General partner (manager of a private equity fund) Global Reporting Initiative High Net Worth Individual Inter‐American Development Bank Brazilian Institute for the Environment and Natural Renewable Resources Brazilian Institute of Corporate Governance International Corporate Governance Network International Finance Corporation Bovespa Corporate Governance Index International Monetary Fund Venture capital development program operated by FINEP Initial Public Offering Bovespa Corporate Sustainability Index Latin American Venture Capital Association Latin American Sustainable Finance Forum Limited partner (investor in a private equity fund) Millennium Development Goals Multilateral Investment Fund (part of IADB) Nivel (Level) 1 of Bovespa’s differentiated corporate governance levels Nivel (Level) 2 of Bovespa’s differentiated corporate governance levels Net asset value Novo Mercado Opportunities for the Majority Price/earnings ratio Private equity Pension fund of Banco do Brasil Return on equity United States Securities and Exchange Commission Small and medium sized enterprises Socially Responsible Investment UK Sustainable Investment Forum United Nations Conference on Trade and Development United Nations Environment Program Finance Initiative United Nations Principles for Responsible Investment Venture Capital World Resources Institute
SUSTAINABLE INVESTMENT IN BRAZIL 2009 iii
EXECUTIVE SUMMARY This report has been prepared by TERI‐Europe for IFC to (a) provide an up‐to‐date assessment of the landscape of sustainable investment in Brazil today, and (b) stimulate discussion on the future evolution and needs of this market. “Sustainable investment” refers to portfolio equity investment in publicly listed companies, using strategies that take into account environmental, social and governance (ESG) issues and their effect on shareholder value. Brazil is the world’s tenth‐largest economy. The São Paolo stock exchange (operated by BM&F Bovespa) has a market cap of some US$585 billion, having fallen by about 50 per cent over the last year in common with most markets around the world. The stock market is dominated by the financial sector, oil & gas, mining and steel. 34 per cent of the benchmark IBOVESPA Index is concentrated in just two stocks ‐ the oil & gas company Petrobras and the mining company Vale R Doce. Domestic savings have increased significantly in recent years: the top 40 asset managers in Brazil control about US$500 billion in mutual funds and other products, whilst the country’s 278 pension funds have combined assets of about US$185 billion. Foreign portfolio investment has also become increasingly important to the economy: the total stock of such investment stood at about US$232 billion at the end of August 2008. In addition, American Depository Receipts (ADRs) issued by Brazilian companies and traded on the New York Stock Exchange have a total ownership value of a further US$110 billion. Uniquely amongst emerging economies, ESG issues have had a prominent place in the Brazilian financial and investment community for nearly a decade. Bovespa introduced its corporate governance‐themed Novo Mercado listing segment in 2001 and in the same year Banco Real launched Brazil’s first socially responsible investment (SRI) mutual fund, Fundo Ethical. A key feature in Brazil’s sustainable investment landscape is BM&F Bovespa’s Corporate Sustainability Index, the ISE. Launched in December 2005, the ISE was swiftly followed by a dramatic increase in the number and size of Brazil’s retail SRI funds and has generally matched the IBOVESPA benchmark in performance. Today, ten asset managers offer retail SRI funds with combined assets under management of about US$315 million. Several of these asset managers came together in 2006 to create the Latin American Sustainable Finance Forum (LASFF) in association with CES‐FGV, a specialist centre of excellence for sustainability studies within Brazil’s leading business school. CES‐FGV is also the data provider for the ISE and designed the index’s ESG methodology. Seed funding from IFC played a critical role in the creation of both the LASFF and the ISE. Brazil’s pension funds have taken a proactive stance on ESG issues, largely due to the leadership of their largest member, PREVI. 18 pension funds have signed the UN Principles for Responsible Investment (PRI). Together they represent combined assets of US$110 billion, or about 60 per cent of the country’s total pension fund corpus. Although implementation is still at a relatively early stage, momentum is high and is supported strongly by the UNPRI Secretariat, which has helped to establish a PRI Brazil Network aided by a part‐time in‐country coordinator. The PRI Brazil Network has now developed a well‐organised work program focusing on shareholder engagement, ESG integration and recruitment of new signatories. Shareholder engagement on ESG issues is still in its infancy, and currently focuses on labour standards in charcoal producers associated with Brazil’s iron and steel industry. This engagement involves cooperation with some international PRI signatories as well as LASFF members and Brazil’s pension funds. In general, though, foreign portfolio investors have thus far not been actively engaged in Brazil’s sustainable investment market and have shown little interest in using the ISE index, for example. However, quantitative data on this point are extremely limited; in the absence of hard facts, TERI‐Europe has used a working assumption that ESG investment styles account for about 1 per cent of foreign portfolio investment and investment in Brazilian ADRs, i.e. approximately US$2.2 billion.
iv
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Other market participants may also be relevant for the future of Brazil’s sustainable investment market. The Brazilian Development Bank (BNDES), for example, has stakes in over 30 publicly listed Brazilian companies; this portfolio is worth about US$16 billion. BNDES follows environmental and social policies for its project finance operations, but is unclear whether or how these are applied to its equity holdings. The wealth management market may also be important: Brazil has 143,000 high net worth individuals (HNWIs) constituting a market of about US$1.4 trillion. About 16 per cent of Latin American HNWIs allocate some part of their portfolio to “green investments” such as clean technology and alternative energy. However, more detailed information is not currently available. The enabling environment for sustainable investment in Brazil is relatively strong compared to large emerging economies such as India or China, particularly in terms of voluntary non‐financial reporting by companies. About 60 per cent of companies in the IBOVESPA publish sustainability reports, many of which are based on the international good practice guidelines issued by the Global Reporting Initiative (GRI). The number and quality of corporate responses to the annual survey of the international Carbon Disclosure Project (CDP) is also improving. Nevertheless, further progress is needed on ESG related transparency and disclosure, especially in relation to regulatory filings and IPO prospectuses. Furthermore, Brazilian stocks do not receive much ESG coverage from international sustainability research firms or equity analysts. Lack of commercial demand on the domestic front also means that Brazil has not yet developed any home‐grown infrastructure in this respect, despite the capacity building efforts of organisations such as the Association of Capital Markets Analysts and Investment Professionals (APIMEC). Other Brazilian industry associations taking a proactive advocacy position on sustainable investment include the Brazilian Association of Pension Funds (ABRAPP) and the National Association of Investment Banks (ANBID). Looking to the future, sustainable investment in Brazil faces some important challenges. Many of these are essentially about adapting to success through a new phase of market evolution. The key issues include: Updating the ISE’s commercial business model Making greater use of the underlying ISE data Creating demand for the commercial provision of ESG research Developing human capital More effective outreach and engagement with international investors Investment in research and development Fostering renewed competition and innovation in the asset management industry Building on LASFF and the PRI Brazil Network to increase the effectiveness of national cooperation in the sustainable investment community. The report provides detailed analysis and recommendations on each of these issues, which are inter‐ related and largely inter‐dependent. A strategic vision is therefore required which combines the long‐ term interests of all stakeholders. One possible vehicle for “organising for success” could be the creation of a fully equipped Brazilian Sustainable Investment Forum (BRASIF) as an evolutionary replacement for LASFF. This new entity – which would complement, rather than duplicate or compete with the existing PRI Brazil Network – would serve the common needs of a range of organisations, including PRI signatories, non‐PRI signatories and other important institutions in the value chain such as BM&F Bovespa and APIMEC. It would also act as a national focal point for sustainable investment in Brazil, including promoting inward sustainable investment from overseas. Ultimately, the right way forward for Brazil must come from a bottom‐up, demand‐driven process rather than through a top‐down blueprint imposed from outside. The analysis and recommendations in this report are offered for consideration and discussion by all participants in Brazil’s sustainable investment market. The final recommendation of this report is therefore to suggest that it might be useful for relevant stakeholders to come together in some type of roundtable discussion that takes stock of the progress made over recent years, and enables debate on the strategic direction and needs of the market over the next five years or so.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
1
1. INTRODUCTION
Objectives Environmental, social and governance (ESG) issues have been a prominent concern and an important commercial differentiator in the Brazilian financial and investment community for nearly a decade. The commitment, depth and sophistication of this market evolution are probably unique among the world’s emerging economies, and in this way Brazil has set examples and pioneered business models that have received international attention and adaptation. Despite the progress that has been made, Brazil’s sustainable investment market is still in its relative infancy and faces continued challenges and fresh obstacles to new opportunities, especially taking into account the country’s environmental and social problems and the scale of domestic and foreign investment in what is now the world’s tenth largest economy. Against this background, this report aims to: • Determine the current state of development of sustainable investment in Brazil by measuring the market on a number of indicators; and • Stimulate discussion by all market participants and stakeholders on the future evolution and needs of the Brazilian sustainable investment market. The report has been prepared by TERI‐Europe based on comprehensive desk research, extensive interviews conducted in São Paulo and Rio de Janeiro in September 2008, and subsequent discussions with a number of organisations and individuals. The study was sponsored by the International Finance Corporation (IFC) through the Sustainable Investing Program of its Sustainability Business Innovator (a division of IFC’s Environment & Social Development Department) as part of a wider IFC project that also covers the markets of India, China and South Africa.
Scope The term “sustainable investment” can mean different things. In the interests of clarity, the scope of “sustainable investment” as covered in this report is domestic and foreign investment in Brazil’s publicly quoted companies using strategies that take environmental and social (sometimes combined with governance) issues into consideration. This includes negative screening, positive screening, best‐ in‐class, shareholder activism and similar “socially responsible investment” styles, together with “integrated” approaches such as engagement and non‐financial risk analysis. Private equity and venture capital funds investing in Brazil are a secondary focus of this study. Specifically, the report covers (a) the use of environmental/social due diligence policies and procedures by “mainstream” private equity and venture capital funds (b) private equity and venture capital funds that are based on sustainability themes such as clean technology and climate change. The report does not cover other segments of the sustainable finance and investment market such as the Equator Principles, ESG‐related banking products or microfinance. As context, however, it is essential to note that (with the possible exception of microfinance) these themes are also a strong feature of the Brazilian capital market: most leading Brazilian banks have committed to implement the Equator Principles for project finance and several have successfully introduced innovative sustainable lending products, while at the same time pioneering many of the sustainable investment initiatives captured in this report as part of the same overarching corporate strategies and ethical values.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
A snapshot in time This report must be seen in the context of the global financial crises that have unfolded during 2008 – and will continue to evolve for the foreseeable future ‐ following the emergence of problems in the US sub‐prime mortgage market in 2007. The authors have done their best to present an accurate and balanced ‘snapshot’ of Brazil’s sustainable investment market in this fast‐changing and turbulent environment and to frame conclusions and recommendations that will hold their currency for the next 6‐12 months. We have sought to use the most up‐to‐date data available, but acknowledge that some of the information and corresponding analysis contained in this report may have an unavoidably short shelf life in these exceptional circumstances.
Exchange rates used Unless otherwise stated, the exchange rate used in this report is R$2.315 to the US$ (the rate prevailing as of December 31, 2008).
Structure of the report As important context for the rest of the report, Chapter 2 begins with a brief overview of Brazil’s development profile, economy and stock market (the BM&F Bovespa), along with a summary of the key industries and companies that are traded on the stock market and a short discussion on ESG value drivers in Brazil. More detailed information on these issues is provided in Appendices A and B. One of the most important centrepieces of the sustainable investment landscape in Brazil is BM&F Bovespa’s Corporate Sustainability Index, the ISE. Detailed information on the ISE’s methodology and impact is presented in Chapter 3. Chapter 4 provides an introduction to the leading asset managers in Brazil, their market share and assets under management, and their current involvement in sustainable investment. Chapters 5 – 8 then analyse sustainable investment activity across different types of market participant, focusing primarily on Brazilian mutual funds, Brazilian pension funds and foreign institutional investors. The enabling environment for sustainable investment in Brazil is analysed in Chapter 9 and includes public policy and regulation, corporate transparency and disclosure practices, equity indices and research coverage. Chapter 9 also highlights the industry associations and similar networks that play a key role in creating the framework conditions for sustainable investment in Brazil, particularly the UN Principles for Responsible Investment (UNPRI) and the Latin American Sustainable Finance Forum (LASFF). Finally, Chapter 10 provides a forward‐looking discussion on the current status of sustainable investment in Brazil and the future opportunities and risks this market faces. A “SWOT” analysis is also presented in Appendix C. Chapter 10 concludes with a number of recommendations that stakeholders in Brazil’s sustainable investment market may wish to take forward for further consideration. Information on sustainable investment practices in Brazil’s private equity and venture capital market (a secondary focus of this report) is provided in Appendix D.
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2. COUNTRY OVERVIEW
Summary Sustainable investment trends in Brazil have to be understood in the wider context of Brazil’s overall economic and sustainable development. Appendix A provides detailed information on Brazil’s development profile, economy and stock market (the BM&F Bovespa), along with data on the key industries and companies that are traded on the stock market and a discussion on ESG value drivers in Brazil. The key points for context are summarised below.
Brazil’s economy Based on the IMF’s 2008 estimates of worldwide GDP, Brazil is today the world’s 10th largest economy. Characterized by large and well‐developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Brazil became investment grade at the end of April 2008, when Standard & Poor’s upgraded Brazil’s sovereign debt rating to BBB‐ from BB+. Economic growth in Brazil increased from 3.8 per cent in 2006 to exceed expectations at 5.4 per cent in 2007. This trend continued over the first seven months of 2008 when GDP grew by some 6.1 per cent. As with almost all countries, Brazil has subsequently been impacted by the global financial shocks that dominated the global economy since the second half of 2008. Brazil has a thriving capital market bolstered by significant domestic savings and pension fund assets. Foreign portfolio investment has also become increasingly important to the economy and Brazil’s share of net portfolio equity flows to all developing countries surged to nearly 25 per cent in 2007. Net foreign portfolio investment flows have increased dramatically in the last few years and by 2007 they reached US$34 billion, almost matching the volume of FDI. The total stock of foreign portfolio investment amounted to some US$214 billion at the end of 2007 and stood at about US$232 billion by August 2008, the latest date for which reliable data are available.
The stock market th The São Paolo stock exchange, operated by BM&F Bovespa, is the 13 largest market in the world by market capitalization, following a dramatic increase in size over the last two decades. In common with the rest of the world, Brazil’s market capitalisation has experienced a sharp decrease in the last 12 months as a result of the global economic crisis and the worldwide fall in equity prices. As of the end of November 2008, the market value of BM&F Bovespa listed companies came to R$1,355 billion (US$585 billion). Brazil’s benchmark index is the IBOVESPA. A vital feature of the São Paolo stock exchange is that it maintains different listing segments for companies, based on differentiated levels of corporate governance. In addition to the Traditional Bovespa segment, these include the Novo Mercado (NM) and two further differentiated corporate governance categories, Level (Nivel) 1 and Level (Nivel) 2. Novo Mercado companies represent about 33 per cent of total market capitalisation. Brazil has experienced a surge of IPOs and secondary public offerings in recent years. Some US$35 billion worth of new deals were completed over the period June 2007 ‐ June 2008. The majority of IPOs are now on the Novo Mercado.
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Figure 1: Sectoral breakdown of the IBOVESPA Index
Financial 21.6%
Other 16.1% Transportation 4.1% Telecom 4.8% Electric utilities 7.3%
Oil and gas 19.8%
Steel 11.1% Mining 15.2%
Key industries and companies As of the end of November 2008, 393 companies were listed on the exchange. Figure 1 shows the sectoral breakdown of the IBOVESPA index, which is dominated by the financial sector, oil & gas, mining and steel. The Brazilian stock market is highly concentrated: the top ten companies with the highest market value make up about 50 per cent of total market capitalisation. It is particularly important to understand that approximately 25 per cent of the total value of the overall market is concentrated in just two companies, Petrobras (oil & gas) and Vale R Doce (mining); these two firms also represent 34 per cent of the notional IBovespa portfolio. The capital structure of both Petrobras and Vale R Doce includes preference as well as common shares and thus neither firm is listed on the Novo Mercado.
Key environmental and social issues Corporations and their investors in Brazil face a wide and often complex range of social and environmental issues that present potentially significant risks and opportunities to shareholder value and corporate reputation. At the current time there does not appear any single source that synthesises this information into an investor‐friendly, comprehensive analysis of key sustainability‐ related business drivers in the industries that make up Brazil’s stock market. A detailed assessment is beyond the current scope of this report, but the principle issues are discussed further in Appendix A and are illustrated by examples of recent media coverage that are provided in Appendix B. One important recent development is the Brazilian Government’s National Plan on Climate Change, published in December 2008. The measures in this action plan may have potentially significant implications (both positive and negative) across a number of key Brazilian industry sectors, including oil & gas, biofuels, mining, steel, power and pulp & paper. Further information is provided in Appendix A.
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3. CORPORATE SUSTAINABILITY INDEX History Brazil’s Corporate Sustainability Index (the ISE) was created in 2005 by the São Paulo stock exchange, Bovespa (now BM&F Bovespa), in response to the country’s growing interest in sustainable investment and sustainable finance. The index was developed with technical input from CES‐FGV and with grant funding from IFC’s former Sustainable Financial Markets Facility. The index was launched in December 2005 at a major international conference on the theme of emerging market sustainable investment, organised by CES‐FGV and again sponsored by IFC. At the time, it was only the second emerging market sustainability index in the world. It is still the only index of its kind in Latin America, and has played an important role in stimulating the development of other emerging market sustainability indices in India, the Middle East, Africa and elsewhere.
Objective The ISE measures the total return on a theoretical portfolio composed by stocks issued by companies highly committed to corporate sustainability and social responsibility. The maximum number of companies that can be admitted to the ISE is 40. Their stocks are selected from among BM&F Bovespa’s most actively traded securities in terms of liquidity, weighted according to the outstanding shares’ market value. The index provides a valuable benchmark for investors and is also intended to promote good practices in the Brazilian corporate community. The ISE index is re‐balanced annually in December.
Management and governance The ISE is operated by BM&F BOVESPA, which is responsible for index calculation and technical management. BM&F BOVESPA has contracted CES‐FGV to undertake the collection and analysis of the necessary corporate sustainability data. The ISE is presided over by an independent Deliberative Board composed of representatives from the following organisations: Brazilian Association of Pension Funds (ABRAPP) National Association of Investment Banks (ANBID) Association of Capital Markets Analysts and Investment Professionals (APIMEC) BM&F BOVESPA Brazilian Institute of Corporate Governance (IBGC) IFC Ethos Institute of Social Responsibility Brazilian Ministry of the Environment United Nations Environment Programme (UNEPFI) The Ethos Institute has been temporarily suspended from the Board for leaking information to the media about the exclusion of Petrobras prior to the official announcement of the 2008/2009 portfolio.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Eligibility Stocks admitted to the ISE must: be among the 150 best classified stocks in the negotiability index, measured in the twelve months preceding the beginning of the re‐evaluation process; have a trading session presence of at least 50 per cent, measured in the twelve months preceding the beginning of the re‐evaluation process; and meet the sustainability criteria approved by the ISE Board.
Sustainability criteria and methodology The ISE’s sustainability criteria and methodology were developed by CES‐FGV and approved by the ISE Board. Data for the ISE are collected by means of a detailed questionnaire (around 140 questions) sent by CES‐FGV each year to up to 150 of Brazil’s largest and most traded publicly quoted companies. CES‐FGV designed a set of criteria based on the “triple bottom line” concept i.e. the integrated analysis of environmental, social and economical aspects. In addition, the methodology takes into account general issues (for example, a company’s commitment to the UN Global Compact), the nature of the company’s product or business activity (for example, risk to consumer health) and corporate governance criteria. The environmental, social and economic criteria are divided into four groups: policies (commitment indicators); management (program, target and monitoring indicators); performance; and legal compliance. Slightly different environmental criteria are applied to companies in the financial sector. Real sector companies are weighted differently on environmental criteria depending on whether they are classified as “high impact” or “medium impact”. CES‐FGV carries out cluster analysis of the dataset to identify groups of companies with similar performance and to select a group with better general performance. Subject to the approval of the ISE Board, the companies included in the latter group are admitted to the ISE portfolio. No more than 40 companies may be included in the ISE. This process is carried out annually to re‐balance the portfolio. However, the ISE Board has the power to exclude a company from the ISE portfolio at any time if “any event alters significantly a component company’s sustainability level”. The ISE’s methodology does not use an exclusion list of “sin sectors” such as defence, tobacco, alcohol, nuclear power or gambling. In ISE’s first year of operation, companies were not required to present documents to prove their sustainability policies. In the second year, verification began to be carried out only after disclosure of the portfolio. Only companies that provided proof of their practices were selected for the ISE in the latest re‐balancing.
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Portfolio composition The current ISE portfolio came into effect on December 1, 2008 and is valid until November 30, 2009 (Table 1). New admissions to the ISE include Celesc, Duratex, Odontoprev, TIM, Telemar and Unibanco. Aracruz, CCR Rodovias, Copel, Iochpe‐Maxion, Petrobras and WEG were dropped from the index. Figure 2 illustrates the new ISE portfolio weightings and provides a comparison with the current IBOVESPA universe of 59 stocks. Figure 3 illustrates the changes to the new ISE portfolio, which – with the addition of Telemar and TIM – now includes telecom stocks for the first time. Figures 4 and 5 show the industry breakdown of the ISE for the 2007/2008 and 2008/2009 periods respectively. The ISE is now heavily weighted towards banking stocks and in particular towards two banks (Bradesco and Itaú) which together make up more than 40 per cent of the notional ISE portfolio. As noted on page 16, the two ‘titans’ of the Brazilian corporate sector are the oil & gas company Petrobras and mining firm Vale R Doce. Vale R Doce has never been a component of the ISE. The decision to exclude Petrobras from the ISE 2008/2009 portfolio means that the re‐balanced sustainability index now differs significantly from the IBOVESPA index. Table 1: ISE portfolio 2008/2009 (source: BM&F Bovespa) Company
Industry
AES TIETE BRADESCO (N1) BRASIL (NM) BRASKEM (N1) CELESC (N2) CEMIG (N1) CESP (N1) COELCE CPFL ENERGIA (NM) DASA (NM) DURATEX (N1) ELETROBRAS (N1) ELETROPAULO (N2) EMBRAER (NM) ENERGIAS BR (NM) GERDAU (N1) GERDAU MET (N1) ITAUBANCO (N1) LIGHT S/A (NM) NATURA (NM) ODONTOPREV (NM) PERDIGAO S/A (NM) SABESP (NM) SADIA S/A (N1) SUZANO PAPEL (N1) TELEMAR TIM PART S/A TRACTABEL (NM) UNIBANCO (N1) V C P (N1)
Electric utilities Financial intermediaries Financial intermediaries Petrochemicals Electric utilities Electric utilities Electric utilities Electric utilities Electric utilities Medical products Wood Electric utilities Electric utilities Aerospace Electric utilities Steel Steel Financial intermediaries Electric utilities Cosmetics Medical products Meat, poultry & others Water utilities Meat, poultry & others Pulp & paper Telecommunications Telecommunications Electric utilities Financial intermediaries Pulp & paper
IBovespa?
Market cap US$ million 2,236 27,966 15,969 1,207 663 6,123 1,908 708 6,191 552 773 12,379 1,704 2,791 1,536 8,584 3,430 30,708 1,908 3,486 263 2,634 2,706 1,162 1,627 5,763 3,628 5,181 15,755 1,545
ISE weight (%) 0.703 22.302 3.934 0.504 0.415 4.883 1.339 0.293 2.047 0.640 0.470 4.847 1.204 3.215 0.635 5.278 3.017 20.330 0.321 1.035 0.248 1.987 1.614 0.727 0.894 5.403 1.227 1.871 7.808 0.810
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Figure 2: Comparison of current ISE and IBovespa index constituents (Source: BM&F Bovespa) PETROBRAS VALE R DOCE BMF BOVESPA ITAUSA USIMINAS SID NACIONAL AMBEV BRASIL TELEC NET BRADESPAR REDECARD LOJAS AMERIC ALL AMER LAT GOL VIVO COPEL NOSSA CAIXA P,ACUCAR-CBD CYRELA REALT CCR RODOVIAS LOJAS RENNER SOUZA CRUZ TAM S/A GAFISA JBS B2W VAREJO ULTRAPAR COSAN TRAN PAULIST KLABIN S/A ROSSI RESID ARACRUZ TELESP COMGAS ODONTOPREV COELCE LIGHT S/A CELESC DURATEX BRASKEM ENERGIAS BR DASA AES TIETE SADIA S/A VCP SUZANO PAPEL NATURA ELETROPAULO TIM PART S/A CESP SABESP TRACTEBEL PERDIGAO S/A CPFL ENERGIA EMBRAER BRASIL ELETROBRAS CEMIG TELEMAR UNIBANCO GERDAU ITAUBANCO BRADESCO
ISE IBOV
0
5
10
15
20
25 % of index
SUSTAINABLE INVESTMENT IN BRAZIL 2009
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Figure 3: Changes in ISE 2008/2009 portfolio compared to 2007/2008 (source: BM&F Bovespa data) PETROBRAS
ARACRUZ WEG CCR RODOVIAS COPEL VCP AM INOX BR EMBRAER SADIA S/A SUZANO PAPEL IOCHP-MAXION BRASKEM SUZANO PETR CELESC LIGHT S/A DASA AES TIETE ENERGIAS BR ODONTOPREV COELCE SABESP ELETROPAULO GERDAU MET DURATEX NATURA TRACTEBEL CEMIG CPFL ENERGIA BRASIL GERDAU PERDIGAO S/A CESP TIM PART S/A ELETROBRAS BRADESCO ITAUBANCO TELEMAR UNIBANCO
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
Figure 4: ISE 2007/2008 industry breakdown (source: BM&F Bovespa) Consumer non-cyclical 3.1% Water utilities 1.3%
Electric utilities 12.4% Steel Oil and gas 25.0%
7.7%
Other 15.8%
Wood and paper 4.4%
Machines and equipment 1.2% Petrochemicals 0.8%
Financials 39.1%
Transportation 5.0%
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Figure 5: ISE 2008/2009 industry breakdown (source: BM&F Bovespa)
Electric utilities 18.6%
Telecomms 6.6%
Steel 8.3%
Wood and paper 2.2%
Transportation 3.2%
Other 12.1%
Water utilities 1.6%
Petrochemicals 0.5%
Financials 54.4%
Consumer non-cyclical 4.6%
Performance
Over the three years since its launch, the performance of the ISE has closely matched that of Brazil’s main benchmark index, the IBOVESPA (Figure 6). Both indices made very strong gains in 2007 (partly as a result of several large IPOs) but have fallen sharply (by around 40 per cent) over the last six months of 2008 due to the wider effects of global economic turmoil. As a result, cumulative performance over the three years since the ISE’s launch is relatively low at around 11 per cent for the period December 2005 – December 2008. Figure 6: Performance of ISE index compared to IBOVESPA, Dec 2005 – Dec 2008 (source: Bloomberg) 140% 120% 100% 80% 60% 40% 20% 0% Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 IBOVESPA
ISE
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Use by investors The ISE has been well received by Brazilian investors interested in sustainability issues and has led directly to a substantial increase in the number and size of SRI mutual funds available in Brazil (see Chapter 5). The managers of these funds currently use the ISE free of charge. The ISE is currently the main tool used by PREVI and other pension funds that are seeking to implement the PRI across their listed equity portfolios. PREVI has indicated that it is keen to see the development of a more sophisticated tool than the ISE, which can only be used for screening purposes and does not enable comparison or ranking of companies and industry sectors. The ISE does not appear to be well used or well known by foreign portfolio investors.
Research into an ISE ‘premium’ Even though the ISE is a relatively young index, there is already a small but growing body of academic research into the possibility that stocks admitted to the ISE trade at a premium as a result of their superior sustainability (i.e. environmental, social and governance) performance. Professor José Luiz Rossi Júnior has used the ISE to assess whether corporate social responsibility has 1 an impact on the value of Brazilian firms . Prof Rossi analyzed data from 2005 to 2007 on a sample of non‐financial Brazilian companies to assess whether corporate social responsibility (measured using ISE inclusion as a proxy) has an impact on firm value. He showed found that companies included in the ISE have a higher market value compared to other publicly traded companies, implying (but not proving) that sustainability is the causal factor for this premium. Bogéa et al conducted an event study to detect unusual changes in the share price of ISE stocks 2 following the annual announcement of index constituents in 2005, 2007 and 2007 . They found no statistically significant evidence of positive abnormal returns following the announcement of companies being included in the ISE. On the other hand, there was also no evidence of negative abnormal returns. The lack of significant results from this research on the ISE have also been found in previous work on international indices such as FTSE4Good, and does not necessarily mean an absence of a relationship between good sustainability practices and the creation of shareholder value. For context, it is relevant to note a number of studies on equivalent questions related to the more mainstream and longer‐established subject of corporate governance in Brazil. A 2003 study commissioned by BOVESPA found that companies that moved into higher corporate governance levels experienced a positive impact on their stock valuation and increased trading volume and 3 liquidity . A 2005 study by Bruno Erbisti (one of Brazil’s leading ESG investment professionals) showed that Brazil‐based firms with the best corporate governance ratings garnered 2004 P/E ratios 4 that were 20 per cent higher than firms with the worst governance ratings . The better‐rated firms were also found to have ROEs that were 45 per cent higher and net margins that were 76 per cent higher than those with below‐average governance practices. Santana et al have also commented on the impact of governance rules on stock prices in Brazil in a 5 2008 paper for the IFC’s Global Corporate Governance Forum . They noted that Bovespa’s index of shares with differentiated corporate governance (the IGC) rose 237 per cent between June 2001 and June 2006, while the IBovespa index gained 168 per cent during the same period. Novo Mercado and Level 2 companies also obtained higher multiples in their IPOs than the market average. 1
Rossi Júnior, José Luiz What is the value of corporate social responsibility? An answer from the Brazilian Sustainability Index IBMEC Working Paper WPE‐95‐2008 (2008) 2 Bogea, Felipe, Campos, Anderson LS and Camino Blasco, David Did the creation of the ISE create value to companies? (September 2008) 3 Gledson de Carvalho, Antonio Effects of migration to special corporate governance levels of Bovespa (2003) 4 Erbisti, Bruno Corporate governance in Brazil: is there a link between corporate governance and financial performance in the Brazilian Market? ABN AMRO Asset Management (July 2005) 5 Santana, Maria Helena, Ararat, Melsa, Aleandru, Petra, Yurtoglu, B. Burcin Novo Mercado and its followers: case studies in corporate governance reform Global Corporate Governance Forum (February 2008)
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Corporate buy‐in Reaction to and use of the ISE The ISE appears to have been accepted and welcomed by Brazil’s publicly quoted companies. The majority of companies admitted to the ISE make extensive use of the fact (and the ISE logo) in their websites, annual reports, sustainability reports, press releases and other external communications. The ISE has a relatively high profile on the internet. Numerous references to the ISE and companies’ inclusion in the index can also be found at Bloomberg and PR Newswire, as well as in the Brazilian media. Many ISE companies use the ISE’s “brand value” in a proactive way in their regulatory reporting as well as in their PR and investor relations. Figure 7 provides an example of one of several Petrobras filings with the US Securities & Exchange Commission that refer to the ISE; similar references to Brazil’s sustainability index can be found in the SEC filings of numerous other ISE companies. Non‐inclusion of Petrobras The fact that Petrobras has been dropped from the ISE’s 2008/2009 portfolio is a very significant development and arguably marks an important milestone in the short life of the Index to date. Petrobras’ exclusion from the ISE is linked to controversial issues concerning serious air pollution from Brazil’s diesel fleet and delays in the introduction of low‐sulphur diesel fuel necessary for low emission vehicles. The news attracted considerable attention in the Brazilian media (but little international coverage). Petrobras was unhappy about the circumstances surrounding its exclusion from the ISE and issued an angry rebuttal alleging that the existence of a defamatory campaign against the company led by the Ethos Institute, a member of the ISE Board (Petrobras also resigned its membership of the Ethos Institute). It is too early to tell what the longer‐term fall‐out of this may be in terms of future support for the Index by other Brazilian companies and relevant stakeholders. Questionnaire response rate The response rate to the annual questionnaire sent out by FGV‐CES has been falling every year since the ISE’s launch (Table 2). This contrasts sharply with the steady growth in corporate sustainability reporting by Brazilian companies, suggesting the type of “questionnaire fatigue” experienced by the SRI market in the US and Europe at a similar stage of maturity. It should also be noted that the Integration Working Group of the PRI Brazil Network is examining the ESG indicators that are most relevant and material for investors in Brazil (page 48). This will include a comparison of the most commonly used indicators in Brazil with those provided in the GRI guidelines. Based on this selection, PRI pension funds in Brazil may then develop a joint questionnaire that they will send to Brazilian companies. The relationship between this initiative and the ISE is currently unclear. Table 2: Declining company response rate to ISE questionnaire
2005
2006
2007
2008
No. of companies invited to complete questionnaire
121
120
137
137
Response rate to questionnaire
52%
50%
42%
37%
Source: CES‐FGV, BM&F Bovespa
SUSTAINABLE INVESTMENT IN BRAZIL 2009 Figure 7: Example of a company’s use of the ISE in investor relations and regulatory reporting (source: SEC)
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 6-K Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of November, 2007 Commission File Number 1-15106
PETRÓLEO BRASILEIRO S.A. - PETROBRAS (Exact name of registrant as specified in its charter)
Brazilian Petroleum Corporation - PETROBRAS (Translation of Registrant's name into English)
Avenida República do Chile, 65 20031-912 - Rio de Janeiro, RJ Federative Republic of Brazil (Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F ___X___ Form 40-F _______ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes _______ No___X____
Petrobras’ participation in BOVESPA’S Corporate Sustainability Index is renewed (Rio de Janeiro, November 27, 2007). – PETRÓLEO BRASILEIRO S/A - PETROBRAS, [Bovespa: PETR3/PETR4, NYSE: PBR/PBRA, Latibex: XPBR/XPBRA, BCBA: APBR/APBRA], a Brazilian international energy company, announces that, for the second consecutive year, it has been included in the list of companies whose shares compose Bovespa’s Corporate Sustainability Index (ISE) for their high degree of commitment to sustainability and social responsibility. Petrobras’ common and preferred shares will have the weights of 11.12% and 13.88%, respectively, totaling 25%, the ISE’s biggest individual weight. The ISE’s new portfolio will go into effect on December 01 2007 and remain valid through November 30 2008. It brings together 40 corporate stocks (common and preferred) issued by 32 companies performing in 13 sectors. These companies were selected for their policies, management practices, performance, and legal obligation fulfillment with regard to economic efficiency, environmental balance, social justice, product nature, and corporate governance. Jointly, the 32 companies’ market value is R$927 billion, or 39.6% of BOVESPA’S total capitalization, currently worth R$2.3 trillion. BOVESPA, ABRAPP, ANBID, APIMEC, IBGC, IFC, the ETHOS institute, and the Ministry of the Environment, who comprise the index’ Deliberation Board, created the ISE as a benchmark for socially responsible investments in Brazil. The Board later added PNUMA to its composition. FGV-EAESP elaborated the methodology used to assess the companies. The 141-question questionnaire was sent to the 137 outfits that issue the 150 most liquid shares traded at the BOVESPA and, ultimately, answered by 62 companies. The ISE is a pioneering initiative in Latin America, designed to create an investment environment that is compatible with sustainable development demands imposed by the contemporaneous society and to encourage ethical corporate responsibility. After undergoing a revision process which involved the participation of several stakeholders, the ISE is now in its third edition. The renewal of Petrobras’ participation in the ISE is a major victory for the company and is the outcome of its efforts to realize its strategic objectives of growing with profitability and social and environmental responsibility.
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Commercial business model All BM&F Bovespa indices, including the ISE, are made available to investors free of charge. Companies wishing to be included in the ISE pay an evaluation fee of US$2,000; companies admitted to the ISE can also purchase a license to use the ISE brand for a fee of US$7,000 per annum. These income streams are the only source of revenue to cover the ISE’s maintenance costs, which are largely incurred by CES‐FGV.
Future directions The ISE Board is currently considering the possibility of changing the ISE methodology to introduce a two‐tier system. The aim behind this concept is to encourage ‘out‐lying’ companies to improve their ESG performance (in a similar way to the exchange’s differentiated corporate governance levels) and to enhance the value of the index to investors. BM&F BOVESPA and CES‐FGV are also interested in the concept of creating a regional Latin American version of the ISE that might include Chile, Argentina and Mexico (and potentially also Peru and Colombia).
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15
4. ASSET MANAGERS
Market overview Brazil has around 8,300 investment funds with over 11 million shareholders and total net assets of around US$700 billion as of Q2 2008, according to data from the Brazilian Securities and Exchange Commission (CVM). The market has grown significantly over the last decade (Figure 8). At the end of 2007, Brazilian investment funds had around 48 per cent of their total assets in equities. Due to sharp falls in the stock market in 2008, re‐allocation and net outflows, as of October 2008 this figure had fallen to around 15 per cent, with the balance represented by investments in fixed income securities. Table 3 lists the top 40 Brazilian asset managers in terms of global assets under management as of October 2008. Their client base is diversified across a wide range of investor types (Figure 9). Pension fund assets make up around 22 per cent of global assets but it should be noted that this figure may be heavily distorted by ‘captive mandates’ i.e. the pension schemes of the parent financial institutions. Between them, these 40 asset managers have equity holdings of around R$178 billion (US$77 billion); about 97 per cent of this equity corpus is managed by 20 firms, most notably Banco do Brasil (Figure 10). Figure 8: Brazilian investment funds AUM (US$ million) (source: CVM)
743
800 700
704
633
AUM US$ million
600 500
434
400
326 247
300 200 100
118
149
148
176 97
0 1999 2000 2001 2002 2003 2004 2005 2006 2007
Jul Aug 2008 2008
16
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 9: Assets under management according to type of investor, Oct 2008 (source: ANBID) Pension funds - public sector companies 10% Corporate 11%
High income retail 9% Insurers 3% Middle market 2% Others 2%
Pension plans 11%
Foreigners 5%
Other; 21%
Investment funds 1% Capitalization 1%
Pension funds - private companies 12%
Public authorities 7% Retail 13%
Private 13%
Figure 10: Top 20 asset managers according to assets under management invested in equities, Oct 2008 (source: ANBID) BANCO DO BRASIL
$21,131 $9,025
BNY MELLON ITAU
$7,188
BRADESCO
$6,072
UBS PACTUAL
$5,226
CAIXA
$3,155
CREDIT SUISSE
$2,925
HSBC
$2,677
OPPORTUNITY
$2,547
SANTANDER BRASIL
$2,448
UNIBANCO
$2,367
BNP PARIBAS
$1,929
GERACAO FUTURO CORRETORA
$1,600
BEM
$1,418
BANCO REAL
$1,299
CITIBANK
$850
ALFA
$775
VOTORANTIM ASSET
$771
BANCO SAFRA
$702
LEGG MASON
$671 $0
$5,000
$10,000
$15,000
$20,000
$25,000
US$ million
SUSTAINABLE INVESTMENT IN BRAZIL 2009
17
Table 3: Ranking of Brazilian asset managers by global assets under management CDP 2008
SRI products
102,566.70
67,410.15
146,539.50
63,300.00
69,270.20
29,922.33
SANTANDER BRASIL
60,658.90
26,202.55
6
UBS PACTUAL
59,436.80
25,674.64
7
UNIBANCO
58,792.00
25,396.11
8
HSBC
56,822.70
24,545.44
9
BNY MELLON
51,643.90
22,308.38
10
BEM
34,445.20
14,879.14
11
BANCO REAL
32,991.90
14,251.36
12
NOSSA CAIXA
27,920.90
12,060.86
13
BANCO SAFRA
21,174.00
9,146.44
14
INTRAG
20,195.80
8,723.89
15
CITIBANK
19,708.30
8,513.30
16
LEGG MASON
18,208.10
7,865.27
17
BNP PARIBAS
18,134.20
7,833.35
18
VOTORANTIM ASSET
18,011.80
7,780.48
19
CREDIT SUISSE HEDGING GRIFFO
17,337.40
7,489.16
20
SUL AMERICAN INVESTIMENTOS
11,408.10
4,927.90
21
OPPORTUNITY
9,108.30
3,934.47
22
CONCORDIA
4,059.50
1,753.56
23
ALFA
3,800.70
1,641.77
24
GERACAO FUTURO CORRETORA
3,705.40
1,600.60
25
CREDIT AGRICOLE BRASIL
3,332.50
1,439.52
26
BANCO FATOR
3,153.20
1,362.07
27
BBM
1,868.90
807.30
28
DYNAMO ADMINISTRACAO DE RECURSOS
1,043.60
450.80
29
BANESTES
979.20
422.98
30
FIBRA
976.70
421.90
31
BRB
816.20
352.57
32
MERCANTIL DO BRASIL
441.60
190.76
33
BANCO DE TOKYO MITSUBISHI UFJ BRASIL
361.80
156.29
34
PAM ‐ PARANA BANCO ASSET
246.60
106.52
35
MAGLIANO
115.40
49.85
36
PROSPER
94.90
40.99
37
COINVALORES
92.40
39.91
38
TITULO
89.60
38.70
39
BANPARA
65.40
28.25
40
PILLA
14.30
6.18
TOTAL
1,170,562.30
505,642.46
R$ million
US$ million
1 2
BANCO DO BRASIL
237,441.90
ITAU
156,054.50
3
BRADESCO
4
CAIXA
5
Source: ANBID (data as of October 2008)
PRI
18
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Status of sustainable investment The National Association of Investment Banks (ANBID) is actively engaged on sustainable investment issues on behalf of its members. It serves on the ISE Deliberative Board and has also worked with the Carbon Disclosure Project (CDP) and the UN PRI. As shown in Table 3, four of the top 40 asset management firms are signatories to the PRI: Banco Real, BNP Paribas, HSBC and Unibanco. Between them, they manage US$73 billion or around 14.5 per cent of total assets under management by all 40 firms. In terms of equity holdings, the four PRI signatories manage US$8.2 billion, which is just under 11 per cent of the total equity corpus of US$77 billion. With the exception of BNP Paribas, each of these firms currently offers retail SRI funds (Chapter 5). However, there is limited information on the extent to which these four PRI signatories are integrating ESG into their mainstream (non‐SRI branded) products and strategies. SRI mutual fund products are also offered by Banco do Brasil, Bradesco, Caixa, Itaú, Legg Mason Western Asset Management, Safra and Votorantim (Chapter 5). None of these asset managers have signed the UNPRI at the current time. Seven of the top 40 firms were signatories to CDP Brazil 2008. They represent combined assets of US$326 billion or nearly 65 per cent of total assets under management by all of the firms listed in Table 3. In terms of equity holdings, the CDP signatories manage US$44 billion or 57 per cent of the total equity corpus. None of the asset management firms employs full‐time ESG analysts. Banco Real, HSBC, Itaú, Unibanco and Votorantim each have one full‐time analyst working on ESG issues part‐time.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
19
5. RETAIL FUNDS Market overview Retail and ‘high income’ retail customers constitute around 13 per cent and 9 per cent respectively of global assets managed by the 40 firms listed in Table 3. The combined value of these assets is around US$109.7 billion; Banco do Brasil and Caixa lead the rankings for retail assets under management whilst the two leading managers of high income retail assets are Itaú and Banco Real (Bradesco has the third place in both categories) (Table 4). Table 4: Retail and high income retail investors' assets under management RETAIL INVESTORS Top 10 managers
HIGH INCOME RETAIL INVESTORS
R$ million
US$ million
Top 10 managers
R$ million
US$ million
1
BANCO DO BRASIL
45,928
19,840
1
ITAU
26,888
11,614
2
CAIXA
38,489
16,626
2
BANCO REAL
12,431
5,370
3
BRADESCO
24,661
10,653
3
BRADESCO
9,737
4,206
4
ITAU
11,335
4,896
4
SANTANDER BRASIL
8,749
3,779
5
SANTANDER BRASIL
10,522
4,545
5
BANCO DO BRASIL
7,735
3,341
6
LEGG MASON
8,249
3,564
6
HSBC
7,658
3,308
7
HSBC
5,473
2,364
7
UNIBANCO
5,833
2,520
8
UNIBANCO
5,129
2,216
8
CAIXA
4,284
1,851
9
BANCO REAL
2,517
1,087
9
BANCO SAFRA
3,440
1,486
10
NOSSA CAIXA
2,437
1,053 10
BEM
2,276
983
99,229
42,863
Total (40 managers)
154,781.5
66,860
Total (40 managers)
Source: ANBID (data as of October 2008)
Status of sustainable investment Not counting feeder funds, there are currently 10 retail SRI mutual fund products available to retail investors in Brazil, with total combined assets of approximately R$730 million (US$315 million) (Table 5). Retail SRI mutual funds therefore represent less than 0.3 per cent of the total retail/high income retail investment market of US$109.7 billion. For comparison, in the UK there are around 80 SRI products for retail investors, accounting for nearly 4 per cent (£30 billion, or US$44 billion) of the UK’s £770 billion (US$1.12 trillion) retail investment funds market. In the United States, there are approximately 180 retail SRI mutual funds, which together represent about 1.8 per cent of the US$9.3 trillion mutual funds market. The growth of retail SRI mutual fund assets over time is illustrated in Figure 11. The first Brazilian retail SRI fund was Banco Real’s Ethical Fund, launched in 2001. It was some three years before a second manager, Itaú, entered this niche market. Further SRI products did not arrive in the market until the launch of the ISE in December 2005, which raised the awareness of retail investors and prompted several other asset managers to enter the market. At the peak of the market (December 2007), the combined net asset value of the SRI products available at that time was around R$1.6 billion, equivalent to US$691 million at the current exchange rate. The dramatic contraction over the last 12 months appears to be the result of the falling stock market rather than redemptions.
20
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Despite several new entrants to the market since the launch of the ISE, market share in the SRI niche continues to be dominated by the early pioneers, Banco Real and Itaú, who each control about 40 per cent of total SRI net assets (Figure 12). Table 5: Brazil's SRI mutual funds Fund name (CNJP No.)
Launch date
NAV
BANCO REAL
REAL FUNDO DE INVESTIMENTO EM AÇÕES ETHICAL II (04.736.006/0001‐82)
Nov 01
ITAU
ITAÚ EXCELÊNCIA SOCIAL AÇÕES ‐ FUNDO DE INVESTIMENTO (06.069.957/0001‐70)
Feb 04
BANCO DO BRASIL
BB TOP AÇÕES ÍNDICE DE SUSTENTABILIDADE EMPRESARIAL FUNDO DE INVESTIMENTO EM AÇÕES (05.775.731/0001‐22)
Dec 05
BRADESCO
BRADESCO FUNDO DE INVESTIMENTO EM AÇÕES ‐ ÍNDICE DE SUSTENTABILIDADE EMPRESARIAL (07.192.379/0001‐28)
Dec 05
HSBC
HSBC FUNDO DE INVESTIMENTO AÇÕES SUSTENTABILIDADE EMPRESARIAL – ISE (07.535.827/0001‐49)
Jan 06
SAFRA
SAFRA ISE ‐ FUNDO DE INVESTIMENTO EM AÇÕES (07.470.273/0001‐49)
Jan 06
UNIBANCO
UNIBANCO SUSTENTABILIDADE FUNDO DE INVESTIMENTO EM AÇÕES (08.151.339/0001‐09)
Mar 07
LEGG MASON WESTERN ASSET
LEGG MASON AÇÕES SUSTENTABILIDADE (1) EMPRESARIAL FI (29.413.945/0001‐17)
Jun 07
CAIXA
FUNDO DE INVESTIMENTO EM AÇÕES CAIXA SUSTENTABILIDADE EMPRESARIAL – ISE (08.070.838/0001‐63)
Nov 07
VOTORANTIM
FUNDO DE INVESTIMENTO VOTORANTIM SUSTENTABILIDADE EM AÇÕES (09.343.566/0001‐90)
Sep 08
TOTAL
R$ m
5 yr
3 yr
1 yr
276.46
119.15
100.47%
12.66%
‐37.60%
235.00
101.29
‐
11.56%
‐43.76%
23.49
10.13
‐
14.97%
‐39.61%
37.56
16.19
64.39
(1)
Cumulative Performance
US$ m
‐
27.75
22.47%
‐
‐37.22%
12.66%
‐44.38%
5.04
2.17
‐
‐
‐41.98%
3.45
1.49
‐
‐
‐35.16%
76.63
33.03
‐
‐
‐43.68%
5.44
2.35
‐
‐
‐41.70%
2.29
0.99
‐
‐
‐
729.76
314.53
(1)
(1)
Source: CVM Investors Portal (www.portaldoinvestidor.gov.br). All data as of December 30, 2008. (1) The Legg Mason Western Asset Management fund was launched in 1986 and did not have any explicit sustainability strategy until it was re‐launched in June 2007 as a ‘sustainability’ fund tracking the ISE index.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
21
Figure 11: Retail SRI fund assets under management in Brazil (source: CVM) 1,800 1,600 1,400
R$ million
1,200 1,000 800 600 LAUNCH OF ISE INDEX 400 200
Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
0
Figure 12: Market share in the SRI niche by NAV (source: CVM) 100%
90%
80%
70% VOTORANTIM CAIXA
60%
LEGG MASON UNIBANCO
50%
SAFRA
40%
BRADESCO
HSBC BANCO DO BRASIL ITAÚ
30%
BANCO REAL
20%
10%
0% 2002
2003
2004
2005
2006
2007
2008
22
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 13: Cumulative Performance ‐ 3 Years (source: CVM)
BRADESCO BANCO DO BRASIL SAFRA HSBC BANCO REAL ITAÚ ISE 0%
5%
10%
15%
20%
25%
Figure 14: Cumulative Performance ‐ 1 Year (source: CVM)
UNIBANCO BRADESCO BANCO REAL BANCO DO BRASIL ISE CAIXA SAFRA LEGG MASON ITAÚ HSBC -50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
The six products with three‐year track records all show out‐performance compared to the ISE over the same period (Figure 13). The best performing SRI fund over three years is managed by Bradesco, which beat the second‐best performing fund by 750 basis points and delivered a return almost double that of the lowest performing fund, managed by Itaú. All ten funds have recorded significant negative performance over the last 12 months, reflecting the falling IBovespa index and market conditions in Brazil as a whole and globally (Figure 14). Unibanco’s SRI fund shows the ‘least worst’ performance over this period, dropping 35 per cent in value compared to a fall of 40 per cent in the ISE and beating the bottom performer, HSBC, by 940 basis points.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
23
Banco Real’s Ethical Fund is based on its own ESG research and sustainability methodology, including an independent ethical advisor on the investment committee. The fund has always differed significantly from the IBovespa and ISE due to the absence (for sustainability/ethical reasons) of Petrobras from its portfolio. All of the other SRI funds on the market use the ISE index to guide their portfolio construction. Most of these funds are passively managed with respect to ESG issues: only HSBC has an active strategy with in‐house ESG research. Shareholder engagement on ESG issues has not been a common feature of Brazil’s SRI mutual funds to date. However, several of the fund managers joined forces in September 2008 to launch a shareholder engagement campaign on labour standards (specifically, modern‐day slavery in sectors such as charcoal production) under the auspices of the Latin American Sustainable Finance Forum (LASFF). In terms of their ESG strategies and sustainability ‘selling points’, the ten funds are relatively homogeneous, especially now that the absence of Petrobras from the ISE’s 2008/2009 portfolio eliminates one of the main historical differentiators between Banco Real’s Ethical Fund and the other nine products. The ten funds represent the first generation of SRI mutual fund products in Brazil. To date, there are no ‘second generation’ products. There has been little or no product innovation (either around alpha‐ seeking ESG strategies or high environmental/social development impact strategies) since Banco Real, Itaú and the ISE index provided the ‘blueprint’ for others to follow. Similarly, retail appetite for the existing SRI products appears to have begun to level out in the middle of 2007, although this obviously coincides with the decline in retail appetite for variable income products in general following the onset of the current global economic downturn. Figure 15 provides an additional insight into the Brazilian SRI mutual fund market and the importance of this niche to the asset managers competing for business in Brazil. As noted earlier in this chapter, investment in equities represents only 15 per cent or so of total assets under management at the current time. Figure 10 presented information on the 20 asset managers who dominate this segment in terms of having the largest equity portfolios. For each of these asset managers, Figure 15 shows assets invested in equities through SRI strategies as a proportion of assets invested in equities through all strategies. Although 10 of the top 20 equity managers offer SRI products, these products are a very small (and, arguably, commercially insignificant) part of the overall equity management business at most of these firms. Even at Itaú, which has a 40 per cent share of the SRI mutual fund market, SRI accounts for less than 2 per cent of total assets in equities. The exception is Banco Real, which pioneered Brazil’s sustainable investment movement in 2001 and today also has a 40 per cent market share. The analysis shown in Figure 15 implies that SRI has a much greater commercial and strategic significance for Banco Real and is perhaps a more integral part Banco Real’s asset management business.
24
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 15: SRI funds as % of AUM in equities (source: ANBID, CVM) BANCO DO BRASIL
0.05%
BNY MELLON ITAU
1.41%
BRADESCO
0.27%
UBS PACTUAL CAIXA
0.07%
CREDIT SUISSE HSBC
1.04%
OPPORTUNITY SANTANDER BRASIL UNIBANCO
0.06%
BNP PARIBAS GERACAO FUTURO CORRETORA BEM BANCO REAL
9.19%
CITIBANK ALFA VOTORANTIM ASSET
0.13%
BANCO SAFRA
0.31%
LEGG MASON
4.93% 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
SUSTAINABLE INVESTMENT IN BRAZIL 2009
25
6. PENSION FUNDS Market overview Pension fund assets have grown significantly in recent years (Figure 16) and currently represent about 18 per cent of GDP. As of September 2008, total pension fund assets amounted to R$428 billion (US$185 billion) with around 32 per cent (R$137 billion, US$59 billion) invested in equities and equity investment funds. Table 6 lists the 25 largest pension funds, which together represent over 75 per cent of the total pension corpus. The three largest funds are: PREVI, the US$55 billion pension fund of Banco do Brasil; Petrobras’ US$17 billion pension fund, PETROS; and FUNCEF, the Caixa Economica Federal pension fund, with assets of US$14 billion. Many pension funds – including PREVI, PETROS and FUNCEF – manage their equity portfolios in‐house rather than through external managers. PREVI, the country’s largest pension fund, is widely acknowledged in the region as a setter of best practice standards across a range of fiduciary, pensions administration, investment management and corporate governance issues. It exercises considerable leadership influence over other Brazilian pension funds and in Brazil’s economy as a whole. Figure 16: Brazilian pension fund assets, 2001‐2008 (source: ABRAPP) 500
R$ million
400 300 200 100 2001
2002
2003
2004
2005
2006
2007
2008
Status of sustainable investment 18 pension funds – including 9 of the top 25 ‐ are signatories to the PRI. Together they represent combined assets of US$110 billion as of September 2008, about 60 per cent of total pension fund assets. As noted above, on average, Brazil’s pension funds allocate about 32 per cent of assets to listed equities. The total value of PRI pension fund investment on the Brazilian stock market can therefore be estimated at around US$35 billion. Further information on the PRI Brazil Network is provided on pages 47‐48. PREVI was a founding signatory to the UNPRI and the President of PREVI, Mr Sergio Rosa, is one of 11 elected representatives on the international PRI Board. PREVI is at the centre of ongoing PRI implementation efforts in Brazil’s pension fund community. Figure 17 provides an overview of PREVI’s implementation of the UNPRI.
26
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 6: The 25 largest pension funds in Brazil Rank
Pension fund
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
PREVI PETROS FUNCEF FUNDACAO CESP VALIA ITAUBANCO SISTEL BANESPREV CENTRUS FORLUZ REAL GRANDEZA FAPES FUNDACAO COPEL POSTALIS HSBC FUNDO DE PENSAO TELOS VISAO PREV FUNDACAO ATLANTICO ELETROCEEE CX EMPR USIMINAS IBM ECONOMUS FACHESF CBS FUNBEP
Total (top 25 pension funds) Total (278 pension funds)
R$ million
US$ million
128,388 40,199 32,574 15,307 9,975 9,530 9,325 8,817 8,154 7,034 6,008 4,995 4,473 4,219 3,839 3,698 3,676 3,374 3,337 3,260 3,166 3,050 2,860 2,747 2,669
55,459 17,365 14,071 6,612 4,309 4,116 4,028 3,809 3,522 3,038 2,595 2,158 1,932 1,822 1,658 1,598 1,588 1,458 1,442 1,408 1,368 1,318 1,235 1,186 1,153
324,674 427,485
140,248 184,659
PRI
CDP 2008
Source: ABRAPP, September 2008
The ISE index is currently used by PREVI as a proxy indicator for companies’ environmental and social performance, although it should be noted that the permitted investment universe extends across the entire market. PREVI has indicated that it is keen to see the development of a more sophisticated tool than the ISE, which can only be used for screening purposes and does not enable comparison or ranking of companies and industry sectors. PREVI has recently been involved in a PRI‐wide engagement campaign focusing on modern‐day slavery in the Brazilian charcoal production sector which supplies pig iron to the iron and steel industry in Brazil and abroad. PREVI is also involved in engagement at other levels, including dialogue with boards and promoting GRI to Brazilian companies under the framework of the international Emerging Markets Disclosure Project (EMDP). PREVI and other leading pension funds are increasing their portfolio allocations to private equity and are participating in several new funds in the infrastructure, ‘greentech’ and climate change arenas: unlike listed equities, these private equity mandates are managed by external firms and PREVI is actively engaging with such general partners on the incorporation of ESG factors into the investment cycle. 29 pension funds – including 11 of the top 25 – were signatories to CDP Brazil in 2008. Their combined assets are about 60 per cent of the total pension fund corpus.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
27
It is important to note that PREVI and most other pension funds use in‐house managers for their investment in listed equities. There is therefore little or no know‐how transfer between the pension funds and asset managers such as Banco Real that have pioneered SRI in Brazil and developed in‐ house research capacity. PREVI itself does not appear to have any in‐house ESG analysts and does not out‐source ESG research. Although the commitment of PREVI and other leading PRI signatories in Brazil is strong, implementation by those pioneers is still at a relatively early stage. Other pension funds that have followed PREVI’s example in a more passive way are likely to still be at the internal awareness raising stage. ABRAPP, the Brazilian Association of Pension Funds, is actively engaged on sustainable investment issues on behalf of its members. As well as serving on the ISE Deliberative Board, it acts as one of the main Brazilian partners for the Carbon Disclosure Project (CDP) and works closely with the UNPRI.
28
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 17: Responsible investment in focus: PREVI Following its signing the UNPRI in 2006, PREVI is in the process of developing a socio‐environmental responsibility policy that, alongside its corporate governance policy, will apply to all investment activities. The main elements of PREVI’s responsible investment strategy are as follows: Voting PREVI votes shareholder resolutions in accordance with its corporate governance code. It views the code as a crucial instrument in guiding the relationships among agents operating in the companies in which it has interests. The code states the behaviours and practices that PREVI expects from invested companies. Transparency, disclosure and accountability A company’s corporate governance framework must promote the timely and accurate disclosure of financial and non‐financial information to allow the interested parties to obtain a fully integrated understanding of a company’s performance. Disclosure should be in accordance with the directives presented in the Global Reporting Initiative (GRI) and Brazilian CSR groups the Ethos Institute and IBASE. In addition to financial statements, PREVI encourages companies to submit annually: A statement indicating adopted corporate governance practices. The policies applied to the management of insurance agreements and the result of systematic risk management including, but not limited to, equity, environmental, technological and regulatory risks. Performance indicators for corporate social responsibility. Policy on and the global amount of compensation paid to directors and executive officers, including variable compensation and stock option plans. Shareholder rights. A company’s corporate governance framework must guarantee the rights and interests of all shareholders and be aligned with the rights of clients, employees, suppliers, the government and community in general. Corporate ethics and social responsibility PREVI invests in profitable and socially responsible companies that, in addition to fulfilling their legal obligations, promote actions to the benefit of the communities in which they operate, offer their workers adequate safety, health and development conditions and care for environmental preservation and social and economic development. PREVI expects the boards of invested companies to engage with stakeholders to establish corporate ethics and standards of behaviour that must be then approved and implemented.
Engagement PREVI will frequently assign a representative to attend the board meetings of companies in which it has significant holdings. This practice is driven by issues relating to performance, business strategy, returns and dividends, long‐term value, corporate governance and, most recently, the management of ESG issues. PREVI will meet with board representatives to raise any concerns it might have with a company and discuss possible risks and areas for improvement. The representative’s role is to transmit PREVI’s view to the board and accordingly seek improvements in the company’s behaviour. PREVI has a process in place to assess the performance of its board representatives, and currently employs 28 people to undertake this activity internally. Employees monitor and assess the performance of 177 representatives in 90 companies. All PREVI representatives meet on an annual basis, and a training process has been put in place to better align them with ESG issues. Divestment In instances where PREVI is concerned about the impact of a company’s activities on society, it may take the decision to disassociate itself from that company, adopting a negative screening approach. External investment manager requirements PREVI is in the process of selecting five new external private equity investment managers. The consideration of ESG issues is a mandatory part of the RFP. PREVI will monitor its external investment managers on the basis of their implementation of a responsible investment strategy and it intends to participate in the investment decision‐ making process by sitting on its fund managers’ investment committees. Socio‐environmental responsibility policy PREVI is currently developing a socio‐environmental responsibility policy that will apply to all its activities. The Pension Fund intends to implement the policy in 2007. The policy will include the consideration of environmental and social issues in investment decision‐making, including engagement and corporate governance activities. PREVI’s goal is for ESG issues to be fully integrated into its stock selection process. In addition, the Pension Fund is developing methodologies and tools to measure the social and environment impact of its investments. Furthermore, PREVI will review its investment policy in an attempt to further align it with each of the Principles of the UNPRI.
www.previ.com.br
Reproduced and adapted from the 2007 report Responsible Investment in Focus by UNEPFI & UKSIF
SUSTAINABLE INVESTMENT IN BRAZIL 2009
29
7. FOREIGN INVESTMENT
Market overview Foreign portfolio investment in Brazil has increased approximately ten‐fold in the last decade. The country’s total stock of foreign portfolio investments as of the end of August 2008 stood at about US$232 billion, with around two‐thirds of this corpus (about US$120 billion) invested in publicly quoted companies (Table 7). A significant number of Brazilian companies issue American Depository Receipts (ADRs) which are traded on the NYSE or other US markets. The 25 largest such ADRs are listed in Table 8 and have a total value of US$110 billion: the leading issuers of ADRs include Petrobras, Vale, Unibanco, Bradesco and Itaú. Ten companies in this list are in the current ISE portfolio. Table 9 identifies some of the main US and non‐US investors that hold the ADRs of Brazilian companies. Investors include JP Morgan, Fidelity, BlackRock, Templeton and AllianceBernstein (the latter being one of CalPERS’ three emerging market managers).
Status of sustainable investment Possibly the most significant development in recent years has been the April 2006 launch of the ABN AMRO Asset Management Brazil Equity Fund, a Luxembourg‐incorporated vehicle for European investment in Brazilian stocks. The investment strategy included an extensive set of sustainability standards (e.g. environmental, social, ethical, corporate governance) applied to individual companies in order to assess their socially responsible characteristics and select or exclude them or their relevant sector. By May 2008, the Brazil Equity Fund had assets of nearly US$400 million. However, following the break‐up of the ABN AMRO Group and the acquisition of its investment management business by Fortis, the Brazil Equity Fund was absorbed into the Fortis L Equity Brazil Fund in November 2008. The prospectus for the Fortis fund suggests that sustainability criteria no longer form a part of the investment strategy (although it should be acknowledged that Fortis is a signatory to the UNPRI). There are insufficient data to estimate what proportion of foreign portfolio assets in Brazil are currently managed under ‘sustainable’ or ‘socially responsible’ mandates. In the absence of hard data, it may be legitimate to make a conservative educated guess that investors who take environmental, social and/or governance (ESG) issues into account in a formal way represent less than 1 per cent of the US$120 billion corpus, i.e. about US$1.2 billion. Anecdotal evidence indicates that most foreign portfolio investors are focusing on the governance element of ESG by, for example, investing only in stocks listed on the Novo Mercado and/or by shareholder engagement as illustrated by F&C’s involvement in a recent case involving the rights of owners of preference shares in relation to VCP’s acquisition of Aracruz. Nevertheless, some foreign investors have recently begun to join forces on environmental and social issues in Brazil under the auspices of the UNPRI. A recent example is the recent engagement led by the UK’s Hermes on labour standards in the iron and steel industry (see box, page 32). With regard to ADRs, some of the fund managers listed in Table 19 are signatories to the UNPRI. However, in the absence of hard facts on the actual policies of specific funds, an educated guess that ESG strategies account for less than 1 per cent of total portfolio suggests that the stock of sustainable investment in Brazilian ADRs might be in the order of US$1 billion.
30
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 7: Foreign portfolio investment in Brazil, 1999‐2008 (source: CVM) Period
Stock of Assets (US$ m)
% in Stocks
% in Fixed Income
Net Flows (US$ m)
1999
23,110
99.0
‐
1,100
2000
18,528
91.9
7.0
‐1,835
2001
15,532
88.5
9.3
‐728
2002
10,373
74.7
21.5
‐336
2003
20,120
86.8
11.6
2,421
2004
29,066
90.1
8.3
270
2005
53,439
91.0
6.8
707
2006
101,601
81.7
16.9
8,585
2007
214,111
77.4
19.0
33,878
2008 (Jan‐Aug)
232,280
67.3
29.8
12,205
Table 8: Top 25 Brazilian ADRs as of Dec 31, 2008 (source: adr.com) ADR
Ownership value (US$ million)
PETROBRAS ‐ PETROLEO BRASILEIRO SA [PBR] PETROBRAS ‐ PETROLEO BRASILEIRO SA [PBR A]
25,057.08 21,767.39
CIA VALE DO RIO DOCE [RIO PR]
13,917.62
CIA VALE DO RIO DOCE [RIO]
10,938.46
ISE
UNIBANCO ‐ UNIAO DE BANCOS BRASILEIROS SA [UBB]
6,985.41
BANCO BRADESCO SA [BBD]
5,154.56
BANCO ITAU HOLDING FINANCEIRA SA [ITU]
4,473.93
EMPRESA BRASILEIRA DE AERONAUTICA SA [ERJ]
2,846.40
VIVO PARTICIPACOES SA [VIV]
2,362.24
TELE NORTE LESTE PARTICIPACOES SA [TNE]
2,248.32
CIA DE BEBIDAS DAS AMERICAS [ABV]
2,244.69
CIA SIDERURGICA NACIONAL SA [SID]
1,864.28
GERDAU SA [GGB]
1,630.17
CIA ENERGETICA DE MINAS GERAIS [CIG]
1,458.40
ARACRUZ CELULOSE SA [ARA]
1,373.37
TAM SA [TAM]
938.73
BRASIL TELECOM PARTICIPACOES SA [BRP]
874.06
TIM PARTICIPACOES SA [TSU]
737.31
GAFISA S.A. [GFA]
736.10
CIA DE SANEAMENTO BASICO DO ESTADO DE SAO PAULO [SBS]
709.92
VOTORANTIM CELULOSE E PAPEL SA [VCP]
601.46
CIA BRASILEIRA DE DISTRIBUICAO GRUPO PAO DE ACUCAR [CBD]
478.62
SADIA SA [SDA]
304.71
NET SERVICOS DE COMUNICACAO SA [NETC]
293.55
ULTRAPAR PARTICIPACOES SA [UGP] TOTAL (top 25)
255.09
110,251.87
SUSTAINABLE INVESTMENT IN BRAZIL 2009
31
Table 9: Key investors in Brazilian ADRs (source: adr.com) TOP 10 HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
Filing date 31‐Oct‐08
PRI
Fidelity Management & Research
US
6,253.92
1.21
Barclays Global Investors, N.A.
US
5,079.43
0.86
31‐Oct‐08
Capital World Investors
US
4,097.64
1.16
30‐Sep‐08
BlackRock Investment Management (UK) Ltd.
UK
3,544.87
4.31
30‐Sep‐08
Baillie Gifford & Co.
UK
3,497.31
12.05
30‐Sep‐08
AllianceBernstein L.P.
US
3,104.38
1.33
31‐Mar‐08
T. Rowe Price Associates, Inc.
US
2,968.97
1.33
30‐Sep‐08
Wellington Management Company, LLP
US
2,897.78
1.14
31‐Oct‐08
J.P. Morgan Investment Management Inc. (New York)
US
2,879.29
2.74
31‐Oct‐08
Templeton Asset Management (Singapore) Ltd.
Singapore
2,397.09
10.54
30‐Sep‐08
TOTAL
36,720.68
TOP 10 US MUTUAL FUND HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
BGF Latin American Fund
US
2,809.84
iShares MSCI Emerging Markets Index Fund
US
2,338.97
American Funds EuroPacific Growth Fund
US
Fidelity Latin America Fund
US
American Funds Growth Fund of America
US
CGM Focus Fund
US
Fidelity Low‐Priced Stock Fund
Filing date
PRI
45.26
29‐Feb‐08
13.86
31‐Oct‐08
1,860.26
2.45
30‐Sep‐08
1,790.49
48.61
30‐Sep‐08
1,379.52
1.09
30‐Sep‐08
1,224.37
16.89
30‐Sep‐08
US
1,133.93
4.39
31‐Jul‐08
American Funds New Perspective Fund
US
1,025.25
2.73
30‐Sep‐08
Dodge & Cox International Stock Fund
US
772.11
2.09
30‐Sep‐08
iShares S&P Latin America 40 Index Fund
US
758.07
61.81
31‐Oct‐08
TOTAL
15,092.81
TOP 10 NON‐US MUTUAL FUND HOLDERS OF BRAZILIAN ADRs
Value (US$ m)
% of portfolio
BGF World Mining Fund
UK
1,381.70
JPMorgan Funds ‐ Emerging Markets Equity Fund
UK
1,200.75
Templeton Emerging Markets Investment Trust
Singapore
1,125.47
26.5
30‐Apr‐08
T. Rowe Price Latin America Fund
UK
906.40
40.64
30‐Sep‐08
Templeton BRIC Fund
Singapore
672.30
25.73
30‐Jun‐08
DWS Invest Bric Plus
Germany
627.08
14.81
30‐Jun‐08
Schroder Intl Selection Fd Bric
UK
584.93
23.63
30‐Jun‐08
Templeton Latin America Fund
Singapore
577.25
23.69
30‐Jun‐08
Harbor International Fund
Bermuda
568.88
2.54
30‐Sep‐08
Vanguard International Growth Fund
UK
509.04
3.17
31‐Aug‐08
TOTAL
8,153.80
Filing date
PRI
8.52
29‐Feb‐08
18.36
30‐Jun‐08
32
SUSTAINABLE INVESTMENT IN BRAZIL 2009
JOINT INVESTOR ENGAGEMENT ON SLAVE LABOUR IN THE BRAZILIAN IRON & STEEL INDUSTRY In late 2006, allegations surfaced about slave labour practices in the iron and steel industry in Brazil. The operations involved were potentially part of the supply chains of the largest manufacturers and users of iron and steel in the world, companies in which, jointly, the signatories had sizeable holdings. The allegations were that these large global users of steel were inadvertently supporting the use of forced labour at charcoal plants in Brazil. Charcoal is an important raw material used in the manufacture of pig iron. PRI signatory Hermes used the PRI Clearinghouse to bring together a group of fellow signatories (including PREVI and other Brazilian pension funds) for a collaborative engagement. The investor group identified a list of target firms, and then jointly wrote to those companies setting out their concerns, focusing on the negative impact on reputation due to any association with inappropriate labour practices. Follow up telephone calls and meetings were also conducted with the companies. There was a wide range of responses. A number of companies had already put into place an audit system to ensure they were not sourcing steel from these operations. However, there were also companies that had not considered the impact of such allegations on their business and were surprised by shareholder interest in this area. These firms undertook to examine the investors’ concerns, and the group had further conversations with these companies to ensure they had addressed the issue. Source: UNPRI
SUSTAINABLE INVESTMENT IN BRAZIL 2009
33
8. OTHER MARKET PARTICIPANTS Brazilian Development Bank Overview The Brazilian Development Bank (BNDES) plays a key role in the country’s sustainable development, including support for private sector development through its equity investment arm (BNDESPAR), infrastructure and SME financing, and management of the recently announced US$21 billion Brazil Amazon Fund. BNDESPAR owns sizeable equity stakes in many of Brazil’s leading publicly quoted companies in strategic industries such as oil & gas, railroads, mining, energy, iron & steel, pulp & paper and agribusiness. Table 10 lists these holdings as of June 30, 2008 based on BNDESPAR’s published financial statements for the first six‐month reporting period of 2008. Using these June 30, 2008 shareholding data and the average quotation by share for the January 23, 2009 trading session of the São Paolo stock exchange, the market value of BNDESPAR’s equity interest in listed shares can be estimated at R$37.4 billion (US$16.2 billion). For comparison, this is 50 times the combined net asset value BNDES SUPPORTS SETUP OF of Brazil’s SRI mutual funds and is in the same order of THE LARGEST EUCALYPTUS magnitude as PREVI’s listed equity portfolio, illustrating the PULP COMPANY IN THE WORLD relative significance of the development bank’s role as a January 20, 2009 (BNDES press release) market participant and its potential influence in corporate boardrooms. BNDES entered an Investment Agreement Status of sustainable investment BNDES has not adopted the Equator Principles (as the country’s main commercial banks have done), although projects financed by BNDES are subject to environmental and social policies and procedures including environmental impact assessment and verification of compliance with national legislation. BNDES is a long‐standing member of UNEPFI and an active participant in UNEPFI’s Latin American Task Force. Exactly how BNDES’s environmental and social policies and procedures are applied to the portfolio illustrated in Table 10 is unclear. For example, there is little or no readily available information on how BNDESPAR integrates ESG considerations into active share ownership and voting. BNDES is not a member of the ISE Advisory Board and, other than UNEPFI, does not appear to be directly involved with key sustainable investment initiatives in Brazil such as the UNPRI, CDP and LASFF. A number of the companies listed in Table 10 are constituents of the ISE. Together they represent 25 per cent of the total estimated market value of the BNDESPAR listed equity portfolio.
with Votorantim Celulose e Papel S.A. (VCP) and its controlling companies, which expect the support of BNDESPAR to the corporate reorganization in the acquisition of Aracruz Celulose S.A. by VCP, for the face value of R$ 5.4 billion. This operation will allow the incorporation of the largest short fiber pulp company in the world. BNDESPAR may invest nearly R$ 2.4 billion in the new company, of which R$ 1.8 billion represent preferred stock issued by VCP and R$ 580 million in debentures issued by Votorantim Industrial S.A. (VID – VCP’s controlling company), exchangeable into common stock issued by VCP. BNDESPAR’s interest in the new company may reach one third of the total capital stock. According to a Material Event disclosed by VCP, VCP’s acquisition of Aracruz shareholding control will depend on Arainvest, one of Aracruz’s shareholders, exercising its tag along rights. The new company will be a global leader in short fiber pulp, with production capacity of 5.8 million tons and 680 thousand hectares of planted area. It will employ 15 thousand people and will deliver estimated annual revenues of R$ 7 billion.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 10: BNDESPAR equity interests in publicly listed companies
Company
ISE
BNDESPAR equity interest as of 1 June 30, 2008 (%)
Estimated market value based on average share price 2 for January 23, 2009 trading session R$ million
US$ million
ALL AMER LAT
11.4
655.50
283.15
ARACRUZ
5.51
711.58
307.38
2.52
997.21
430.76
BEMATECH
8.21
25.23
10.90
BRASIL TELECOM PART
3.51
250.00
107.99
BANCO DO BRASIL
BRASKEM
CEG
5.42
164.82
71.20
34.56
484.52
209.29
CEMIG
1.7
263.46
113.81
CESP
5.71
243.06
104.99
23.96
1,401.93
605.58
COPEL COTEMINAS
10.35
48.52
20.96
CPFL ENERGIA
5.72
825.63
356.64
ELETROBRAS
11.81
3,469.68
1,498.78
EMBRAER
5.05
365.15
157.73
GERDAU
3.38
638.39
275.76
INDUSTRIAS ROMI
6.78
37.52
16.21
13
852.23
368.13
20.25
613.34
264.94
33.69
1,535.65
663.35
MARFRIG
2.94
41.40
17.88
METALFRIO
7.59
20.68
8.93
PARANAPANEMA
7.06
42.69
18.44
PETROBRAS
7.62
16,089.01
6,949.90
JBS KLABIN LIGHT S/A
REDE ENERGIA
21.07
385.42
166.49
SID NACIONAL
3.77
1,046.39
452.00
SPRINGS GLOBAL
4.28
12.54
5.42 29.96
SUZANO PAPEL
1.89
69.37
TELEMAR
1.63
182.99
79.05
TRACTEBEL
2.8
335.18
144.79
USIMINAS VALE R DOCE VCP
TOTAL ESTIMATED MARKET VALUE
1.73
251.14
108.48
4.1
5,231.05
2,259.63
3.1
89.03 37,380.33
38.46 16,147.01
Sources: 1 BNDESPAR Financial Statements for the Six Month Periods Ended June 30, 2008 and 2007 and Independent Auditors’ Report 2 BM&F Bovespa trading data for January 23, 2009
SUSTAINABLE INVESTMENT IN BRAZIL 2009
35
High Net Worth Individuals Overview High Net Worth Individuals (HNWIs) are defined as those holding at least US$1 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences. A further distinction is often made at the upper end of this market, where Ultra‐High Net Worth Individuals (Ultra‐HNWIs) are those holding at least US$30 million in financial assets. The World Wealth Report 2008 by Cap Gemini/Merrill Lynch highlights the following headlines: Main wealth management 10.1 million individuals worldwide held at least companies operating in the US$1 million in financial assets, an increase of 6.0 Brazilian market per cent over 2006. Global HNWI wealth totalled US$40.7 trillion, a Amicorp do Brasil 9.4 per cent gain from 2006, with average HNWI Banco Alfa de Investimento wealth surpassing US$4 million for the first time. Banco Banif Primus The Ultra‐HNWI wealth band experienced the Banco BNP Paribas Brasil strongest growth, gaining 8.8 per cent in Banco Bradesco population size and 14.5 per cent in accumulated Banco Citibank wealth. Banco de Investimentos Credit Suisse Banco do Brasil Emerging markets, especially those in the Middle Banco do Estado do Rio Grande do Sol East and Latin America, scored the greatest Banco Fator regional HNWI population gains. Banco Itaú Europa International India, China and Brazil had the highest HNWI Banco Itaú population growth at the country level in 2007. Banco J Safra HNWI financial wealth is projected to reach Banco J P Morgan US$59.1 trillion by 2012, advancing at an annual Banco Safra growth rate of 7.7 per cent. Banco Santander Banespa Banco UBS Pactual BBM Gestao de Recursos The market in 2008 and outlook for the next 1‐2 years Ciano Investimentos Gestao de may not be as robust as suggested by the above Recursos observations and forecasts, given the global financial Credit Agricole Brasil crisis, market uncertainty and investors’ flight to low‐risk Deutsche Bank ‐ Banco Alemao portfolios. Fabiano Calil ‐ Gestao Financeira Pessaol Gavea Gestao de Investimentos Amongst these global headlines are some interesting GWI Consultoria Participacoes e data on Latin America and Brazil. The HNWI population Servicos in Brazil grew an impressive 19.1 per cent in 2007, up Hedging‐Griffo Corretora de Valores HSBC Bank Brasil – Banco Multiplo significantly from 10.1 per cent growth in 2006. There Itaú Private Bank are now some 143,000 HNWIs in Brazil. Forecasts in the Maua Investimentos World Wealth Report 2008 were made before the onset Merrill Lynch Representacoes of the current global financial and economic downturn, Opus Gestao de Recursos although it may still be useful to note that the HNWI Rio Bravo Investimentos forecast for Latin America by the year 2012 was US$10.3 Safdie Dristribuidora de Titulos e trillion, compared to US$6.2 trillion in 2007. Valores Votorantim Asset Management Information from Private Banking World Brasil 2009 suggests that the HNWI market in Brazil is currently worth around US$1.4 trillion. Between them, the 40 asset management firms listed in Table 3 manage assets of R$152 billion (US$66 billion on behalf of private (HNWI) clients. The ten leading firms (by size of assets) are shown in Table 11 and represent over 80 per cent of this US$66 billion corpus.
36
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 11: Private (wealth management) assets under management Top 10 managers
R$ million
US$ million
1
ITAU
33,962
14,670
2
UNIBANCO
17,387
7,510
3
CREDIT SUISSE HEDGING GRIFFO
12,552
5,422
4
UBS PACTUAL
12,430
5,369
5
BNY MELLON
11,712
5,059
6
SANTANDER BRASIL
9,458
4,086
7
BRADESCO
8,412
3,634
8
OPPORTUNITY
6,761
2,920
9
BANCO DO BRASIL
6,150
2,657
VOTORANTIM ASSET MANAGEMENT
5,178
2,237
152,058
65,684
10
Total (40 managers) Source: ANBID (data as of October 2008)
Status of sustainable investment There are no readily available data on the sustainability segment of the Brazilian wealth management industry. The Merrill Lynch/Cap Gemini survey identified that, globally, HNWIs and Ultra‐HNWIs have a large and growing interest in “green investing”. Roughly 12 per cent of HNWIs and 14 per cent of Ultra‐ HNWIs around the world allocate part of their investment portfolio to green technologies and alternative energy sources (Figure 18). Regionally, the most environmentally attuned HNWI and Ultra‐HNWI populations, as measured by the percentage of affluent investors allocating to green investing, were found in the Middle East and Europe—with participation rates ranging from around 17 per cent to 21 per cent in 2007, all exceeding global averages. Latin American participation rates were also relatively high, at 15‐17 per cent (the report does not provide more detailed data specifically on Brazil). By comparison, only 5 per cent of HNWIs and 7 per cent of Ultra‐HNWIs in North America allocated part of their portfolio holdings to green investing. Further insights can be gleaned indirectly from Eurosif’s 2008 report, High Net Worth Individuals and Sustainable Investment. Eurosif estimates that sustainable investments represent approximately 8 per cent of European HNWIs’ portfolios as of December 2007. Overall European HNWI financial wealth in 2007 was estimated at €6.7 trillion (US$8.6 trillion at current exchange rates), which translates into an EU HNWI sustainable investment market of €540 billion (US$690 billion). For context into the significance of this size, the HNWI sustainable investment segment corresponds to between 20 to 30 per cent of the European institutional SRI market. Eurosif predicts that by 2012 the share of sustainable investments in HNWIs’ portfolios will have increased to 12 per cent. Based on the above, it may be reasonable to guess that the potential stock of sustainable investment (in a variety of asset classes) by Brazilian HNWIs is about 5 per cent of the country’s total HNWI market i.e. in the order of US$70 billion.
SUSTAINABLE INVESTMENT IN BRAZIL 2009 Figure 18: HNWI investment in green technologies and alternative energy
Percentage of HNWIs who allocate part of portfolio to green technologies and alternative energy sources Percentage of Ultra-HNWIs who allocate part of portfolio to green technologies and alternative energy sources
20% 17% 14%
13%
12%
14%
20%
21%
17%
15%
7% 5%
Global
North America
Asia-Pacific
Latin America
Source: Capgemini/Merrill Lynch Financial Advisor Survey, April 2008
Europe
Middle East
37
38
SUSTAINABLE INVESTMENT IN BRAZIL 2009
9. ENABLING ENVIRONMENT
Regulatory and policy frameworks Environmental legislation and enforcement Brazil has an advanced framework of environmental legislation and inspection at both the federal and state levels (see box). However, enforcement standards vary from state to state and between federal and state agencies for reasons ranging from lack of resources to the influence of corruption. In addition to federal and state environmental protection agencies, federal and state public prosecutors are able to take independent action to deal with environmental problems, and do so frequently and effectively. ENVIRONMENTAL LAW IN BRAZIL Under the Federal Constitution, the federal government and the states have the power to legislate concurrently on (i) the protection of the natural environment, which includes forests, hunting, fishing, wildlife, conservation of nature, protection of the soil and natural resources and pollution control; (ii) the protection of the cultural environment, involving protection of historical, artistic, touristic and landscape heritage; and (iii) liabilities for damages to the environment. Those public bodies and institutions responsible for protecting and improving the quality of the environment make up the National Environmental System (SISNAMA). Some of the most important components of SISNAMA are: (i) the National Council for the Environment (CONAMA), a decision‐making and consultative body empowered to establish environmental rules and standards; (ii) the Brazilian Institute for the Environment and Natural Renewable Resources (IBAMA), whose purpose is to execute governmental policy and directives aimed at the environment, to impose the penalties set forth by law on those that violate federal environmental legislation and to license activities that could cause environmental damages on a regional or national level or in areas under federal domain; (iii) state environmental agencies; and (iv) local environmental inspection and control agencies. Although they are not part of SISNAMA, the Federal and State Ministries of Public Prosecution have institutional powers under the Federal Constitution to initiate civil inquiries and to bring public civil actions with respect to environmental damages, as well as penal actions for crimes against the environment. Public prosecutors (Ministério Público) file enforcement lawsuits independently of environmental agencies based on civil and criminal investigations of environmental harms. In addition to enforcing environmental laws, public prosecutors have become a primary actor in other areas of public interest law such as disability rights, consumer protection, and anti‐corruption. Under the Federal Constitution, environmental liability may occur in civil, administrative and criminal levels. Civil liability for environmental damages is strict (i.e. it occurs irrespective of fault or intent by those that have caused the damage) and the law also provides for joint and several liability. Penalties for administrative violations can include fines of up to R$50 million (approximately US$20 million). Criminal liability extends to both individuals and legal entities with penalties including fines, imprisonment and facility closure. Environmental licensing requirements and procedures include Environmental Impact Assessment (EIA) for major developments and conditions and restrictions for the installation and operation of licensed activities and facilities.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
39
Pension fund transparency Internationally, a number of countries have taken public policy measures to promote sustainable investment thorough government legislation on pension fund transparency. For example, a July 2000 amendment to the UK Pensions Act now requires UK occupational pension funds to disclose the extent to which they take account of social, environmental or ethical issues in their investment decisions. Many other countries in Europe and the Asia‐Pacific region have followed the example set by the UK. Brazil has not taken steps in this direction. However, it should be noted that 60 per cent of the country’s pension fund assets are already managed by UNPRI signatories. Non‐financial disclosure requirements At the international level, policy‐makers, regulators, institutional investors and other key stakeholders in many countries are placing an increasing emphasis on non‐financial information in management reports (including, where relevant, environmental issues such as climate change). In December 2008, for example, the International Corporate Governance Network (ICGN) ratified the ICGN Statement and Guidance on Non‐financial Business Reporting, which encourages companies to disclosure information on potentially material issues such as climate change; matters affecting employees, customers, suppliers and host communities; and ethics. In some cases, the approach has included legislative measures in addition to voluntary momentum. Denmark, for example, has recently amended its Financial Statements Act to require an estimated 1,100 of the largest Danish companies, both listed and state owned, to include information on their corporate responsibility policies and practices in their annual financial reports. Sweden, China, Malaysia and South Africa are among other countries that have introduced similar regulations and directives, often referencing the GRI guidelines. Brazilian companies have a relatively long tradition of non‐financial disclosure. The current emphasis in Brazil is on voluntary GRI reporting (see overleaf). Mandatory sustainability reporting is not on the political or legislative agenda. Brazil does not currently have any legislation specifically concerned with non‐financial reporting and assurance related to potentially material environmental and social issues. Arguably, a sound framework for sustainable investment includes disclosure and discussion of potentially material sustainability issues in IPO prospectuses. There is no published research on the extent and quality of this kind of disclosure in recent Brazilian IPOs. However, it is probable that, in common with the rest of the world, this is an important gap in Brazil. Around 35 of Brazil’s largest companies – including Vale R Doce and Petrobras – are listed in New York with the US Securities & Exchange Commission (SEC) and are subject to the SEC’s transparency and disclosure rules. Items 101 and 103 of SEC Regulation S‐K require disclosure of relevant environmental issues. Again, there is no published research on the extent and quality of this kind of disclosure by Brazilian companies. However, selective sampling of Form 6‐K filings suggests that Brazilian companies are proactive in filing positive environmental news (such as winning awards or being included in sustainability indices); but rather less forthcoming with information on issues such as environment‐related law suits, major pollution incidents, plant closure or project delays due to community protests, and major capital expenditure to meet environmental standards for production facilities and end‐products. Developments in the US are increasing pressure for climate change disclosure under SEC regulations. Actions over the last several years by the New York State Attorney General and by coalitions of institutional investors, environmental groups and state government agencies with regard to climate change disclosure have received considerable media coverage. Other recent developments in the US include the issuance of draft standards for climate change disclosure by ASTM International and proposed revisions by the Financial Accounting Standards Board (FASB) to its FAS 5, Accounting for Contingencies.
40
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Changes in the interpretation or letter of SEC regulations and/or financial accounting standards in the US could therefore have important implications for Brazilian firms listed in New York; in turn this could also have implications for sustainability disclosure in general in Brazil. Listing rules and guidelines It is important to note that, like most of the world’s stock exchanges, BM&F Bovespa is not a regulator. The regulator in Brazil is CVM, together with other government agencies and departments dealing with matters such as company law. Nevertheless, exchanges can and do play an important role in improving company standards and increasing access to information, either by issuing guidelines to companies and/or by setting listing rules that go beyond the regulatory baseline. A powerful example of the latter in Brazil is provided by the 2001 introduction of the Novo Mercado, which has been very successful in raising corporate governance standards, market profile and investor confidence. Internationally, a small but growing number of exchanges are taking measures to improve non‐ financial disclosure, including disclosure of environment‐ and social‐related business issues such as climate change and community relations. In rare cases – such as the Johannesburg Stock Exchange (JSE) – this is being done though listing rules. The majority of exchanges that are leading such improvements are doing so via corporate governance guidelines, which are strongly promoted and monitored, often on a “comply or explain” basis as in the case of the Australian Securities Exchange (ASX). BM&F Bovespa’s listing rules do not expressly mention non‐financial reporting or sustainability issues, and the exchange has not currently issued formal guidance on these matters.
Voluntary non‐financial reporting Sustainability reporting A growing number of Brazilian companies are producing annual sustainability reports, many using the Global Reporting Initiative (GRI) guidelines (Figure 19). Publicly listed companies account for over half the sustainability reports published in Brazil in 2007 (the latest year for which a reasonably complete dataset is available). This increase in sustainability reporting in recent years coincides with the 2005 launch of the Bovespa ISE Index; adoption of the Equator Principles by Brazil’s banks and the Principles for Responsible Investment (PRI) by Brazil’s pension funds; the extension of the Carbon Disclosure Project (CDP) to Brazil; and the on‐going efforts of numerous non‐governmental organisations and other advocates including GRI, the Ethos Institute, FGV‐CES and several consulting firms. Overall, the supply of awareness raising and capacity building initiatives for sustainability reporting, along with the local availability of consulting expertise on this topic, appears to at least match the current level of demand from companies. About 60 per cent of the 59 companies in the current IBovespa Index publish sustainability reports (Table 12). Almost all of these reports are available in English as well as Portuguese. Most companies produce stand‐alone sustainability reports, although a sizeable minority are integrating this information into their annual reports. 18 companies make use of the GRI guidelines (including the latest G3 guidelines). Seven IBovespa companies publish sustainability reports that are subject to some form of external assurance. Outside of the IBovespa index, few listed companies currently publish sustainability reports.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
41
Table 12: Sustainability reporting by IBOVESPA companies Company
Industry
ALL AMER LAT (N2)
Railroads
AMBEV ARACRUZ (N1) B2W VAREJO (NM)
Retail
BMF BOVESPA (NM)
Diversified financial services
BRADESCO (N1)
Financial intermediaries
BRADESPAR (N1)
Holdings ‐ diversified
BRASIL (NM)
Financial intermediaries
BRASIL T PAR (N1)
Telecommunications
BRASIL TELEC (N1)
Telecommunications
BRASKEM (N1)
Petrochemicals
CCR RODOVIAS (NM)
Toll roads & highways
CELESC (N2)
Electric utilities
CEMIG (N1)
Electric utilities
CESP (N1)
Electric utilities
COMGAS COPEL (N1) COSAN (NM)
Sugar ‐ alcohol
CPFL ENERGIA (NM)
Electric utilities
DURATEX (N1)
Residential building construction Wood
ELETROBRAS (N1)
Electric utilities
ELETROPAULO (N2)
Electric utilities
EMBRAER (NM)
Aerospace
GAFISA (NM)
Residential construction
GERDAU (N1)
Steel
GERDAU MET (N1)
Steel
GOL (N2)
Airlines
ITAUBANCO (N1)
Financial intermediaries
ITAUSA (N1)
Financial intermediaries
JBS (NM)
Meat, poultry & others
KLABIN S/A (N1)
Pulp & paper
LIGHT S/A (NM)
Electric utilities
LOJAS AMERIC
Retail
LOJAS RENNER (NM)
Retail
NATURA (NM)
Cosmetics
NET (N2)
Cable TV
NOSSA CAIXA (NM)
Financial intermediaries
P.ACUCAR‐CBD (N1)
Retail
PERDIGAO S/A (NM)
Meat, poultry & others
PETROBRAS
Oil, gas & biofuels
REDECARD (NM)
Diversified financial services
ROSSI RESID (NM)
Residential construction
SABESP (NM)
Water utilities
SADIA S/A (N1)
Meat, poultry & others
SID NACIONAL SOUZA CRUZ TAM S/A (N2)
Airlines
TELEMAR
Telecommunications
TELEMAR N L
Telecommunications
TELESP
Telecommunications
TIM PART S/A
Telecommunications
TRAN PAULIST (N1)
Electric utilities
ULTRAPAR (N1)
Holdings ‐ diversified
UNIBANCO (N1)
Financial intermediaries
USIMINAS (N1)
Steel
V C P (N1)
Pulp & paper
VALE R DOCE (N1)
Mining
VIVO
Telecommunications
CYRELA REALT (NM)
ISE
Report
English
GRI
Beer & soft drinks
Pulp & paper
Gas utilities
Electric utilities
Verification
(see GERDAU)
(see ITAUBANCO)
Steel
Tobacco
42
SUSTAINABLE INVESTMENT IN BRAZIL 2009
The consulting firm SustainAbility has recently published independent research on sustainability 6 reporting by Brazilian corporations . This included a ranking of ten leading reports using a standardised scoring methodology, the results of which are reproduced in Table 13. They identified several areas for improvement. In particular, the report concluded that Brazilian companies need to deepen the strategic value of reporting and demonstrate how sustainability is being embedded throughout the business. Weaknesses in reporting include a lack of information on: Governance: Board level leadership and governance structures to deliver on sustainability aspirations Materiality: Methods to identify and prioritize material issues being used to help focus reports on priority topics Targets: Specific, measurable and comparable targets (rather than qualitative statements of intent). ©
Figure 19: Corporate sustainability reports in Brazil (source: CorporateRegister.com)
Number of companies reporting
100 90 80 70 60 50 40 30 20 10 0 1997
1998
1999
2000
2001
LISTED
2002
2003
2004
2005
NON-LISTED
2006
2007
Table 13: Top 10 sustainability reports (SustainAbility/FBDS survey) Rank
Company
Industry
Year
1
Natura
Personal care products
2007
2
Suzano Petroquimica
Chemicals
2006
3
Ampla
Electric utilities
2007
Coelce
Electric utilities
2007
5
Banco Real
Financial services
2007
6
Energias do Brasil
Electric utilities
2007
7
Sabesp
Water utilities
2007
8
Bunge
Food processing
2007
Celulose Irani
Forestry & paper
2007
10
Banco Itaú
Financial services
2007
Source: The Road to Credibility: a survey of sustainability reporting in Brazil SustainAbility, FBDS & UNEPFI (2008)
6
The Road to Credibility: a survey of sustainability reporting in Brazil SustainAbility (2008)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
43
Table 14: CDP6 disclosure by IBOVESPA companies (omits companies not included in CDP6) Company
Industry
Response
GHG data disclosed
ALL AMER LAT (N2)
Railroads
ISE
AQ
AMBEV
Beer & soft drinks
AQ
ARACRUZ (N1)
Pulp & paper
AQ
B2W VAREJO (NM)
Retail
AQ
BRADESCO (N1)
Financial intermediaries
BRADESPAR (N1)
Holdings – diversified
BRASIL (NM)
Financial intermediaries
BRASIL T PAR (N1)
Telecommunications
BRASIL TELEC (N1)
Telecommunications
BRASKEM (N1)
Petrochemicals
CCR RODOVIAS (NM)
Toll roads & highways
CELESC (N2)
Electric utilities
AQ
CEMIG (N1)
Electric utilities
AQ
CESP (N1)
Electric utilities
AQ
COMGAS
Gas utilities
AQ
COPEL (N1)
Electric utilities
AQ
COSAN (NM)
Sugar – alcohol
CPFL ENERGIA (NM)
Electric utilities
CYRELA REALT (NM)
Residential building construction
DURATEX (N1)
Wood
AQ
ELETROBRAS (N1)
Electric utilities
AQ
ELETROPAULO (N2)
Electric utilities
EMBRAER (NM)
Aerospace
GAFISA (NM)
Residential building construction
GERDAU (N1)
Steel
GERDAU MET (N1)
Steel
GOL (N2)
Airlines
ITAUBANCO (N1)
Financial intermediaries
ITAUSA (N1)
Financial intermediaries
KLABIN S/A (N1)
Pulp & paper
LIGHT S/A (NM)
Electric utilities
LOJAS AMERIC
Retail
LOJAS RENNER (NM)
Retail
NATURA (NM)
Cosmetics
NET (N2)
Cable TV
PERDIGAO S/A (NM)
Meat, poultry & others
PETROBRAS
Oil, gas & biofuels
NP
ROSSI RESID (NM)
Residential building construction
DP
SABESP (NM)
Water utilities
AQ
SADIA S/A (N1)
Meat, poultry & others
AQ
SID NACIONAL
Steel
DP
SOUZA CRUZ
Tobacco
AQ
TAM S/A (N2)
Airlines
NP
TELEMAR
Telecommunications
TELEMAR N L
Telecommunications
TELESP
Telecommunications
TIM PART S/A
Telecommunications
TRAN PAULIST (N1)
Electric utilities
ULTRAPAR (N1)
Holdings – diversified
UNIBANCO (N1)
Financial intermediaries
USIMINAS (N1)
Steel
V C P (N1)
Pulp & paper
VALE R DOCE (N1)
Mining
AQ
VIVO
Telecommunications
AQ
AQ
(see CPFL ENERGIA)
AQ (see BRASIL TELEC) AQ
AQ AQ
NP
AQ
AQ (see AES) NP DP AQ
(see GERDAU)
NP
AQ
(see ITAUBANCO)
NP
NR AQ DP
AQ
AQ
NP
AQ AQ NP
AQ AQ NP
AQ
AQ
DP
AQ – answered questionnaire; NP – answered questionnaire but response not made publicly available; DP – declined to participate; NR – no response
44
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Carbon Disclosure Project The international Carbon Disclosure Project (CDP) has been increasing its focus on Brazil in recent 7,8 years with the support of its local partners, ABRAPP and Banco Real . The CDP questionnaire went to 50 of Brazil’s largest quoted companies in 2006 (CDP4). In 2007 (CDP5) this increased to 60 companies, and 75 companies were surveyed in 2008 (CDP6). The response rate of Brazilian companies is high (Figure 20). Nevertheless, 27 per cent of companies in the current IBovespa index that were surveyed by CDP 2008 either did not respond, declined to participate or answered the questionnaire but withheld permission for their responses to be made publicly available. In terms of index weighting, this gap in public disclosure represents about 33 per cent of the current IBovespa notional portfolio and notably includes companies such as Petrobras, Klabin and Usiminas, where climate change business issues might be expected to be important factors. A detailed breakdown is provided in Table 14. Figure 21 summarises some of the key trends picked out by CDP’s analysis of the 2008 survey. Overall, the results paint a largely encouraging picture of corporate activity and management quality in relation to climate change, although further progress is needed. Areas identified by CDP for further improvement and development in 2009 include: Improving the extent of qualitatitive information in companies’ responses, particularly in relation to supply chains Formulation of emission reduction targets Maturing climate change governance among Brazilian companies Inclusion of climate change policy in short, medium and long‐term sustainability strategies. Figure 20: CDP response rates 100% 90% 80% 70% 60% CDP4 (2006)
50%
CDP5 (2007)
40%
CDP6 (2008)
30% 20% 10% 0% Brazil
India
China
Global
7 8
Carbon Disclosure Project Report 2008 – Brasil CDP (2008) Carbon Disclosure Project Report 2008 – Global 500 CDP (2008)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
45
Figure 21: Trends revealed by company responses to CDP6 (Brazil)
See regulatory risks
49%
See physical risks
77%
See regulatory opportunities
83%
See physical opportunities
57%
Disclose GHG emissions data
49%
GHG emissions data externally verified
19%
GHG emissions reduction plan
43%
Board Committee for climate change
60% 21%
Participation in emissions trading 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Global Compact Communications on Progress Many pension funds and asset managers that are members of the PRI are now communicating their expectation that the companies they invest in should be committed to the Global Compact principles. One of the explicit commitments that a company makes when it participates in the Global Compact is to produce an annual Communication on Progress (COP). In 2000, the year when the UN Global Compact was launched, over 600 Brazilian companies signed on to the initiative. Today, the Global Compact lists 110 business signatories in Brazil (excluding SMEs); only six companies submitted COPS in 2008, according the Compact’s online database.
Indices, equity research and ratings Specialised indices in addition to the ISE Apart from the ISE and BM&F Bovespa’s corporate governance index (the IGC), there are no other sustainability or similar indices focusing specifically on Brazilian or Latin American stocks. As noted on page 14, BM&F Bovespa is considering the possibility of changing the ISE by introducing a two‐tier system that would bring more Brazilian companies into the scope of the Index. Consideration is also being given to the concept of a regional sustainability index modelled on the ISE but covering countries such as Chile and Mexico as well. Both of these concepts are at an early stage of discussion. Dow Jones Sustainability Index A small number of Brazilian companies are included in the international Dow Jones Sustainabilty Index (DJSI). For the 2007/08 period, these companies were Aracruz Celusose; Banco Bradesco; Banco Itaú; Itausa; CEMIG; and Petrobras. The DJSI was re‐balanced in Q4 2008 for the 2008/09 period. No Brazilian companies were dropped from the index; Usiminas and VCP were admitted for the first time. It is noteworthy that Petrobras kept its place in the DJSI while being dropped from the ISE at the same time.
46
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Independent sustainability research and rating products None of the US or European sustainable investment research firms have a permanent presence or full‐time research capability in Brazil. Although coverage of Brazilian stocks is relatively limited, firms such as Innovest Strategic Value Advisors and KLD Research & Analytics Inc. (amongst others) do provide some research on approximately 25 of Brazil’s leading companies. Innovest has also undertaken research for the IADB on the extent to which selected Latin American companies participate in markets at the “base of the pyramid”, also referred to as Opportunities for the Majority (OM). This study included 26 Brazilian companies ranging from Banco Bradesco and 9 Unibanco to Natura, CEMIG and GOL . Brazil’s sustainable investment market has not yet led to the establishment of an indigenous SRI research and rating industry. The expertise exists in Brazil but has not been formed into a commercial offering due to the lack of commercial demand from the buy‐side, who thus far have limited themselves to using the publicly‐available ISE index, supplemented in a few cases by one or two in‐ house, part‐time sustainability analysts. Similarly, there are no solicited ‘sustainability’ rating services in Brazil, suggesting there is little or no demand for such solutions in Brazil’s corporate community. One exception to this may be the Brazilian firm Serasa, a credit rating and business information firm recently acquired by Experian. Serasa has apparently been offering an “Environmental Responsibility Report” product on Brazilian firms since 2006 and reportedly introduced a “Social Responsibility Report” product in 2007. However, beyond a short statement to this effect, the company’s website does not provide any further information on these products. The Serasa products do not appear to have a high profile with the asset managers, pension funds and other stakeholders contacted during this project. Sell‐side equity research on sustainability issues Brazilian sell‐side broker/dealers do not produce any equity research focusing on environmental and social sustainability issues. This is despite the efforts of the LASFF, which developed analytical methodologies for three sectors in 2007/08 and disseminated them through APIMEC, the Brazilian equity analysts association. Again, the primary barrier is not a lack of expertise, but a lack of commercial demand from the buy‐side. Although international investment firms such as HSBC have recently begun to produce sustainability research on emerging markets such as India, emerging markets like Brazil are still under‐researched and certainly have not received any coverage of the kind being promoted in Europe and the US under programmes such as the Enhanced Analytics Initiative (EAI). Some Brazilian companies are covered by global sector research: for example, Petrobras is covered by Goldman Sachs’ recent research on sustainability issues in the energy sector.
Networks and associations Industry bodies As noted throughout this report, many of Brazil’s investment industry associations and professional bodies are involved in sustainable investment issues of behalf of their members. This includes participation in the ISE Advisory Board, awareness‐raising activities, and involvement in initiatives such as CDP. The key organisations that are active in this respect are the Brazilian Association of Pension Funds (ABRAPP); the National Association of Investment Banks (ANBID); and the Association of Capital Markets Analysts and Investment Professionals (APIMEC). 9
Innovest Strategic Value Advisors Opportunities for the Majority Index: Analysis of Corporate Performance in Latin America and the Caribbean Inter‐American Development Bank (December 2007)
SUSTAINABLE INVESTMENT IN BRAZIL 2009
47
UNEPFI Brazilian financial institutions are very active members of UNEPFI’s Latin America Task Force. The Task Force focuses mainly on the banking sector and on building awareness and capacity for sustainable banking outside Brazil, and is therefore not considered further in this chapter. It should be noted that UNEPFI’s Geneva‐based Emerging Markets Responsible Investment Project is closely involved in the PRI Brazil Network (see below) and that UNEPFI itself is a member of the ISE Advisory Board. LASFF The LASFF (www.lasff.org) was formed in 2006 by CES‐FGV with seed funding from IFC and is currently supported by FEBRABAN. Members include BM&F Bovespa, APIMEC, Banco Real, Banco Itaú, Banco Bradesco, Unibanco, Citi and HSBC. The Forum was created to: Support opportunity‐detection and investment strategies on regional level; Influence policy‐making and public sector awareness of the financial industry’s potential role in the promotion of sustainable development; Create an on‐line system (or clearing house) containing a thorough database on SF to be used for research, professional education and exchange; Foster the development of high quality products and services as well as training and research; Promote career opportunities in sustainable finance as a field for professional development through training, communication and networking; Coordinate efforts to enlarge sustainable finance markets regionally, through global networking with key global market makers. The LASFF Capital Markets Working Group is comprised of the main asset managers who currently run retail SRI funds (Chapter 5) and deals with the type of issues covered by this report. Other thematic working groups exist for topics such as the Equator Principles, microfinance and reporting. The Working Group’s activities include collaboration with APIMEC to provide sustainability training for analysts (see previous page), and a recent sign‐on campaign urging listed companies to remove forced labour from their supply chains. CES‐FGV hosts an LASFF web site which is available in both English and Portuguese, although the majority of materials and downloads are in Portuguese only. The Forum is essentially a project of the CES‐FGV and is not constituted as a separate legal entity with its own staff, membership structure or budget. The LASFF does not have a full‐time coordinator or director. The Forum cannot be considered to be analogous to sustainable investment professional membership bodies such as the US Social Investment Forum (SIF), the UK Sustainable Investment Forum (UKSIF) or the Association for Sustainable & Responsible Investment in Asia (ASrIA). UNPRI The PRI Brazil Network was launched in late 2008 and is emerging as a major force for sustainable investment in Brazil. The Network benefits from a part‐time co‐ordinator based in São Paolo and strong support from the PRI Secretariat and UNEPFI’s Emerging Markets Responsible Investment project. A summary of the PRI Brazil Network’s organisation and work programme is provided in the box overleaf. Initial efforts focused on gaining more Brazilian signatories in both the asset owner and asset manager categories. The emphasis is now on support for implementation. PREVI and other Brazilian UNPRI signatories are also able to draw on PRI’s centralised services including the PRI Engagement Clearinghouse and the PRI Enhanced Research Portal.
48
SUSTAINABLE INVESTMENT IN BRAZIL 2009
PRI BRAZIL NETWORK
Background The PRI Brazil Network was launched in November 2008 in response to strong signatory demand for a local Portuguese language platform. PREVI, the largest pension fund in Brazil, was leading this with support from the PRI Secretariat. The purpose of the PRI Brazil Network is to facilitate implementation of the Principles in Brazil and to promote collaboration among signatories on a range of material ESG issues in the local Brazilian context. The PRI Secretariat employs a part time coordinator in Sao Paolo who supports key network activities and translates PRI materials into Portuguese. The Network has monthly calls chaired by PREVI. During the first call signatories set up three working groups Engagement, Recruitment and Integration, which all currently have monthly calls.
Engagement In 2009 the focus of the Engagement Group is on promoting disclosure and improving quality of sustainability reports in Brazil. This is done in the context of the Emerging Markets Disclosure project and the group is working closely with the Global Reporting Initiative (GRI) in Brazil. In order to select companies with which to engage, the group is planning to analyse corporate sustainability reports for the 2008 financial year and identify companies that need to improve reporting quality and those companies that do not report at all. Signatories will then collectively engage in dialogue with these companies to improve the quality of disclosure. In addition to the disclosure focus, there are several other potential engagements being considered, including the elimination of slave labour in the supply chain, and engagements in construction and in agribusiness sectors. Banco Real Asset Management coordinates the Engagement group. Active participants include Luz Engenharia, Funcef, Unibanco Asset Management, Astra Investimentos, HSBC Global Asset Management, Valia, Sustain Capital, PREVI, ARUS, Santa Fé Portfólios and NSG Capital.
Integration of ESG issues into investment analysis Members of the Integration group plan to share methodologies for ESG integration into investment analysis. The goal is to compare different methodologies and to create a common methodology for integrating ESG issues into valuations, which can be used by all PRI signatories in Brazil. The group would also like to identify and select ESG indicators that are most relevant and material for investors in Brazil. Based on this selection, the group plans to create a questionnaire to send to companies. The group will also compare the most commonly used indicators in Brazil with the GRI indicators. The group is coordinated by Astra Investimentos and its participants include Funcef, Infraprev, Unibanco Asset Management, Banco Real Asset Management, Valia, Sustain Capital, Centrus, PREVI, Santa Fé Portfólios and NSG Capital.
Recruitment This working group aims to promote PRI among investors that are not yet signatories. To facilitate recruitment and implementation, the PRI Secretariat is working on overcoming the language barrier by making key PRI materials available in Portuguese. For example a ‘sign up kit’ has been developed, with all key information about the PRI and a description of the sign up process in Portuguese. The Recruitment group is coordinated by Infraprev and has participants from Luz Engenharia, Banco Real Asset Management, Funcef, Unibanco Asset Management, PREVI, Mauá Investimentos, Santa Fé Portfólios and NSG Capital.
Source: UNPRI
SUSTAINABLE INVESTMENT IN BRAZIL 2009
49
Development finance institutions IFC has helped to develop the sustainable investment market in Brazil since 2002. In addition to the current report, IFC’s technical assistance and advisory services have included support for: a CES‐FGV market intelligence briefing (2003) a major São Paulo conference on emerging market sustainable investment (2004) the development of the ISE index (2005) the creation of the LASFF (2006) GRI reporting by corporations (2008) In addition, IFC has been providing occasional training courses on sustainable investment for private equity funds in Latin America since the late 1990s. The IADB also runs sustainable investment training courses for private equity funds and plays a key role in the INOVAR program discussed in Appendix D. BNDES’ role in building Brazil’s venture capital industry (including “cleantech” funds such as those launched recently by Stratus and Sustain Capital) is also discussed in Appendix D. BNDES has US$16 billion worth of investments in publicly listed companies but is not involved in Brazil’s sustainable investment movement (see page 33).
Language barriers The availability of information, reports, conference materials and training programs in both Portuguese and English (and, ideally, Spanish) is an important factor in the operation and further development of Brazil’s sustainable investment market and its interaction with foreign investors. It is widely agreed that the language barrier can be a significant problem. There is a large body of English‐language sustainable investment material that is relevant to Brazilian professionals. Much of this is now being translated by the PRI Brazil Network. Similarly, there is a substantial body of Brazilian material is relevant to international investors and analysts. Although most corporate sustainability reports are available in English as well as Portuguese, other key materials (such as statistical data and information on legislation) are difficult for a non‐Portuguese speaker to access. This is an unnecessary impediment to engaging with foreign portfolio investors on sustainability issues in Brazil’s capital market.
Green consumerism According to research conducted by the National Geographic Society and the international polling firm GlobeScan, consumers in Brazil are amongst the “greenest” in the world in terms of sustainable 10 consumption and ethical consumer choices . GlobeScan conducted Internet surveys of consumers in 14 countries to compare the behaviours of individuals in four key areas: housing, transportation, food, and consumer goods. The index measures both discretionary and essential consumption. Consumers in Brazil and India tied as most "green," with each scoring 60 on the 100‐point sustainable‐consumption scale. Those in the United States scored lowest, or most wasteful (Figure 22). Although the survey does not cover consumer attitudes and behaviour with respect to financial products and investment services, the results suggest a favourable retail environment for sustainable investment in Brazil. 10
Greendex 2008: Consumer Choice and the Environment—A Worldwide Tracking Survey National Geographic/GlobeScan (May 2008)
50
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 22: Green consumerism in Brazil (source: National Geographic/GlobeScan)
India (1)
60.0
Brazil (1)
60.0 56.1
China (3) Mexico (4)
54.3
Hungary (5)
53.2
Russia (6) Australia (7)
50.2
Germany (7)
50.2
Great Britain (7)
50.2
Spain (10)
50.0
Japan (11)
49.1
France (12)
48.7
Canada (13)
48.5
USA (14)
52.4
44.9
SUSTAINABLE INVESTMENT IN BRAZIL 2009
51
10. BUILDING ON SUCCESS
Overall market size Consolidated estimates of SRI assets under management Table 15 aggregates the various data, estimates and educated guesses from Chapters 4‐9 on the stock of sustainable investment in Brazil at the current time. It should be emphasised that this exercise is based on numerous assumptions and estimates as stated in the report, as well as data from different sources and time periods: it provides only a rough approximation but one which may nevertheless be useful. Overall, the total stock of investment that may be classifiable as “sustainable” could be in the order of US$75 billion. The total domestic market capitalisation of the São Paulo stock exchange at the end of October 2008 was US$585 billion. “Sustainable” investment could therefore be at least 10 per cent of market cap. Taking a conservative approach, TERI‐Europe believes an estimate of US$40 billion (<7 per cent of total market cap) may be more useful for comparative and decision‐making purposes. Table 15: TERI‐Europe’s estimates of the stock of sustainable investment (SI) in Brazil Segment Asset manager signatories to UNPRI (excluding NAV of SRI funds, below)
Percentage of segment total
Basis for % comparison
11%
ANBID data (Oct 2008); estimating 15% allocation to equities; assuming UNPRI implementation
US$0.3
2%
ANBID data (Oct 2008) and CVM data (Jan 2009); estimating that 15% of total retail AUM are allocated to equities
US$35.0
60%
ABRAPP data (Sep 2008); estimating 32% allocation to equities; assuming UNPRI implementation
Unknown
Unknown
BNDESPAR holdings as of June 30, 2008; Bovespa trading data as of Jan 23, 2009
Foreign investment under SI management
US$1.2
<1%
CVM data (Aug 2008); guessing that 1% of total stock is SI
ADR investment under SI management
US$1.0
<1%
ADR data as of Jan 2009; guessing that 1% of total stock is SI
US$24.5
<5%
Independent estimates of HNWI wealth; guessing that allocation to equities is 35% and SI could be 5% of this
TOTAL excluding BNDES
US$70 billion
12%
TOTAL including BNDES
US$86 billion
15%
Retail SRI mutual funds
Pension fund signatories to UNPRI BNDES (US$16 billion in listed equities)
HWNI assets available for sustainable investment
Estimated stock of SI (US$ billion) US$7.9
Percentage of total domestic market cap (US$585 billion as of Oct 2008) (World Federation of Exchanges data)
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Brazilian SRI in a global context Europe and the US provide useful international benchmarks. Eurosif estimates that SRI assets 11 represent over 17 per cent of the asset management industry in Europe . According to the US Social Investment Forum, roughly 11 per cent of assets under professional management in the US are now 12 involved in SRI .
Strengths and weaknesses Appendix B provides a detailed analysis of the strengths and weaknesses identified by TERI‐Europe across the overall “ecosystem” of sustainable investment in Brazil. Strong commitment Brazil has made significant progress in developing a sustainable investment market over the last decade and rightly deserves its reputation as the leader among emerging economies in this regard. These achievements are attributable to the long‐term vision and commitment of a relatively small number of individuals and organisations in Brazil (particularly BM&F Bovespa, Banco Real, PREVI, CES‐ FGV and the Ethos Institute), supported at key moments by external change agents such as IFC, CDP, GRI and UNPRI. In addition to what has been achieved for the country itself, the evolution of a sustainable investment market by Brazil has led other emerging markets to focus on the same issues and goals. Strong business case Taken in combination, the many positive trends described in this report add up to a strong prima facie case for the mainstream importance of sustainability in business and investment in Brazil today, even if the current body of empirical data does not yet allow the business case to be proved by impeccable quantitative evidence. Contribution to sustainable development Brazil’s sustainable investment movement is now just beginning to move into the evolutionary phase where its development impact can start to go deeper as a result of efficient capital allocation to private enterprises that create real, on‐the‐ground, benefits to people’s livelihoods and the environment. For example: the ISE index is gradually becoming more rigorous and assertive in holding companies to account; shareholder engagement is (slowly) beginning to evolve from an emphasis on sustainability reporting to direct pressure on issues such as forced labour in the supply chain; there are opportunities to create new investment products with high development impact themes such as climate change, SME finance, blended value investment, biodiversity and indigenous peoples. 11 12
2008 European SRI Study (Eurosif, 2008) 2007 Report on Socially Responsible investing trends in the United States (Social Investment Forum, 2007)
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Strategic challenges and risks Despite the many positive things that can be said about Brazil’s sustainable investment market, the movement is still relatively small and somewhat fragile, especially given current market conditions. Economic turmoil aside, the main challenges that lie in front of Brazil with respect to sustainable investment over the next two to three years are: Stagnation (especially relevant to asset managers competing in the non‐institutional investor market) Fragmentation (especially between the LASFF/ANBID and UNPRI/ABRAPP “cliques”) Possible corporate push‐back (especially in relation to a more assertive ISE and early efforts at shareholder engagement) Excessive risk aversion, reluctance to deviate from the IBovespa benchmark and internal resistance to new concepts and practices Internalising the costs of sustainability research as well as the benefits Meeting raised expectations (especially relevant to UNPRI pension funds) Planning and adapting market architecture to meet evolving needs, including investment in human capital
Issues on the horizon The ISE paradox The ISE index has been very successful. Amongst other things, it has: significantly increased the amount of SRI assets under management; increased choice for retail investors; stimulated competition between asset management firms; raised companies’ awareness and influenced their behaviour; shown that sustainable investment strategies can match the performance of conventional benchmarks; encouraged BM&F Bovespa to introduce other sustainability services; and prompted the creation of similar indices in other countries. Going forward, however, the ISE also presents some complex challenges that have critical implications. If these issues are not resolved, Brazil’s sustainable investment market could potentially end up in an evolutionary cul‐de‐sac. They basically boil down to the commercial business model adopted for the index. As discussed in Chapter 3, all BM&F Bovespa indices, including the ISE, are made available to investors free of charge. Companies wishing to be included in the ISE pay an evaluation fee of US$2,000; companies admitted to the ISE can also purchase a license to use the ISE brand for a fee of US$7,000 per annum. These income streams are the only source of revenue to cover the ISE’s maintenance costs, which are largely incurred by CES‐FGV. Assuming that CES‐FGV analyses 50 companies a year (see Table 2, page 12) and that all of the 40 companies admitted to the ISE pay for a license to use the brand image, annual gross income is likely to be in the region of US$300,000. By comparison, assuming that management fees on the ten SRI funds listed in Table 5 (page 20) are a conservative 1 per cent, gross income on those ISE‐based funds could be about US$3 million per annum at the bottom of the market. At the height of the market in December 2007, this figure may have been closer to US$7 million per annum. Although these are “back of the envelope” calculations, it should also be noted that they do not take into account the economic value of the ISE to beneficiaries such as PREVI and other Brazilian pension funds, for whom the ISE is currently one of the main tools available for implementation of the PRI across a total equity portfolio of around US$35 billion (page 25).
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The long‐term durability and equitability of ISE’s business model therefore deserves particular attention, especially given the need to support further innovation and capacity building in this field. The key points for consideration are as follows: The entities that benefit most from the index (the SRI fund managers and – to a less extent ‐ the UNPRI pension funds) do not remunerate those who provide the service and carry the risk (BM&F Bovespa and especially CES‐FGV). The entities that do pay for the index are the companies that apply to join it and the companies that are ultimately admitted. This could pose a potential or actual conflict of interest. Gross income earned by the index (i.e. by CES‐FGV) is effectively capped by the ISE regulations on the number of companies that can be included in the notional portfolio, regardless of how successful the index is in terms of adding value to its customers (the SRI fund managers and pension funds). Not only is this basically unfair and commercially irrational, it also creates the theoretical risk that regulations might be changed to expand the portfolio simply to increase revenue at the expense of quality. CES‐FGV’s overheads as data provider to the ISE are not a topic for this study but it may be reasonable to assume that net income is not large and leaves little scope for human capital development, investor education, corporate outreach, marketing or research & development. The underlying data collected and maintained by CES‐FGV are potentially very useful to investors, analysts and other organisations and could generate additional revenues that could be used for strategic development. However there is no commercial or even not‐for‐ profit outlet for this data. This may be partly attributable to confidentiality agreements between CES‐FGV and companies responding to the ISE questionnaire. Investors can use the ISE free of charge and it meets their basic needs at the current time. This may create a disincentive for investors to pay for the development or purchase of more advanced sustainable investment tools. Arguably, it also seriously distorts the potential market for the commercial provision of more advanced tools. In a worst case scenario, a monopoly situation then develops with no incentive or financial means for innovation in a marketplace that has become accustomed to subsidised externalisation of the costs of investing responsibly. A related issue is the fact the ISE methodology (and cost/revenue structure) relies on collecting data by means of a questionnaire and the response rate to this questionnaire has fallen every year since the ISE’s launch in 2005 (Table 2, page 12). Given the success of the index and the increase in sustainability reporting (Figure 19, page 42), the response rate trend should be strongly positive. Questionnaire fatigue is a well‐known facet of the sustainable investment industry around the world and requires prompt mitigation or adaptation. Falling company interest in or cooperation with the ISE is a matter of concern that should be given priority attention as soon as possible. The matter is further complicated by the possibility that PRI pension funds in Brazil may develop their own ESG questionnaire that they would jointly send to Brazilian companies (see pages 12 and 48). Limited research coverage As discussed on page 46, ESG research on Brazilian equities is relatively limited at the current time. In particular, Brazilian sell‐side analysts do not produce ESG research (despite initiatives by LASFF and APIMEC) and Brazil does not have any local sustainable investment research firms.
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Brazil has proven that it has expertise to produce such ‘advanced’ sustainable investment tools, or at least the capability to create or acquire such expertise. Although corporate sustainability reporting is still far from perfect, it provides a reasonably good dataset for such research and is improving. Moreover, CES‐FGV collects and maintains an extensive database of relevant information, as a result of its work on the ISE index: this knowledge bank could be made available to commercial research providers, for example through licensing agreements or some form of commercial partnership. The expertise and information exists in Brazil but has not been formed into a commercial offering for a simple reason: there is little or no commercial demand from the buy‐side. In turn, this is attributable to four factors: The disincentive created by a “free” ISE index, as discussed above. Investors like PREVI are only just beginning to work out what their needs are for the kind of “advanced” analytical tools that require good quality ESG research. Moreover, pension funds and asset managers in Brazil have a relatively strong ethos of developing and using in‐house expertise – out‐sourcing is not a strong part of the culture. The Brazilian sustainable investment community as a whole has not leveraged the purchasing power of foreign portfolio investors by sensitizing them to the advantages (and potential availability of) good quality ESG research provided by in‐country experts with deep local insight. Stagnation in the asset management sector Chapter 5 describes the remarkable emergence of SRI mutual funds in Brazil, beginning with Banco Real’s Ethical Fund in 2001 and expanding over the 2005‐2007 boom years. Several issues suggest that there is a risk of stagnation in this small but important section of the Brazilian sustainable investment market. At US$315 million, the ten SRI funds still represent a very small proportion of total assets under management. For example, Banco do Brasil dominates the market in terms of assets under management that are invested in equities, with more than twice the business of its two closest competitors put together (see Figure 10, page 16): SRI is only 0.05 per cent of this business (Figure 15, page 24). Amongst those asset management firms with SRI funds, the “mainstreaming” of sustainable investment practices across “conventional” strategies and products appears to be rather limited (page 18). Several firms that manage SRI funds are not yet signatories to the UNPRI. None of the asset management firms employs full‐time ESG analysts, and five do not even have part‐time ESG analysts. Despite several new entrants to the market since the launch of the ISE, market share in the SRI niche continues to be dominated by the early pioneers, Banco Real and Itaú, who each control about 40 per cent of total SRI net assets (Figure 12, page 21). The ten SRI funds are all “first generation” products that are similar to one another in terms of their sustainability features (page 23) and financial performance (Figures 13 and 14). There has been almost no product innovation (either around alpha‐ seeking ESG strategies or high environmental/ social development impact strategies) since Banco Real, Itaú and the ISE index provided the “blueprint” for others to follow. Retail appetite for these somewhat homogenous sustainability products appears to have begun to level out in the middle of 2007, although this obviously coincides with the recent decline in retail appetite for variable income products in general. This potential stagnation is exacerbated by the asset managers’ relative isolation from the main driving force for sustainable investment in Brazil today, i.e. PREVI and the other pension fund signatories to the UNPRI.
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The pension funds largely manage their equity portfolios in‐house and until recently there has therefore been little or no know‐how transfer or cross‐fertilization of ideas between the pension funds and asset managers such as Banco Real that have pioneered SRI in Brazil and developed in‐ house research capacity. Limited involvement of foreign portfolio investors The ISE index and Brazil’s sustainable investment movement in general do not yet seem to have captured the imagination of foreign portfolio investors or investors in Brazilian ADRs (page 11). With some exceptions (such as collaborative engagement on the issue of forced labour) (page 32), foreign portfolio investors have had relatively little active involvement in Brazil’s sustainable investment activities, especially since the “loss” of ABN AMRO’s Luxembourg‐registered Brazil Equity Fund (page 29). In part, this reflects the fact that sustainable investment is only just now beginning to mature in Brazil and is still a relatively new concept for the majority of foreign investors in emerging markets. However, it also highlights the absence of a coordinated international marketing strategy by all those involved in Brazil’s sustainable investment community. Fragmentation and overlap in market leadership Unibanco, Banco Real and HSBC are members of both the LASFF and PRI Brazil Network, with the latter two firms playing a particularly active role. Other than this, there is little or no membership overlap or interaction between LASFF and the UNPRI network in Brazil. Until very recently, the two networks appear to have had relatively little to do with one another and to some extent they compete for members and influence. At the current time the PRI Brazil Network appears to have significantly more momentum than the LASFF.
Recommendations Update the ISE’s commercial business model BM&F Bovespa and CES‐FGV should consider changes to the ISE’s commercial business model that would: encourage sustainability investors (asset managers and pension funds) to begin to internalise the costs of sustainable investment; and provide stronger foundations for continuous improvement to the ISE’s regulations and methodology, for international marketing and promotion, and for the possible later development of new products such as the idea of a regional index. The rationale for changing the ISE’s commercial business model would be as follows: Reduce the index’s financial reliance on companies, in order to eliminate the risk of conflicts of interest. Create income that is linked to the value that the index provides to investors, not the number of companies in the index basket. Allocate more resources for marketing and promotion, especially at the international level (thus enhancing the brand value of the ISE for companies). Create incentives to find commercial outlets for the underlying database and knowledge bank held by CES‐FGV.
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Remove the risk that the index could be inadvertently holding back progress by distorting the commercial market for complementary research and rating services.
The assessment fee currently paid by companies ‘applying’ for admission to the index could be reduced or phased out completely (the license fee paid by ISE companies for the right to use the ISE logo should probably be maintained). The names and weightings of ISE portfolio companies have always been in the public domain, as with all BM&F Bovespa indices. Changing this may be counter‐productive as well as impractical. However, some type of fee structure could be phased in for those asset managers who currently use the ISE to manage and market existing SRI products. At the simplest level, this could be a license fee for the right to use the ISE name and logo in fund prospectuses, fact‐sheets and related marketing materials, perhaps with a simple sliding scale based on NAV. For existing ISE‐based funds (and given current market conditions), it may be appropriate to make this a voluntary arrangement in 2009‐2010 on the understanding that their contributions will be passed on to BRASIF (see pages 61‐64). More robust arrangements could be developed as and when asset managers start to develop new SRI funds under more favourable economic conditions. Make greater use of ISE data There are probably various ways to create commercial outlets for the ISE database held by CES‐FGV, as well as a number of potential barriers to market entry. The best way to explore and test these possibilities is to put the concept to the test of entrepreneurialism, whilst also looking at the lessons that can be learned from other markets. The options could include: A solicited ESG or CSR rating product, i.e. companies pay to be rated by an independent firm and are then able to use this rating/report in their investor relations and public relations. Examples include Reputex’s recent work in China, and the European solicited ratings business of the French firm, Vigeo. An on‐line database of historical GRI‐type indicator data. In theory, companies would pay to have their information on this database (as a way to deal with questionnaire fatigue) and investment analysts would pay to access it. The London Stock Exchange developed a similar product (the Corporate Responsibility Exchange) several years ago. Although their particular business format did not find commercial success at the time, it may provide useful lessons and ideas. A joint venture or similar arrangement between CES‐FGV and an established SRI research house in Europe or North America. CES‐FGV could license its database to the research house, which would then be able to offer much better coverage of Brazilian stocks for its off‐the‐shelf products and customised research. The Johannesburg Stock Exchange’s Socially Responsible Investment (SRI) Index (where the data provider is the UK‐based firm EIRIS) may provide some useful lessons and ideas in this regard. PREVI has commented that it needs tools that go beyond the in/out screening represented by the ISE (pages 11 and 26). It needs to be able to drill down into companies based on ESG issues and carry out horizontal comparisons between companies and sectors. In light of this, the UNPRI pension funds may be the main initial audience for new information products based on the underlying database and knowledge bank that CES‐FGV has built up by being the data provider for the ISE since 2005. As discussed on page 12, the PRI Brazil Network’s Integration Working Group is examining the ESG indicators that are most relevant and material for investors in Brazil and consideration is being given to developing a joint questionnaire that the PRI pension funds will send to Brazilian companies. The relationship between this initiative and the ISE index is currently unclear. Clarifying this issue will also be important in taking forward the idea that greater use can be made of the ISE database.
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Create a commercial market for ESG research The key mechanism for creating a business environment that favours commercial ESG and SRI research providers consists of updating ISE’s commercial business model and exploiting the latent value of the underlying ISE database, as discussed above. This involves a major but necessary change in mind‐set: the costs of investing sustainably should be internalized in order to drive the next phase of progress. These costs should be regarded as an investment in the future, not just an overhead. Willingness to make this shift in mind‐set and practice is an important test of Brazil’s commitment to sustainable investment, especially in relation to the possibility of new support from DFIs. Consideration should also be given to complementary initiatives that would help to encourage ESG research and rating providers. For example, competitive forums could be created to showcase good research. The Enhanced Analytics Initiative (recently absorbed into the UNPRI) and UNEPFI’s 2004‐ 2005 “Materiality” project provide models that might be adapted in this regard. Develop human capital There are probably fewer than a dozen individuals in Brazil at the current time with substantial hands‐ on experience in ESG analysis and SRI portfolio management. These experts are located mainly in the asset management arms of organisations like Banco Real, Votorantim and HSBC. These organisations also have relevant expertise in their corporate banking and project finance business units as a result of initiatives such as the Equator Principles. There is therefore a great deal of asymmetry between human and financial capital for sustainable investment. The human capital is mainly located in asset managers, the financial capital is mainly located in pension funds; there is not a lot of interaction, and the human capital is spread thinly. This report has already emphasised the need for closer cooperation on sustainable investment between Brazil’s pension funds and leading asset managers. Human capital development can be part of this, for example through joint workshops or even secondment of staff. This could be done on a domestic only basis (between Brazilian organisations) or a mutually beneficial international basis (for example, with European and North American counterparts and/or with DFIs such as IFC). It may be useful to prepare an inventory of existing human capital and survey key organisations about their current and future needs. Training and employment opportunities could be advertised on relevant websites, and appropriate plans for training and qualifications could be developed with organisations such as the FGV business school, APIMEC and other bodies. Human capital development with other market actors may also be useful. For example, there may be value in holding workshops or seminars with CVM officials, the Brazilian Institute of Investor Relations (IBRI) and similar stakeholders. Implement an international strategy Brazil’s sustainable investment community should develop an international communications and technical cooperation strategy with the following main objectives: Raise the international profile of the ISE Index and ISE companies (in cooperation with BM&F Bovespa) Help “mainstream” international investors in Brazil to understand the importance of ESG issues and the resources that are available to assist them. Encourage international sustainability investors to invest in Brazil and to develop products similar to the former ABN AMRO Brazil Equity Fund discussed on page 29. Import and export of news, information, new research and market intelligence.
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Such a strategy should focus on a targeted range of foreign stakeholders including institutional investors, investment consultants, asset managers and SRI research houses. The strategy should address the language barriers discussed on page 49 and help to provide a single focal point for international access to relevant information from multiple Brazilian sources and organisations. Apart from a good quality website and a bi‐lingual communications officer, this strategy could include: Blogging. Monthly or quarterly newletters/e‐mail bulletins. Annual or biennial reports on the state of sustainable investment in Brazil (similar to the annual Eurosif reports on SRI in Europe, and perhaps taking this TERI‐Europe report as a starting point for future updates). Participation in relevant international networks in addition to the UNPRI and regular attendance at appropriate overseas conferences. Capital markets events/analyst presentations on sustainable investment in Brazil. Annual or biennial surveys of foreign institutional investors’ views and/or activities in relation to sustainable investment in Brazil. Invest in research and development This report identifies several areas where there are significant and important data gaps. In order of likely priority, the four main topics that merit further investigation are: 1. ESG Issues Mapping At the current time, there is no single source that provides (and updates) an investor‐friendly synthesis of key ESG issues relevant to shareholder value in Brazil’s main industry sectors (page 4). These sectors are financial services; oil & gas; mining; steel; utilities; telecommunications and transportation (see Figure 1). Pulp & paper and biofuels should probably also be added to the list. IFC is currently sponsoring a similar mapping exercise on the Indian market by WRI, and this could provide a model for the kind of research that is suggested here. LASFF and APIMEC have already developed relevant materials on three sectors (page 46) and these may also provide a valuable foundation for this activity. Amongst other things, such an ESG mapping exercise should pay special attention to climate change, particularly the economic and commercial implications of Brazil’s recently published National Plan on Climate Change (see Appendix A). 2. ESG Footprint of Foreign Institutional Investors It is currently difficult to form an accurate picture of the foreign portfolio investors who are the main investors in Brazilian stocks, although good data are publicly available in relation to ADRs. In both cases, information on the extent to which such investors take ESG considerations into account in one way or another is mainly anecdotal (Chapter 7). Further studies to answer these types of questions would probably have synergy with the work of the UNPRI, as well as a forthcoming Mercer Investment Consultants report (commissioned by IFC) on ESG practices in the world’s leading asset managers for the emerging markets asset class. Together with the suggested “ESG Mapping” project, this research would be valuable for the international strategy described earlier. 3. Non‐financial disclosure practices As discussed in Chapter 9, Brazilian companies have a good and continually improving record of voluntary non‐financial disclosure, in the form of annual sustainability reports (largely following GRI guidelines) and the number (if not necessarily the quality) of responses to the Carbon Disclosure Project.
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On the other hand, these activities still appear to be coloured by public relations objectives rather than the governance of material ESG‐related risks (for example, see SustainAbility’s observations on page 43). This impression is reinforced by a cursory review of IPO prospectuses and Form 6‐K filings with the US SEC (pages 39‐40). Arguably, it may now make sense to capitalise on the strengths of current practice and make progress on remaining gaps by institutionalising non‐financial disclosure through some type of formal code. This would reinforce the kind of corporate governance leadership represented by the Novo Mercado, and would need to take into account: emerging best practice as illustrated by the recent ICGN statement (page 39) and related measures being taken by exchanges in other markets such as Australia (page 40); possible developments in relation to climate change disclosure under US SEC rules (page 39); expectations for an eventual recovery in Brazilian IPO activity (see Appendix A for information on capital raising prior to the current global economic downturn). However, further research on the current baseline is needed in order to weigh up the potential business case for such an initiative. The starting point should probably be a detailed review of the treatment of ESG risk issues in regulatory filings and recent IPO prospectuses, perhaps in conjunction with research into Brazilian and international buy‐side views on this subject. 4. HNW Opportunities Brazil’s rapidly growing HNW population forms a wealth management market of over US$1 trillion. Although “green investment” trends in the HNW market have been researched at a global level (by CapGemini and Merrill Lynch), there is no detailed information on this market niche in Brazil (page 36). An educated guess is that the potential stock of HNW sustainable investment in Brazil could be roughly US$70 billion. For comparison, the total stock of retail assets under management is about US$110 billion (page 19), and the sustainability component of this is only US$315 million and appears to be stagnating (page 23). Given that the Brazilian pension funds with the most interest in sustainable investment tend to use in‐ house equities managers (page 25), the HNW market probably represents the best opportunity for Brazil’s asset managers to expand their sustainable investment product range and market share. To stimulate competitive thinking on this theme, it may be useful to carry out market research into this area along the lines of EUROSIF’s assessment of the European market (page 36). This might even be combined with a targeted public opinion survey on “green financial consumerism”, building on the National Geographic/GlobeScan survey (page 49). Foster competition and innovation In addition to the market research outlined above, other measures can be taken to stimulate renewed competition and innovation among Brazil’s asset managers in the SRI field once economic conditions improve. One of the most obvious possibilities is to encourage better differentiation between the rival products in relation to their sustainability credentials as well as their financial performance. For example, Trucost, the London‐based international environmental research organisation, calculates an annual ranking of UK investment funds based on their carbon emissions, enabling 13 investors and others to compare investments on an environmental basis . The firm has also recently extended this kind of analysis to Australian funds and, with the support of IFC, to emerging Asian funds. Research of this kind on Brazil could produce some very interesting and useful results. 13
Carbon Counts 2007: The Carbon Footprint Ranking of UK Investment Funds (Trucost, 2007)
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Another possible route that might be suitable for Brazil in the medium term is illustrated by the Eurosif Transparency Guidelines. These focus on retail SRI funds in order to increase accountability to consumers. Launched in November 2004 with support from the European Commission, as of April 2008, there were about 50 signatories, representing more than 140 SRI funds. Eurosif has created a logo specific to the Transparency Guidelines that can be used by signatories once their responses to the Guidelines have been updated and reviewed by their national Social Investment Forum. Signatories are expected to disclose information on a number of questions, including: How does the fund define SRI? What are the SRI criteria of the fund? What is the SRI research methodology and process? How are the results of research integrated into the investment process? What is the policy and procedure for divestment on SRI grounds? What methods of engagement are employed? What engagement activity has been carried out on behalf of the fund during the past year? Does the fund have a voting policy and are voting practices disclosed? What voting actions occurred that were related to the SRI fund criteria? Fostering “second generation” sustainability products and strategies through competition and innovation among Brazil’s asset managers would arguably also have significant benefits for pension funds implementing PRI. As previously noted, PREVI and other leading UNPRI signatories have historically relied on in‐house analysts and portfolio managers, and there have been few opportunities to harness the SRI experience of external asset managers. By working together under a more collaborative framework, however, creative partnerships could be developed. For example, a pension fund (or consortium of pension funds) might consider putting a relatively small mandate (say US$100 million) into the hands of an external manager as a “one‐off” strategic learning exercise that can then be internalized. The RFP would invite asset managers to come forward with innovative, “second generation” SRI strategies (for example, based on engagement, carbon optimisation or sustainability leaders). Such a unique, prestigious and strategically important mandate is likely to stimulate a high level of competition and innovation, both among the asset management firms and internally among in‐house portfolio managers.
Organising for success For a number of reasons, 2009 is probably a milestone year in the development and evolution of Brazil’s sustainable investment market. The last ten years or so have seen a number of building blocks fall into place and the market has attained a new level of maturity and mainstream acceptance. New risks and opportunities lie ahead. The way that the sustainable investment community adapts to these risks and opportunities over 2009‐2010, through difficult economic conditions, is likely to shape its market for at least the next five years. The issues that need to be addressed (and their potential solutions) are inter‐related and, to a large extent, inter‐dependent. A strategic vision is therefore required. The ideal development path involves a series of linked and mutually reinforcing actions that, in combination, will: help Brazil’s pension funds to meet their UNPRI objectives in a cost‐effective manner; encourage and enable Brazil’s asset managers to develop “second generation” sustainable investment products for their clients, especially in the retail and HNW market; unlock the latent potential of sustainable foreign investment. The recommendations in this report form the main elements of such a strategic development concept. Such a strategic vision underlines the need for Brazil’s sustainable investment community to improve the way it is organised.
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The Latin American Sustainable Finance Forum (LASFF) has played an important role since its creation in 2006 and its significant contribution deserves acknowledgement. However, LASFF was not designed as an analogue to organisations such as the UK Social Investment Forum (UKSIF) or Eurosif that are vital to mature sustainable investment markets in other parts of the world. The time may now be right to create such an organisation to represent and support Brazil’s multi‐billion dollar sustainable investment industry. One option might be to create a Brazilian Sustainable Investment Forum (BRASIF). This concept is outlined in the box below and would need to unify the interests of the PRI Brazil Network, the retail SRI fund managers and the ISE. Possible concept for a Brazilian Sustainable Investment Association (BRASIF) The geographic focus should be firmly on Brazil, not the region. Other economies in the region are too far behind Brazil in relation to sustainable investment; given the important needs of Brazil itself, other organisations such as UNEPFI and IFC should take the lead in sowing the seeds for sustainable investment in those countries. Brazil should, of course, continue to support regional awareness raising and capacity building on this subject to the extent possible, especially in relation to sustainable investment issues that have a cross‐border significance such as climate change, regional infrastructure development and Brazilian multinationals. The industry focus should be firmly on institutional, retail and HNW portfolio investment in listed equities, expanding as and when appropriate to include other assets classes that are important for institutional investors (such as private equity, real estate and corporate bonds). Sustainable banking and the Equator Principles are already well served by organisations like FEBRABAN, UNEPFI and IFC. BRASIF could be a separate legal entity constituted as a not‐for‐profit membership organisation with an elected board of directors and a full‐time executive director; ideally it would also have its own office premises and a small staff handling administration and communications. The US Social Investment Forum, UKSIF and ASrIA all provide good models for BRASIF to adapt. “Twinning” with an organisation like UKSIF or the US Social Investment Forum could be very valuable. This approach would help to ensure that BRASIF’s learns from the successes (and mistakes) of other sustainable investment membership organisations. In addition, it would provide an excellent mechanism for raising Brazil’s profile with foreign sustainability investors. Importantly, BRASIF would need to be a coming together of Brazil’s pension funds and leading asset managers, who have thus far mainly moved in separate circles as far as sustainable investment is concerned. PRI would be a very important part of BRASIF’s agenda and there should be a close working relationship with the UNPRI Brazil Network. UNPRI and UNEPFI have recruited a part‐time PRI coordinator based in Brazil, and co‐location could be considered. BRASIF would continue the goals set out for LASFF and be the main driving force and monitor of the strategic development vision that evolves from the proposals in this report. Specific priorities and possible projects would include: Fostering a commercial market for ESG research; Human capital development; A strategy for international engagement and marketing Brazil overseas; Research and development on issues of common interest to members; and Fostering “second generation” sustainability products and strategies through competition and innovation among Brazil’s asset managers. The moral support (and possibly financial support) of development finance institutions such as IFC, IADB and BNDES would help to refine and implement this strategic development vision. In BNDES’s case, involvement is also relevant in view of BNDESPAR’s own significant investments in publicly quoted companies. One option could be for BRASIF to have some type of DFI Liaison Group, composed of the development banks and key BRASIF members, to provide an informal framework for such interaction and potential support.
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One possible disadvantage of the BRASIF concept is that it could dilute the momentum of the PRI Brazil Network and, in particular, lead to competition for membership fees. Weighing against this, however, are the significant benefits of having an organisation such as BRASIF that combines the PRI Brazil Network with other Brazilian organisations that are not currently PRI signatories (or, in the case of industry associations such as APIMEC, are not eligible to become signatories) in order to have one body representing Brazil’s national interests in sustainable investment. Work‐around solutions may be possible to avoid competition for membership fees in a way that also provides organisational clarity and win‐win benefits for all stakeholders. One such possible solution is illustrated in Figure 23. This takes into account a number of related recommendations made earlier in this chapter, including updating the ISE’s business model and exploring opportunities for CES‐FGV to make greater commercial use of the underlying data. The concept involves increasing ISE fee revenues to BM&F Bovespa; the stock exchange could then use net ISE fee income to sponsor BRASIF. Whilst it may still be appropriate for BRASIF members to pay a membership fee (to discourage ‘free‐loaders’), this fee could be relatively low.
64
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Ultimately, the right way forward for Brazil must come from a bottom‐up, demand‐driven process rather than through a top‐down blueprint imposed from outside. The analysis and recommendations in this report are offered for consideration and discussion by all participants in Brazil’s sustainable investment market. The final recommendation of this report is therefore to suggest that it might be useful for relevant stakeholders to come together in some type of roundtable discussion that takes stock on the progress made over the last five years and enables debate on the strategic direction and needs of the market over the next five years or so. Hopefully, this report will add value to such a process. Whether and how this happens will depend on the right people taking the initiative for convening and shaping the discussion going forward. Given the quality of leadership for sustainable investment in Brazil, there is an encouraging number of candidates for this role. TERI‐Europe and the authors of the report look forward to feedback with great interest and will be pleased to lend their ongoing support.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
65
APPENDIX A: COUNTRY PROFILE
66
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Profile Table 16 provides information on selected development indicators for Brazil. Based on the IMF’s 2008 estimates of worldwide GDP, Brazil is today the world’s 10th largest economy (Figure 24). Characterized by large and well‐developed agricultural, mining, manufacturing, and service sectors, Brazil's economy outweighs that of all other South American countries and is expanding its presence in world markets. Brazil became investment grade at the end of April 2008, when Standard & Poor’s upgraded Brazil’s sovereign debt rating to BBB‐ from BB+. The World Bank/IFC annual Doing Business survey of 181 countries worldwide provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, th enforcing contracts and closing a business. Brazil ranked 124 out of 181 economies in the 2008 th survey (Table 17). By comparison, the other BRIC economies of Russia, India and China ranked 120 , nd rd 122 and 83 respectively. (The top three ranked countries globally were Singapore, New Zealand and the US). Figure 25 illustrates Brazil’s ranking in the Doing Business Survey and in several other commonly used international benchmarks covering issues such as corruption, human development and competitiveness. Figure 24: The world's 20 largest economies (source: IMF) United States Japan China Germany France UK Italy Russia Spain Brazil Canada India Mexico Australia Korea Netherlands Turkey Poland Belgium Saudi Arabia 16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
GDP, current prices, US$ billions, 2008 estimates
SUSTAINABLE INVESTMENT IN BRAZIL 2009
67
Table 16: Brazil ‐ selected development indicators WORLD VIEW Population, total (millions) Population growth (annual %) Surface area (sq. km) (thousands) Poverty headcount ratio at national poverty line (% of population) GNI, Atlas method (current US$) (billions) GNI per capita, Atlas method (current US$) GNI, PPP (current international $) (billions) GNI per capita, PPP (current international $) PEOPLE Income share held by lowest 20% Life expectancy at birth, total (years) Mortality rate, under‐5 (per 1,000) Immunization, measles (% of children ages 12‐23 months) School enrolment, primary (% net) Prevalence of HIV, total (% of population ages 15‐49) ENVIRONMENT Forest area (sq. km) (thousands) Agricultural land (% of land area) Improved water source (% of population with access) Improved sanitation facilities, urban (% of urban population with access) Energy use (kg of oil equivalent per capita) CO2 emissions (metric tons per capita) Electric power consumption (kWh per capita) ECONOMY GDP (current US$) (billions) GDP growth (annual %) Inflation, GDP deflator (annual %) Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Gross capital formation (% of GDP) STATES AND MARKETS Time required to start a business (days) Market capitalization of listed companies (% of GDP) Military expenditure (% of GDP) Fixed line and mobile phone subscribers (per 100 people) Internet users (per 100 people) High‐technology exports (% of manufactured exports) GLOBAL LINKS Merchandise trade (% of GDP) Net barter terms of trade (2000 = 100) External debt, total (DOD, current US$) (millions) Short‐term debt outstanding (DOD, current US$) (millions) Total debt service (% of exports of goods, services and income) Foreign direct investment, net inflows (BoP, current US$) (millions) Workers' remittances and compensation of employees, received (US$) (millions) Official development assistance and official aid (current US$) (millions) Source: World Bank – World Development Indicators database
2007 2007 2007 2006 2007 2007 2007 2007 2005 2006 2006 2006 2005 2007 2005 2005 2006 2006 2005 2005 2005 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2006
191.60 1.2 8,514.9 25.6 1,133.03 5,910 1,795.65 9,370 2.9 72 20 99 94 0.6 4,777.0 31.2 91 84 1,122 1.8001 2,008 1,314.17 5.4 4.5 5 31 64 13 11 22 152 104.3 1.6 84 26.1 12.0
2007 2006 2006 2006 2006 2006
22.0 104 194,150 20,325 37.3 18,782
2007
4,382
2006
82
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 17: Doing Business 2009 – Brazil’s profile Doing Business rank (out of 181 countries)
Ease of… Doing Business
2009
2008
Change in rank
125
126
+1
Starting a business
127
125
‐2
Dealing with construction permits
108
105
‐3
Employing workers
121
120
‐1
Registering property
111
115
+4
Getting credit
84
79
‐5
Protecting investors
70
66
‐4
Paying taxes
145
138
‐7
Trading across borders
92
98
+6
Enforcing contracts
100
103
+3
Closing a business
127
134
+7
Source: Doing Business 2009 (World Bank/IFC)
Figure 25: International benchmarking
UNDP: Human Development Report 2007/08
HUMAN DEVELOPMENT INDEX Brazil’s ranking: 70/177
Transparency International: Corruption Perception Index 2008
CORRUPTION PERCEPTIONS INDEX Brazil’s ranking: 80/180
World Bank: Doing Business 2009
EASE OF DOING BUSINESS INDEX Brazil’s ranking: 125/181
World Economic Forum: Global Competitiveness Report 2008-09
GLOBAL COMPETITIVENESS INDEX Brazil’s ranking: 64/134
A T Kearney/Foreign Policy magazine: Globalization Index 2007
GLOBALIZATION INDEX Brazil’s ranking: 67/72
World Economic Forum: Financial Development Report 2008
FINANCIAL DEVELOPMENT INDEX Brazil’s ranking: 40/52
Lower performers
Better performers
SUSTAINABLE INVESTMENT IN BRAZIL 2009
69
Millennium Development Goals Brazil’s progress towards achieving the Millennium Development Goals (MDGs) is summarised in Table 18. The Government of Brazil has attached great importance to achieving the MDGs and has produced three National Monitoring Reports (2004, 2005 and 2007), based on detailed official data. In addition to the measurement of indicators, these reports also include a presentation of the most relevant public policies and analysis of the prospect of achievement. During the past decade, the results show significant improvement in most indicators and clearly show that Brazil has already accomplished some targets and is close to achieving others. However, important challenges still remain primarily due to the great levels of inequality and disparity in Brazilian society and among geographic regions. Income inequality has been decreasing since 2001 and reached its lowest level in 2005. Table 18: Millennium Development Goals ‐ summary profile for Brazil MDG 1: Eradicate extreme poverty and hunger
Brazil has already fulfilled its commitment to this Goal.
MDG 2: Achieve universal primary education
Significant improvements have been registered in access to education, resulting in nearly universal coverage for elementary school. But the quality of basic education still lacks, since a large number of children finish grade 4 without adequate reading and writing skills.
MDG 3: Promote gender equality and the empowerment of women
Women have reached a higher schooling level than men in Brazil. However, discrimination is revealed in high levels of domestic violence, women’s participation in the labour market and their presence among political leaders. The indicators show a slight improvement but challenges still remain.
MDG 4: Reduce child mortality
Child mortality and infant mortality have been decreasing at an escalating pace. At the national level Brazil is likely to reach the Goal if present trend continues.
MDG 5: Improve maternal health
Maternal mortality rate fell from 61.2 to 53.4 per 10,000 babies born between 1997 and 2005, which indicates that Brazil is on track to achieve this Goal. But a close monitoring of maternal mortality is still difficult because of poor information and underreporting of cases.
MDG 6: Halt the spread of HIV/AIDS, malaria and other diseases
The number of people living with HIV/AIDS has remained steady since 2000 and the number of AIDS‐caused deaths has fallen among men and women. This indicates a reversal of the trend of growing death rate, resulting in fulfilment of this Goal. Similarly, after 3 years of increase, the incidence rate for malaria dropped in 2006.
MDG 7: Ensure environmental sustainability
Brazil has reduced its deforestation index, reduced the CFC consumption and increased its energy efficiency by relying on renewable energy sources. Expanding water supply indicates that Brazil will reach this indicator by 2015. However, improving urban and rural sanitation depends on the criterion used for its gauging and on the volume of investments. Data show that progress has already been achieved in many Brazilian cities – the proportion of urban domiciles with adequate housing conditions increased from 49.4% in 1992 to 61.5% in 2005. To rapidly improve the situation, the Government has introduced this issue as a national priority in its recently approved Accelerating Growth Plan for the next four years.
MDG 8: Develop a global partnership for development
Brazil has had a leading role in striving to achieve fairer trading rules and is making considerable efforts towards achieving universal access to AIDS medicines. The Government of Brazil has been very proactive and innovative in promoting global partnerships using South‐South Cooperation as a vehicle. Therefore, Brazil is very likely to achieve this Goal.
Source: UN MDG Monitor (Brazil profile last updated January 2008)
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Economy GDP growth Economic growth in Brazil increased from 3.8 per cent in 2006 to exceed expectations at 5.4 per cent in 2007 (Figure 26). This trend continued over the first seven months of 2008 when GDP grew by some 6.1 per cent. Growth has subsequently been impacted by the global financial shocks that have dominated the second half of the year, and the final figure for 2008 is expected to be 5.2 per cent. The outlook for 2009 is rather more pessimistic, with the IMF’s latest estimates suggesting that GDP growth will decline to 3.0 per cent in 2009, reflecting global economic conditions. Brazil’s economy is nevertheless expected to be relatively strong compared to the world’s advanced economies: for example, US ‘growth’ is expected to be ‐0.7 per cent in 2009 whilst the forecast for the UK is even worse at ‐1.3 per cent. Figure 26: Brazil GDP growth trends (source: IMF) 7 6
GDP growth %
5 4 3 2 1
e
e
13
12
20
20
e 11 e 20
e
10
20
e
09
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
20
19
19
98
0
Value‐added The services sector contributes around two‐thirds of the value added to Brazil’s GDP. Industry accounts for 31 per cent; Brazil’s main industries include textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts and other machinery and equipment. Agricultural production – which consists of coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus and beef – accounts for about 5 per cent of GDP. Foreign trade Brazil’s main trade partners are the US, Argentina, China, Germany, the Netherlands and Nigeria (Table 19). Strong external demand, high commodity prices and a more active export policy have contributed to booming export earnings since 2003, leading the trade surplus to swell and transforming the current account from a deficit of 4.6 per cent of GDP in 2001 to a surplus for several years. However, this surplus has been steadily declining and the current account is expected to be in deficit in 2008.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
71
Table 19: Brazil ‐ main import and export markets (2007 data) Major exports
% of total
Major imports
% of total
Transport equipment & parts
12.5
Machinery & electrical equipment
26.1
Metallurgical products
11.6
Chemical products
15.4
Soybeans, meal & oils
8.2
Oil & derivatives
16.6
Chemicals
1.9
Transport equipment & parts
Leading markets US
% of total
12.0 % of total
US
15.7
Argentina
9.2
China
10.5
China
6.8
Argentina
8.6
Netherlands
5.6
Nigeria
4.4
Germany
4.6
Netherlands
Export earnings (est)
16.1
Leading suppliers
US$161 billion
Import bill (est)
0.9 US$121 billion
Sources: Economist Intelligence Unit, CIA World Factbook
Private capital flows International context Net debt and equity inflows to developing countries increased by US$269 billion in 2007 to reach a record US$1.03 trillion, according to the World Bank’s Global Development Finance 2008 report. This marks five consecutive years of strong gains in net private flows, which averaged over 44 per cent a year (however, much of the increase in dollar terms reflects the depreciation of the US$ against most other currencies). The rapid expansion in private flows reflects strong gains in both equity and debt components. Net (foreign direct and portfolio) equity inflows reached an estimated US$616 billion in 2007 (Figure 27), equal to a record 4.5 percent of GDP, up from 4.1 per cent in 2006. Figure 27 also illustrates how portfolio equity inflows have become increasingly important since the turn of the millennium. Brazil Foreign direct investment (FDI) into Brazil has averaged at just over US$22 billion a year over the last decade, and reached a high of US$35.5 billion at the end of 2007. Net foreign portfolio investment flows have increased dramatically in the last few years and by 2007 they reached US$34 billion, almost matching the volume of FDI (Figure 28). Data from CVM indicates that the total stock of foreign portfolio investment amounted to some US$214 billion at the end of 2007 and by the end of August 2008 stood at US$232 billion (Figure 29). Brazil’s share of total FDI flows to emerging markets has been in decline since 1998 and is estimated at just under 6 per cent for 2007 (Figure 30). Over the last three to four years, foreign portfolio investment has become increasingly important to Brazil’s economy; Brazil’s share of net portfolio equity flows to all developing countries surged to nearly 25 per cent in 2007 (Figure 31).
72
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 27: Net equity flows to developing countries (source: World Bank Global Development Finance 2008) 500 450 400
US$ billion
350 300 250
Net portfolio equity inflows
200
Net FDI inflows
150 100 50 1999
2000
2001
2002
2003
2004
2005
2006
2007
Figure 28: FDI and foreign portfolio investment in Brazil: flows (sources: CVM, UNCTAD) 40,000 35,000
US$ million
30,000 25,000 20,000
FDI
15,000
Foreign portfolio investment (net)
10,000 5,000 (5,000) 1997
1999
2001
2003
2005
2007
Figure 29: FDI and foreign portfolio investment in Brazil: stock (sources: CVM, UNCTAD)
350,000
US$ millions
300,000 250,000 200,000 FDI
150,000
Foreign portfolio investment
100,000 50,000 0 1997
1999
2001
2003
2005
2007
SUSTAINABLE INVESTMENT IN BRAZIL 2009
73
Figure 30: Brazil's share of total FDI flows to emerging markets (source: UNCTAD) 35% 30% 25% Brazil
20%
Russia 15%
India China
10% 5% 0% 1994
1996
1998
2000
2002
2004
2006
Figure 31: Brazil's share of net portfolio equity flows to developing countries (sources: CVM; World Bank Global Development Finance 2008) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 1999
2000
2001
2002
2003
2004
2005
2006
2007
The stock market Market size th The São Paolo stock exchange, operated by BM&F Bovespa, is the 13 largest market in the world by market capitalization (Figure 32), following a dramatic increase in size over the last two decades (Figure 33). In common with almost all other markets, Brazil’s market capitalisation has experienced a sharp decrease in the last 12 months as a result of the global economic crisis and the worldwide fall in equity prices. As of the end of November 2008, the market value of BM&F Bovespa listed companies came to R$1,355 billion (US$585 billion).
74
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Figure 32: Domestic market capitalisation of the world's 20 largest exchanges (USD millions) (source: World Federation of Exchanges) NYSE Group Tokyo SE Nasdaq Euronext London SE Shanghai SE Hong Kong Exchanges TSX Group Deutsche Börse BME Spanish Exchanges Swiss Exchange Australian SE BM&FBOVESPA Bombay SE OMX Nordic Exchange National Stock Exchange India Borsa Italiana Korea Exchange JSE Taiwan SE Corp. 0
5,000,000 end Oct 2008
10,000,000
15,000,000
20,000,000
end Oct 2007
Domestic market cap US$ millions
Figure 33: BM&F Bovespa domestic market capitalisation (source: World Federation of Exchanges)
1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000
October 2008
End 2007
End 2006
End 2005
End 2004
End 2003
End 2002
End 2001
End 2000
End 1999
End 1998
End 1997
End 1996
End 1995
End 1994
End 1993
End 1992
End 1991
End 1990
0
SUSTAINABLE INVESTMENT IN BRAZIL 2009
75
Table 20 shows the country weighting for Brazil in the three main emerging market indices published by FTSE, MSCI and Standard & Poor’s. The table includes data for India for comparison. Table 20: Country weighting in key emerging market indices Index
BRAZIL
INDIA
Reporting date
FTSE All‐World Emerging Index
14.59%
9.97%
Jan 14, 2009
MSCI Emerging Market Index
13.36%
6.65%
Jan 14, 2009
S&P/IFCI Composite Index
12.78%
7.13%
Nov 30, 2008
Corporate governance segments There are different listing segments for companies traded on the stock exchange. In addition to the Traditional Bovespa segment, these include the Novo Mercado and two further differentiated corporate governance categories, Level (Nivel) 1 and Level (Nivel) 2. The key features of these corporate governance segments are summarised in Table 21. Table 21: Novo Mercado and corporate governance levels Requirements
Disclosure of Information
Protection to minority shareholders
Management Requirements
Level 1
Level 2
Novo Mercado
Information sharing standards
Minimum required by CVM
IFRS or US GAAP
IFRS or US GAAP
Other requirements
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Shareholding position of the Board and Senior Management Identity of any shareholder with more than 5% of total shares Income statement, balance sheet and cashflow of the company and the controlling company Annual public meeting for presenting results and perspectives
Stocks without voting rights permitted?
Yes
Yes
No
Minimum free floats
25%
25%
25%
Tag along for stocks with voting rights
No
100%
100%
Tag along for stocks without voting rights
No
80%
N/A
Conflict solving via arbitration chamber
Optional
Obligatory
Obligatory
Requirements regarding the Board of Directors
No
Minimum: 5 members and 2 year mandate
Minimum: 5 members and 2 year mandate
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Key companies and industries As of the end of November 2008, 393 companies were listed on the exchange with a combined market capitalisation of R$1,355 billion (US$570 billion). Figure 34 shows the share of market capitalisation between the different listing segments: Novo Mercado companies represent about 33 per cent of total market cap. Table 22 lists the companies in the IBovespa, the market’s main benchmark index. The five industrial sectors with the highest market value are financial institutions (22 per cent); oil, gas and biofuel (20 per cent); mining (15 per cent); steel and metallurgy (11 per cent); and electric power (7 per cent) (Figure 35). The market is highly concentrated: the top ten companies with the highest market value make up about 50 per cent of total market capitalisation. Approximately 25 per cent of the total value of the market is concentrated in just two companies, Petrobras and Vale R Doce; these two firms represent 34 per cent of the notional IBovespa portfolio. The capital structure of both Petrobras and Vale R Doce includes preference as well as common shares; neither firm is listed on the Novo Mercado. Figure 34: Market capitalisation by listing segment NOVO MERCADO (32.6%)
TRADITIONAL BOVESPA (32.6%)
NIVEL 2 (2.1%)
NIVEL 1 (47.2%)
Source: BM&F BOVESPA (data as of end Nov 08)
Figure 35: Industry breakdown of IBovespa index constituents
Financial 21.6%
Other 16.1% Transportation 4.1% Telecom 4.8% Electric utilities 7.3%
Oil and gas 19.8%
Steel 11.1% Mining 15.2%
SUSTAINABLE INVESTMENT IN BRAZIL 2009
77
Table 22: Companies in the IBovespa index Company
Industry
ALL AMER LAT (N2)
Railroads
AMBEV ARACRUZ (N1)
Beer & soft drinks Pulp & paper
B2W VAREJO (NM) BMF BOVESPA (NM)
Retail Diversified financial services
BRADESCO (N1) BRADESPAR (N1)
Financial intermediaries Holdings ‐ diversified
BRASIL (NM) BRASIL T PAR (N1)
Financial intermediaries Telecommunications
BRASIL TELEC (N1) BRASKEM (N1)
Telecommunications Petrochemicals
CCR RODOVIAS (NM) CELESC (N2)
ISE ?
Market cap US$ million
IBovespa weight (%)
2,868
1.415
24,219 1,409
1.122 0.777
1,156 5,265
0.904 4.360
27,966 2,834
3.700 1.199
15,969 5,091
2.404 0.721
7,745 1,207
0.420 0.545
Toll roads & highways Electric utilities
4,076 663
0.611 0.121
CEMIG (N1) CESP (N1)
Electric utilities Electric utilities
6,123 1,908
1.642 1.215
COMGAS COPEL (N1)
Gas utilities Electric utilities
1,652 2,686
0.114 0.651
COSAN (NM)
Sugar ‐ alcohol
1,575
0.603
CPFL ENERGIA (NM) CYRELA REALT (NM)
Electric utilities Residential building construction
6,191 1,400
0.522 1.257
DURATEX (N1) ELETROBRAS (N1)
Wood Electric utilities
773 12,379
0.551 1.903
ELETROPAULO (N2) EMBRAER (NM)
Electric utilities Aerospace
1,704 2,791
0.691 0.656
GAFISA (NM) GERDAU (N1)
Residential building construction Steel
597 8,584
0.930 3.100
GERDAU MET (N1) GOL (N2)
Steel Airlines
3,430 858
0.916 0.737
ITAUBANCO (N1) ITAUSA (N1)
Financial intermediaries Financial intermediaries
30,708 15,437
3.471 2.238
JBS (NM) KLABIN S/A (N1)
Meat, poultry & others Pulp & paper
3,034 1,530
0.658 0.355
LIGHT S/A (NM) LOJAS AMERIC
Electric utilities Retail
1,908 1,915
0.203 1.200
LOJAS RENNER (NM) NATURA (NM)
Retail Cosmetics
815 3,486
0.858 0.638
NET (N2) NOSSA CAIXA (NM)
Cable TV Financial intermediaries
2,372 3,124
0.946 0.397
P.ACUCAR‐CBD (N1) PERDIGAO S/A (NM)
Retail Meat, poultry & others
3,249 2,634
0.553 0.887
PETROBRAS
Oil, gas & biofuels
95,846
19.776
REDECARD (NM) ROSSI RESID (NM)
Diversified financial services Residential building construction
7,401 311
0.933 0.569
SABESP (NM) SADIA S/A (N1)
Water utilities Meat, poultry & others
2,706 1,162
0.403 1.139
SID NACIONAL SOUZA CRUZ
Steel Tobacco
9,845 5,768
3.454 0.487
TAM S/A (N2) TELEMAR
Airlines Telecommunications
1,145 5,763
0.711 1.511
TELEMAR N L TELESP
Telecommunications Telecommunications
5,773 9,272
0.296 0.191
TIM PART S/A TRAN PAULIST (N1)
Telecommunications Electric utilities
3,628 2,766
0.955 0.371
ULTRAPAR (N1) UNIBANCO (N1)
Holdings ‐ diversified Financial intermediaries
3,103 15,755
0.437 2.417
USIMINAS (N1) V C P (N1)
Steel Pulp & paper
5,677 1,545
3.667 0.618
VALE R DOCE (N1) VIVO
Mining Telecommunications
60,142 4,457
15.154 0.722
78
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Capital raising The amount of capital raised on the stock exchange by Brazilian companies through the issuance of new and secondary equity offerings has increased significantly over the last three to four years (Figures 36 and 37). Although the number of IPOs has increased since 2005 and reached a record high in 2007, the longer term trend is dominated by secondary public offerings. Table 23 provides details of Brazilian IPO and secondary public offerings from June 2007 to June 2008 (new deals since June 2008 have all but dried up as a consequence of wider economic conditions). Some US$35 billion of new deals were completed during this period. Key IPOs have included Bovespa (US$3.7 billion in October 2007); the commodities exchange BM&F (US$3.3 billion in November 2007); the electricity generation and distribution firm MPX Energia (US$1.3 billion in December 2007); and the oil & gas company OGX (US$4.1 billion in June 2008). The majority of IPOs in recent years have been on the Novo Mercado. Figure 36: Capital raised by share issues on BM&FBOVESPA (US$ millions) (source: World Federation of Exchanges) $45,000 $40,000 $35,000 US$ millions
$30,000 $25,000 Secondary public offerings
$20,000
Initial public offerings
$15,000 $10,000 $5,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 37: Number of IPOs on BM&FBOVESPA (source: World Federation of Exchanges)
Number of newly listed companies
80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008
SUSTAINABLE INVESTMENT IN BRAZIL 2009
79
Table 23: Main deals completed in Brazil since June 2007 Company
Industry
Date
OGX PETRÓLEO GERDAU LE LIS BLANC COPASA METALURGICA GERDAU ANHANGUERA EDUC HYPERMARCAS GLOBAL VILLAGE GP INVESTMENTS NUTRIPLANT TEMPO PERDIGAO MPX ENERGIA BOLSA BM&F BANCO PANAMERICANO LAEP INVESTMENTS AMIL BRASIL BROKERS BOVESPA HOLDINGS HELBOR AGRENCO PDG REALTY MARISA BR MALLS PARTIC SEB EDUCAC TRISUL CONSTRUTORA TENDA BANCO INDUSTRIAL E COMER SATIPEL INDUSTRIAL GENERAL SHOPPING BRASIL SPRINGS GLOBAL PARTIC MULTIPLAN EMP IMOBIL COMPANHIA PROVIDENCIA BANCO DO RIO GRANDE SUL BANCO ABC BRASIL AÇUCAR GUARANI MRV ENGENHARIA E PARTIC CIA HERING TRIUNFO PARTIC E INVEST KROTON EDUC MINERVA S/A INVEST TUR BRASIL BANCO INDUSVAL DROGASIL BANCO DAYCOVAL MARFRIG FRIGORIFICOS BANCO CRUZEIRO DO SUL EZ TEC TOTAL COUNT
Oil & gas Materials Consumer Staples Utilities Materials Consumer Discretionary Consumer Staples Telecommunications Financials Materials Financials Consumer Staples Utilities Financials Financials Financials Financials Real Estate/Construction Financials Real Estate/Construction Industrial Real Estate/Construction Consumer Discretionary Real Estate/Construction Consumer Discretionary Real Estate/Construction Real Estate/Construction Financials Real Estate/Construction Real Estate/Construction Industrial Real Estate/Construction Industrial Financials Financials Consumer Staples Real Estate/Construction Consumer Staples Industrial Consumer Discretionary Consumer Staples Real Estate/Construction Financials Healthcare/Pharma Financials Financials Financials Real Estate/Construction
Jun 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Feb 08 Feb 08 Feb 08 Dec 07 Dec 07 Dec 07 Nov 07 Nov 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Oct 07 Sep 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jul 07 Jun 07 Jun 07 Jun 07 Jun 07
Source: Citigroup Global Markets Equity Research; BM&F Bovespa
Primary 4,100.0 600.3 76.9 239.8 601.0 266.6 367.0 156.8 186.5 11.8 217.7 507.3 1,080.3 2,890.7 391.3 286.8 457.5 171.3 3,218.6 129.9 370.0 277.7 245.0 332.1 159.2 176.5 333.6 310.6 114.4 143.2 189.5 360.8 246.1 428.8 328.7 357.8 540.2 123.2 163.7 191.7 199.7 450.6 120.4 106.8 486.4 305.2 222.1 245.9 27,845 79%
Size (US$ million) Secondary ‐ ‐ ‐ 36.0 ‐ 39.2 55.0 11.7 557.2 1.8 47.1 94.9 215.6 433.6 55.9 42.9 331.7 224.8 482.9 30.3 55.5 41.7 ‐ ‐ 68.2 ‐ ‐ 139.7 99.1 7.2 109.7 124.7 ‐ 690.5 5.1 ‐ 30.1 44.4 112.1 65.0 39.9 59.0 17.2 97.8 81.2 218.3 67.6 36.9 7,216 21%
Total 4,100.0 600.3 76.9 275.8 601.0 305.8 422.0 168.4 743.7 13.5 264.8 602.1 1,295.9 3,324.2 447.2 329.7 789.2 396.1 3,701.5 160.2 425.6 319.4 245.0 332.1 227.5 176.5 336.6 450.2 213.5 150.4 299.2 485.4 246.1 1,119.2 333.8 357.8 570.3 167.5 275.8 256.7 239.6 509.6 137.6 204.6 567.6 523.5 289.7 282.7 35,061 100%
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
Performance Figure 38 compares the performance of Brazil’s benchmark index, the IBOVESPA, with that of the MSCI Emerging Market Index (MSCI EM) over the last five years. The IBOVESPA steadily gained in value over the 2005‐2007 period and began to outperform the MSCI EM in Q3 2007 as the “sub‐prime” problem began to make its effects felt beyond the US. Both the MSCI EM and IBOVESPA have fallen sharply since Q2 2008 as the international credit crunch crisis evolved into a severe global financial and economic downturn. The IBOVESPA, while falling dramatically, continues to be ahead of the MSCI EM. Figure 38: IBOVESPA performance compared to MSCI Emerging Market Index, 5 years (source: Bloomberg) 250% 200% 150% 100% 50% 0%
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
-50%
IBOVESPA
MSCI EM
Market participants Figure 39 illustrates trading on BM&F Bovespa by different classes of market participants: individuals (including investment clubs), institutional investors, international investors, companies and financial institutions. Trading by companies has declined over time relative to other types of market participants, whilst trading by Brazilian institutional investors and international investors has increased, reflecting the increase in domestic savings and foreign portfolio investment. Figure 39 also shows how individual investors and investor clubs have continually been a very important component of the buy‐side in Brazil.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
81
Figure 39: Evolution of investors’ participation on BOVESPA's Total Trade Value (%) (source: BM&F Bovespa)
Jun-08
24.4
26.3
37.2
2007
23
29.7
34.5
2.4
10.4
2006
24.6
27.2
35.5
2.3
10.4
2005
25.4
2004
27.5
2003
26
27.5
16.5
2001
21.7
16
20.2 Individuals
26
3.5
25.1
15.8 Institutional
24.3
22 International
3.2 5.3 Financial Institutions
8.8
2.6
27.3
27.6
21.9
2000
32.8
28.1
2002
3.3
3.4 4.1
11.7 13.8 18
32.1 34 36.7 Companies
Key environmental and social issues Corporations and their investors in Brazil face a wide and often complex range of social and environmental issues that present potentially significant risks and opportunities to shareholder value and corporate reputation. At the current time there does not appear any single source that synthesises this information into an investor‐friendly, comprehensive analysis of key sustainability‐ related business drivers in the industries that make up Brazil’s stock market. A detailed assessment is beyond the current scope of this report. Principal issues The main environmental and social issues that influence business and investor risk in Brazil include: Poverty and inequality Access to finance at the ‘base of the pyramid’ Land distribution and landless workers Food security Child labour Forced labour Indigenous peoples and associated land rights Urban air pollution Biodiversity protection Deforestation and land use change Greenhouse gas emissions Water and sanitation Energy (including oil & gas, hydroelectricity and biofuels) Climate change adaptation Regional (cross‐border) infrastructure development Appendix B provides a selection of recent press articles illustrating the relevance of these issues to Brazil’s leading industries and corporations.
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SUSTAINABLE INVESTMENT IN BRAZIL 2009
New national plan on climate change One important recent development is the Brazilian Government’s National Plan on Climate Change, published in December 2008. The measures in this action plan may have potentially significant implications (both positive and negative) across a number of key Brazilian industry sectors, including oil & gas, biofuels, mining, steel, power and pulp & paper. Some of the key principles and actions in the National Plan on Climate Change are summarised in the box below.
NATIONAL PLAN ON CLIMATE CHANGE (DECEMBER 2008) SELECTED MEASURES INCREASE ENERGY AND CARBON EFFICIENCY IN THE PRODUCTIVE SECTOR: Achieve gradual energy savings up to 106 TWh/year by 2030, avoiding emissions of around 30 million tons of CO2 in that year. Increase use of sustainable charcoal to replace coal in steel plants, mainly through the encouragement of forestation in degraded areas. Encourage use of water solar power heating systems, reducing electricity consumption in 2,200 GWh per year by 2015. Phase out use of fire for clearing and cutting of sugarcane in areas where harvesting mechanization can take place. Integrated agricultural and cattle raising systems including carbon sinks via crop‐livestock integration and agro‐forestry. MAINTAIN RENEWABLE ENERGY’S HIGH SHARE IN THE ELECTRIC MATRIX: Increase electricity supply from cogeneration, mainly from sugarcane bagasse, to 11.4 per cent of the total supply in the country, in 2030, corresponding to 136 TWh. Reduce non‐technical losses in the electricity distribution at a rate of 1,000 GWh per year over the next ten years. 34,460 MW from new hydropower plants to be added to the system in accordance with the schedule of works of the Ten Year Energy Plan (2007‐2016). Increase the energy matrix share of renewable energy from wind and sugarcane bagasse through specific auctions of renewable energy. More than 7,000 MW of renewable sources will be implemented by 2010. Expand national solar photovoltaic industry and the use of this energy source in systems that are isolated and connected to the grid. INCREASE BIOFUEL USE AND WORK TOWARDS AN INTERNATIONAL MARKET OF SUSTAINABLE BIOFUELS: Encourage industry to achieve an average annual ethanol consumption increase of 11 per cent in the next ten years. Stimulate an international ethanol market through technical cooperation with other countries with a high potential for growing sugarcane. ACHIEVE ZERO ILLEGAL DEFORESTATION: Amazon Fund: created in 2008, the Amazon Fund aims to raise financial resources nationally and internationally from governments and the private sector for the reduction of deforestation, sustainable forest use and conservation. Climate Fund: submitted to the National Congress, amongst other purposes it aims to finance actions concerned with preventing deforestation. Minimum price policies for non‐timber forest produces (linked to traditional communities and peoples). ELIMINATE NET LOSS OF FOREST COVERAGE BY 2015: Revision of current banking requirements to make forestation and reforestation activities more attractive, including areas for charcoal production. Development of forest products for fuel applications. Prevention of the use of illegal timber in the building industry – starting in January 2009, the legal origin of timber will have to be proved by building companies and companies from the real estate sector.
SUSTAINABLE INVESTMENT IN BRAZIL 2009
APPENDIX B: EXAMPLES OF ESG ISSUES IN THE INTERNATIONAL MEDIA
83
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!
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APPENDIX C: SWOT ANALYSIS
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STRENGTHS/OPPORTUNITIES
WEAKNESSES/THREATS
BM&F Bovespa is a proactive and innovative stock exchange with respect to ESG investment concepts and solutions
Many other initiatives and challenges compete for management attention
The Brazilian investment and corporate community puts a strong emphasis on corporate governance, including pioneering initiatives such as the Novo Mercado
Corporate governance culture has not yet evolved to fully include governance of environment and social risks – emphasis remains on ‘core’ CG issues such as minority shareholder rights No listing rules or stock exchange guidance in relation to non‐ financial reporting or ESG disclosure Risk of falling behind emerging best practices (e.g. ICGN Statement and Guidance on Non‐financial Business Reporting)
Strong environmental legislation
Variable environmental enforcement
The complexity and significance of environmental and social issues in Brazil mean that there is a strong business case for corporate sustainability, and therefore a strong value‐added argument in favour of sustainable investment strategies
The complexity and significance of environmental and social issues presents important information and management challenges, as well as decision‐making dilemmas and difficult judgement calls. Failure to deal adequately with ESG issues in investment can lead to very real social and environmental damage and put value at risk
Through its Center for Sustainability Studies, Brazil’s leading business school (FGV) is an active and catalytic participant in the development of Brazil’s sustainable investment market
CES‐FGV’s resources may sometimes be spread too thinly
The ISE Index has matured into a successful and important element in the Brazilian investment and corporate responsibility landscape, and appears to be able to operate on a break‐even basis
The ISE business model may not provide sufficient revenue for R&D, marketing, etc and arguably distorts the marketplace for commercial ESG research The ESG investment needs of Brazilian institutional investors like PREVI are evolving beyond what the ISE can currently provide The company response rate to the annual ISE survey is low and falling steadily and the ISE has a low profile with foreign portfolio investors
Many of Brazil’s leading asset managers participate in sustainable investment and have built up experience via SRI mutual funds that have proved they can deliver respectable financial returns compared to relevant benchmarks
Currently, no asset manager employs full‐time ESG analysts: human capital development is likely to emerge as an issue for the future Lack of ESG research out‐sourcing hinders the development of a commercial ESG research services Relatively few asset managers have signed the UNPRI and there seems to be limited interaction and know‐how exchange with Brazil’s UNPRI pension funds and the UNPRI as a whole The competing SRI mutual funds are all similar to one another in terms of ESG features and financial performance The asset managers’ SRI business lines appear to be stagnating (no recent product innovation, static/falling consumer appetite) Since the ‘loss’ of the ABN AMRO Brazil Fund, Brazilian asset managers no longer offer off‐shore ESG funds suitable for foreign investors Shareholder engagement is in its infancy.
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Brazilian pension funds were among the founding signatories of the UNPRI and are currently the main driving force behind sustainable investment in Brazil under the leadership of the influential leadership of PREVI, by far the country’s largest pension fund Public policy measures to promote sustainable investment (e.g. pension fund transparency rules) have not been necessary
Implementation is at a relatively early stage and is mainly concentrated in PREVI Currently, no pension fund employs full‐time ESG analysts: human capital development is likely to emerge as an issue for the future Lack of ESG research out‐sourcing hinders the development of a commercial ESG research services By itself, the ISE is currently insufficient for the ESG investment needs of PREVI and other UNPRI signatories – however, developing additional tools and methodologies is a significant challenge In‐house management of equities isolates the UNPRI pension funds from the sustainable investment expertise built up by asset managers in the SRI mutual fund niche Shareholder engagement is in its infancy.
IFC has played a catalytic role by supporting a number of strategic initiatives in this field, including the development of the ISE Index IADB and BNDES both play key roles in helping to develop Brazil’s hi‐tech and ‘greentech’ venture capital industry IADB has commissioned interesting research from Innovest on the “Opportunities for the Majority” strategies of several Latin American corporations, including a number of Brazilian firms
Other emerging markets/advisory needs compete for IFC’s management attention and finite grant funding resources BNDES and IADB do not appear to be engaged in Brazil’s networks and initiatives for sustainable portfolio investment in Brazil It is not clear whether or how BNDES handles ESG issues with respect to its ownership of significant stakes in Brazil’s leading listed companies There is little or no interaction between IFC, IADB and BNDES on DFI support for the development of Brazil’s sustainable investment market
Brazil’s HNWI population is growing rapidly and may represent a potential stock of sustainable investment assets of roughly US$70 billion
There is no published market research on sustainable HNWI investment in Brazil
As a general observation, foreign portfolio investors are increasingly focusing on ESG issues when investing in Brazil and other emerging and frontier markets
There is relatively little data on the ESG “footprint” of Brazil’s foreign portfolio investors and investors in Brazilian ADRs listed in New York
Brazil has emerged as the main centre of PE/VC activity in the region, including a number of “greentech” funds and deals Institutional investors such as PREVI are promoting sustainable private equity investment in Brazil through the UNPRI IPOs have become an attractive exit route, creating synergies between sustainable PE and the ISE Index WRI’s New Ventures programme plays a key role in developing VC opportunities in sustainable SMEs
GPs with formal ESG policies and procedures are still the exception rather than the rule Biofuels have become a significant part of PE/VC activity in Brazil and this sector poses complex environmental and social issues and challenges New tools, standards and capacity building programmes are needed to support further progress towards mainstream integration of ESG investment in the PE/VC sector At some point in the future WRI is likely to need an effective “exit” mechanism for New Ventures Brazil, possibly involving commercial spin‐out
Brazil’s leading listed companies are relatively good at voluntary non‐financial reporting in the form of GRI sustainability reporting and responses to the Carbon Disclosure Project Brazil has a strong body of consultants, not‐for‐profit organisations and other entities that provide expertise and advocacy for sustainability reporting etc.
Further progress is needed in terms of coverage and quality Sustainability reporting still has a strong PR flavour Non‐financial reporting of potentially material ESG risks does not appear to be widely practiced in relation to IPO prospectuses and regulatory filings Many of Brazil’s leading listed companies are listed in New York and are therefore potentially vulnerable to regulatory changes that are currently being discussed in the US in relation to e.g. SEC rules on climate change disclosure
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A small number of international sustainable investment research firms cover some of Brazil’s leading companies Brazil has the human capital to develop its own sustainable investment research providers
Coverage by international firms is still relatively limited and is largely conducted by non‐Brazilians located abroad Brazil has not developed its own sustainable investment research industry, due to lack of commercial demand from the buy‐side
Some international sell‐side firms are producing sector‐specific sustainability research which includes a small number of Brazilian companies that are globally significant in their sector
International sell‐side research on the ESG aspects of Brazilian stocks is extremely limited Brazilian sell‐side analysts do not produce ESG research due to lack of commercial demand from the buy‐side
Organisations such as the Brazilian Association of Pension Funds, the National Association of Investment Banks and the Association of Capital Market Analysts and Investment Professionals play an active part in promoting sustainable investment in Brazil
Language barriers (English‐Portuguese and Portuguese‐English translations of key reports, guidance materials and other relevant information are rare and often of poor quality)
Several of Brazil’s asset managers are active in CES‐FGV’s Latin American Sustainable Finance Forum (LASFF) The UNPRI is becoming increasingly active in Brazil and intends to recruit a full‐time Brazil‐based coordinator to expand membership and support implementation
The LASFF does not have a wide membership base in the asset management community, and does not fulfil the crucial role played by industry organisations in other regions as UKSIF in the UK or ASrIA in Asia Despite having almost identical strategic and technical interests, there is little membership overlap between the LASFF and UNPRI, and technical cooperation has begun only recently. LASFF and UNPRI both have limited human and budget resources
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APPENDIX D: SUSTAINABILITY IN BRAZIL’S PRIVATE EQUITY AND VENTURE CAPITAL MARKET
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Market overview The Emerging Market Private Equity Association (EMPEA) provides extensive and authoritative 14 information on private equity and venture capital in Brazil and Latin America , as do the Brazilian Private Equity and Venture Capital Association (ABVCAP) and the Latin American Venture Capital Association (LAVCA). Brazil has implemented a series of reforms in recent years to attract and promote private equity and venture capital, and is now the leading center for PE/VC activity in the region. These reforms have included stronger laws on fund formation and operation, better protection of intellectual property rights, and lower restrictions on institutional investors. In addition, the corporate governance segments created by Bovespa in 2001 have opened new opportunities for exits on public markets. Prior to the global economic crisis, Brazil led a resurgence of investor interest in private equity in Latin America in general, and drew nearly 60 per cent of the private equity capital raised for Latin America PE funds in 2007. Investment volumes recorded unprecedented heights—at US$4.7 billion, 2007 volumes were roughly 10 times that of 2005, and double the peak of the 1990s boom years. As a result, 53 firms commenced private equity operations in Brazil between 2001 and 2007, and 89 PE/VC firms currently manage 153 funds in Brazil (Table 24). Brazilian private equity managers also built a solid record of exits, contributing to the explosion in IPO activity in 2006 and 2007. Brazil’s 2007 aggregate exit values surpassed dollar volumes across the entire region from 2003 to 2005. Brazilian institutional investors are becoming increasingly active in private equity. Insurance companies may invest up to 50 per cent of reserves in variable‐income instruments such as shares. The insurance sector remains underdeveloped in Brazil, though it is expanding. The participation of pension funds in PE/VC activity is larger than that of insurers, and pension funds have become major players in the industry by regional standards. ‘Open’ pension funds (i.e, those not limited to employees and retirees from specific companies) may invest 60 per cent of reserves in stocks. Many pension funds insist in participating on the investment committees of funds in which they invest. Fundraising Activity Until the recent economic downturn, the funds universe in Brazil was in a period of dramatic growth, both in the amount of capital being raised and the diversity of funds tapping the market (Figure 40). This growth spans the buyouts end of the spectrum, the middle market and the venture capital segment. Overall, funds focused on Brazil raised more than US$1 billion between April 2007 and April 2008. Additionally, at least 10 funds are raising upwards of US$4.6 billion, translating to a potential doubling in capital focused on Brazilian opportunities in 2008 relative to the US$2.5 billion raised in 2007. The financial crisis will undoubtedly have an impact on international fund‐raising. However, the impact on the Brazilian venture capital and private equity industry is likely to be cushioned because Brazilian pension funds such as PREVI are becoming increasingly active in this asset class. 14
Insight Brazil: An Overview of Trends in Select Sectors and Markets EMPEA (May 2008)
94
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 24: Brazil ‐ recent private equity funds (source: EMPEA)
PE Firm
Fund
Sector Focus
Actis
Actis Latin America 3 LP (US$132m)
Generalist
Advent International
Latin America Private Equity Fund IV (2007, US$1.3b)
Generalist
AIG Capital Partners
AIG Brazil Special Situations Fund II (2008, US$692m)
Generalist
Angra Partners
AG Angra Infrastructure Fund (2006, US$397m)
Infrastructure
Artesia Gestao de Recursos
Artesia Exclusive II (2007, US$98m)
‐
Axxon Group
Natixis Mercosul Fund (2001, US$100m)
‐
Banco Pactual
Fundo Brasil Energia (2004, US$255m)
Energy
Banco Santander
ASCET I‐FIP (2007, US$31m) BRASOIL FIP (2007, US$31m)
Generalist
Capitania Gestores
Private Equity Brazil Multi‐strategy I (2007, US$260m)
Generalist
CRP
CRP VI Venture (2006, US$28m)
Generalist
Darby Overseas Investments
Darby BBVA Latin America (2005, US$175m)
Agribusiness/Infrastructure
DGF
FIPAC (2006, R$80m)
Technology, Pharma
Dynamo
Puma II (2004, US$208m)
‐
FIR Capital Partners
Fundo Tec II (2007, US$45m) DFJ FIR Brazil Fund II (2007, US$100m)
Technology, life sciences
Gavea Investimentos
Fund II (2007, US$480m)
Generalist
GG Investimentos
Governança & Gestão Fund I (2006, US$140m)
‐
GP Investments
GP Capital Partners IV (2007, US$1.3b)
Generalist
Infinity
Infinity Bioenergy Fund I (2006, US$516m)
Cleantech
Investidor Profissional Gestão de Recursos
Gibraltar Fundo de Investimento em Participacoes II (2007, US$78m)
Technology
JB Partners
JBVC I Fund (2007, US$57m)
Generalist
Mellon Global Investments Brazil
Rio Agribusiness FIP (2007, US$13m) Polaris Fundo de Investimento em Participacoes (2007)
Agribusiness/Generalist
Mercatto Venture Partners
MVP Tech Fund (2002, R$23m)
Technology
Patriã Private Equity
Fundo de Terceirização de Serviços para o Brasil (2006)
Outsourcing
PTZ/Biomass Technology Group
PTZ/Biomass Technology Fund I (2006, US$63m)
Cleantech
Rio Bravo
RB Nordeste II (2006, US$46m)
Generalist
Southern Cross Group Brazil
Southern Cross Latin American Private Equity Fund III (2007, US$751m)
Generalist
Stratus Investimentos
Stratus VC Fund III (2006, US$31m)
Cleantec
Temple Capital Partners
Clean Energy Brazil (2006, US$197m)
Cleantech
Vision Brazil
Vision Agro Fundo de Investimento em Participacoes II (2007, US$78m)
‐
Votorantim Ventures
Votorantim New Business (US$300m)
IT, life sciences
SUSTAINABLE INVESTMENT IN BRAZIL 2009
95
Figure 40: PE funds raised 2002‐2007 (source: EMPEA) May 2008
by PriceWaterhouse Coo-
food and beverage retailers Grupo RA and La Mansion,
110 transactions involving
and duty-free retailer Brasif. GP Investments is building an
mpleted in 2007, 57 were
integrated human resources company through acquisitions
ortfolio companies. Fund
of Grupo Suma, Top Service, and People Domus. Equity
ts of consolidation plays
International and GP Investments are building a portfolio
ich has been investing in
of shopping center developments through their 2006 co-
e region, such as Brazilian
investment in BR Malls.
f Brazilian GPs is a critical
Figure 41: Number of PE‐backed Public Offerings in Brazil (source: EMPEA) ÕLiÀÊvÊ* L>Vi`Ê*ÕLVÊ"vviÀ}Ã
ery.
25
cial sponsors) account for
21
hirds of the exits in 2007.
20
s with strategic sponsors
16
path to exit in Brazil. Re-
15 12
International’s exit from
adora (JMS) in exchange
10
9
umer credit bank Parana
ealized a US$12.5 million
5
h a sale to US protective Industries. In November
0
nts realized its investment
2004
2005
2006
2007
Source: ABVCAP, Bovespa.
Investing Trends ÕÊ6 É* Ê ÝÌÃ]ÊÓääÈÊÊÓääÇ Net Revenues 2006 (USD million)
Association
393 1746 161 308 305 3374 793 517 n/a 122 n/a
Private equity firms are bullish on Brazilian agricultural investments, in spite of the tight credit Investment Time to exit Estimated IRRs (USD million) (years) in US$ markets. Investors with cash say the current market turmoil will create opportunities in Brazil’s fast 11 2 481% growing agricultural sector, especially in the heavily leveraged sugar and ethanol sector, where 26 1 242% analysts expect a wave of mergers and acquisitions. Fuel production and energy drew the majority of 16 <1 199% investment in 2007. The attractiveness of sugarcane‐based ethanol production projects is being 100 5 40% driven by strong demand in Brazil (where 87 per cent of all new light vehicle sales are flex‐fuel cars) 78 9 36% and by global energy security concerns. Investors are also active in beef, coffee, bioenergy and 77 8 26% infrastructure, logistics and retail. 202 7 22% 49
8
9%
Exit Trends n/a 4 130% 2.5 7 32% 7 6 12% Trade sales (to strategic or financial sponsors) accounted for roughly two‐thirds of exits in 2007. Among trade sales, transactions with strategic sponsors continue to be the predominant path to exit in Brazil. Although rare during private equity’s early years in Brazil, IPOs became an attractive exit route prior to the current economic crisis. Of the 176 IPOs on the São Paulo Stock Exchange over 2004 – 2007, 30 per cent were companies backed by private equity or venture capital (Figure 41). Examples of private equity‐backed IPOs are shown in Table 25 and include DASA (now a component of the ISE index), TAM and GOL. 5
96
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 25: Examples of successful VC/PE exits, 2006 ‐ 2007 Exit Type
Company
Net revenues 2006 (US$ million)
Investment (US$ million)
Time to exit (years)
Estimated IRRs in US$
Equatorial
393
11
2
481%
1,746
26
1
242%
TOTVS
161
16
<1
199%
DASA
308
100
5
40%
Gafisa
305
78
9
36%
3,374
77
8
26%
ALL
793
202
7
22%
Localiza
517
49
8
9%
Akwan
n/a
n/a
4
130%
Autotrac
122
2.5
7
32%
Microsiga
n/a
7
8
12%
GOL
IPO
TAM
Trade Sale
Source: EMPEA (ABVCAP, Bovespa)
Developing Brazil’s venture capital industry The government‐owned Brazilian Innovation Agency (FINEP) (part of the Ministry of Science and Technology) has played a key role in building Brazil’s venture capital industry. The INOVAR Project was created by FINEP in 2000 in conjunction with financing from the Multilateral Investment Fund (MIF) (part of the InterAmerican Development Bank, IADB) as a financial mechanism to support small high‐tech start ups through venture capital funds. The project has since established 24 funds, half of which have been invested in by the MIF, and has also created the Inovar Seed Money program (Inovar Semente) to stimulate the generation of seed and early stage funds for small entrepreneurs. The INOVAR Project includes: INOVAR Fund Incubator; Brazil Innovation Forum; Brazil Venture Capital website; INOVAR Business Prospecting and Development Network; Development of capacity building and training programs for venture capital agents. BNDES has also played an important strategic role in the Brazilian PE/VC industry by emphasizing the development of venture capital in general and investments in PE in priority sectors.
Status of sustainable investment An analysis of sustainable investment practices in the Brazilian private equity/venture capital market can be broken down into three main (but overlapping) topics: Integration of ESG issues (primarily risks) into the investment policies of ‘mainstream’ private equity funds (i.e. funds that are not specifically focused on sustainability‐related investment themes).
SUSTAINABLE INVESTMENT IN BRAZIL 2009
97
‘Themed’ private equity and venture capital funds whose investment strategy is focused on ESG and sustainability‐related opportunities such as clean technology, biofuels, etc. In recent years, the bio‐ethanol industry has been a large part of PE/VC activity in Brazil. The environmental and social pros and cons of this industry are complex and are the subject of much debate. A more detailed discussion of these issues is beyond the ambitions and scope of this report.
Venture capital funds and related technical assistance programs focusing on social enterprises and sustainable entrepreneurs towards the ‘base of the pyramid’.
Mainstream private equity At the ‘mainstream’ end of the spectrum, few GPs and private equity funds in Brazil have formal ESG policies and procedures dealing with sustainability‐related risks and/or responsible investment values. There are a few exceptions particularly amongst funds whose LPs include multilateral/bilateral development finance institutions (DFIs). Such DFIs include IFC, the Inter‐American Investment Corporation (IIC), MIF, the US Overseas Private Investment Corporation (OPIC) and CDC. Table 26 lists examples of DFI‐backed funds. The policies of IFC and many other such DFIs stipulate that private equity funds in which they invest must follow certain social and environmental procedures, including negative screening on issues such as child labour and compliance with applicable national and World Bank standards and guidelines. DFIs such as IFC provide guidance on their environmental and social requirements and occasionally run training programs for their GPs. The UK‐based firm Actis, which has raised close to US$130 million for its Latin America Fund 3, has a well‐defined and comprehensive management system for incorporating environmental, social and governance issues into the investment process. This integration occurs at all stages of investment decision making, from origination through to investment appraisal and management of portfolio companies. Most other mainstream PE firms investing in Brazil concentrate more or less exclusively on corporate governance issues and have no systematic procedures for identifying environmental or social impacts or for subsequently engaging with the investee companies to improve environmental and social standards. Discussions with several Brazilian PE firms revealed that there has been little or no pressure from the majority of their LPs to conform to higher environmental and social standards. However, this situation is slowly changing: Brazilian pension funds are becoming more active in the PE/VC market and are seeking to implement the UNPRI in the asset class. PREVI, for example, has recently run workshops for GPs on the integration of ESG issues into PE/VC term sheets, and has expressed interest in developing additional sustainable investment standards and tools specific to PE in Brazil. Three PE firms – NSG Capital, Stratus and Sustain Capital – have signed the UNPRI. Other notable exceptions include DGF Investimentos, which has a strong framework of documented ESG policies and procedures, and a management team with impressive expertise in sustainability‐related risks and opportunities.
98
SUSTAINABLE INVESTMENT IN BRAZIL 2009
Table 26: Examples of Latin American and Brazilian PE funds backed by development finance institutions Inception year
DFI LPs include
Advent Latin American Private Equity Fund II
2002
IFC, IIC
Darby/BBVA
Darby‐BBVA Latin America Private Equity Fund
2003
IFC
Dynamo
Dynamo Puma II International
2003
IFC
GP
GP Capital Partners III
2005
IFC
Advent International
Advent Latin American Private Equity Fund III
2005
IFC
Paladin Realty
Paladin Realty Latin America Investors II
2005
IFC
GP
New GP Capital Partner B
2002
IFC
Actis
Actis Latin American Private Equity Fund III
2008
CDC
Patria
Patria Brazilian Private Equity Fund III
2008
CDC
Advent International
Advent Latin American Private Equity Fund IV
2008
CDC
Conduit Capital Partners
Latin Power III
2005
OPIC
PE Firm
Fund
Advent International
Clean technology and venture capital Venture capital and early stage start‐ups are especially suited to investments in environmental and clean technology sectors. According to New Energy Finance (NEF), by the end of 2007, worldwide venture capital/private equity (VC/PE) investments in clean energy companies was US$9.8 billion with VC investments reaching an all time high of US$3.5 billion. Despite the recent correction in public markets, NEF believes that the underlying fundamentals driving investments in clean energy remain strong, although deal sizes may become smaller. EMPEA provides extensive market intelligence on 15 cleantech investment in Brazil and other emerging markets . Brazil is the world’s second largest producer of ethanol as an alternative fuel, and is expected to surpass the US and Europe in production volumes by 2015. Given the high level of development of its biofuels sector (92 per cent of all gas stations sell ethanol), Brazil is extremely well positioned for continued strong profitable growth of its cleantech industry as energy security concerns grow and global demand for biofuels and corresponding technology such as flex‐fuel cars boom. In January 2008, the government mandated that all diesel fuel contain at least 2 per cent biodiesel, rising to 5 per cent by 2013. Seven biofuels deals accounted for nearly US$600 million (as much as 20 per cent) of private equity investment in 2006–2007. Notable deals in 2007 included Brenco, a new holding company investing in Brazilian bioethanol production, which raised US$240 million from a consortium of high profile investors including Vinod Khosla, James Wolfensen, Steven Bing and Steve Case. In March 2007, the Carlyle Group and Riverstone Holdings invested US$240 million in four ethanol mills. Clean Energy Brazil paid US$130 million for 49 per cent of ethanol producer Usaciga and in October 2007, Goldman Sachs invested US$221 million in Santelisa Vale, Brazil’s number two sugar and ethanol producer. Notable biofuels IPOs have included the US$200 million IPO of Sao Martinho, a sugar and ethanol producer, on the São Paulo Stock Exchange in February 2007. More than half its shares were acquired by foreign investors. Cosan Ltd, Brazil’s largest sugar ethanol producer, raised US$1 billion on the New York and São Paulo exchanges in August 2007. In addition to ethanol production, Brazil has also seen investments in timber, wind energy, and renewable plastics. Dow Chemical and Brazil’s Crystalsev announced plans to build the world’s largest polyethylene from sugar cane plant in July 2007, and Econergy International announced the purchase of the Pedra do Sal wind project. 15
Insight Cleantech: An overview of trends in select sectors and markets EMPEA (April 2008)
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99
Local PE firms investing selectively in ‘sustainable’ markets include Rio Bravo, whose portfolio includes Hortus (organic vegetable production), Agira (gas station compressors for fueling natural gas powered vehicles), Ecoluz (an energy service company), ADESPEC (an award‐winning supplier of environmentally friendly adhesive solutions) and Perenne (water and effluent treatment technology for industries such as ethanol and pulp & paper). A number of “greentech” PE/VC funds have been launched by local managers over the last year, most of which have evolved from FINEP’s highly successful INOVAR program and respond to innovative RFPs issued by BNDESPAR. Stratus closed its US$60 million Stratus VC III Fund in 2006 and started investing in 2007. The fund invests in biomass, biotechnology/biodiversity, and environmental technologies companies in Brazil. The portfolio includes Ecosorb (an oil spill pollution response firm) and Brazil Timber (FSC‐certified sustainably managed native forests). LPs include BNDES, FINEP, PETROS and MIF. DGF has raised US$140 million for its Terra Viva Equity Fund. The firm is primarily targeting Brazilian players for its fund, which will invest in the entire ethanol chain including raw material producers, manufacturers and transport logistic operators during its 10 year life cycle. The fund’s investment strategy places a strong emphasis on labour standards and does not permit investment in sugar cane in the Amazon. Sustain Capital and its controlling shareholder Latour Capital have been selected by BNDES to manage BRASIL SUSTENTABILIDADE, the first private equity fund incorporated in Brazil associated with the Clean Development Mechanism (CDM) of the Kyoto Protocal. The fund is unique in that it invests only in companies that have CDM projects, but does not take the carbon revenue. BNDES is the cornerstone investor with US$100M and the GP is now capital raising with other investors. The pipeline consists of three‐four expansion investments and one‐two greenfield investments. The fund’s primary focus is renewable energy. It will also seek investments in forestry projects (mainly charcoal), where the strategy is based on replacing use of native forests with use of eucalyptus, combined with more efficient kilns that fix more carbon in the charcoal. Sustain Capital has developed a comprehensive sustainability screening tool covering environmental, social and governance issues. Sustainable entrepreneurs Brazil is one the main hubs of the New Ventures program, an initiative of the World Resources Institute (WRI) that aims to promote sustainable growth in emerging markets by supporting and accelerating the transfer of capital to businesses that deliver social and environmental benefits at the base of the economic pyramid. New Ventures focuses on small and medium sized enterprises in fast‐ growth, environmental and base‐of‐the‐pyramid (BoP) sectors such as ecotourism, renewable energy, clean technologies and water management. Each New Ventures country program releases an annual Call for Business Plans from businesses in target sectors seeking investment from US$100,000 to US$5 million. New Ventures screens businesses for financial outlook, innovation, market potential, and social and environmental benefits. Once selected into the New Ventures Portfolio, SMEs receive intensive business consulting services that improve their business plans, help increase sales, and better prepare them to move into new markets. Investors have an opportunity to interact with the New Ventures companies at an annual New Ventures Investor Forum. New Ventures Brazil is run in partnership with CES‐FGV and is sponsored by Banco Real and Natura amongst others; the program also works with other Brazilian organisations such as FINEP, ABVCAP and BNDES. The Brazilian portfolio currently consists of over 40 SMEs, ranging from ethical clothing and organic baby food to sustainable aquaculture and fuel cell technology. New Ventures’ November 2008 investor forum in São Paulo was hosted by BM&F Bovespa and attracted over 180 participants. To date, New Ventures’ Brazilian program has helped five enterprises to attract investment of R$13.5 million (US$5.8 million). Venture capital funds specialising in this segment of the market in Brazil include Axial PAR and E+Co.
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