As investors up their focus on ESG, Brazilian companies are finding themselves more and more in the spotlight.
Home to 60 percent of the Amazon rainforest, Brazil (and its issuers) will always be at the center of discussions around climate change. The Covid-19 pandemic and Black Lives Matter movement, meanwhile, have thrown renewed attention on Brazil’s high level of social inequality.
Last year investors gave companies leeway over ESG issues as they responded to the outbreak of coronavirus, says Agnes Blanco Querido, director for Brazil at Morrow Sodali – but 2021 is set to bring more scrutiny. Below, she discusses with IR Magazine the growing focus on ESG in Brazil and how companies are responding.
How has the focus on climate change and other environmental issues evolved in the Brazilian market?
We are a market that is very intensive in natural resources and agriculture, two industries that have a large carbon footprint. Companies are under more pressure to commit to specific goals by specific deadlines. So far we don’t see commitments as strong as we see in Europe or the US, but companies are discussing climate change and addressing it in their strategic plans.
Attention was heightened by the Amazon fires in 2019, which became a political source of attrition between the president of France and our president. This criticism within the political spheres spilled over to the companies.
This is a topic we see come up when we have engagements with the ESG or stewardship teams of investors, even if the companies are not in sectors that are directly connected. We will hear questions like: do you have business close to indigenous areas? Do you have anything in your supply chain that could be damaging the forest?
What is the legacy of Brazil’s corruption scandals on attitudes to corporate governance?
Brazil has a long history of political corruption. There were scandals of companies in the past that had agreements with the government in terms of payments and other ‘benefits’ to get concessions, for instance. Once the scandal with Petrobras went public, governance became a key priority for investors to focus on to make sure the right governance framework was in place in order to avoid similar situations in the future.
It’s still a delicate situation. Brazil is not the most stable country, and we have a very controversial president right now.
For the companies we work with, we make sure their disclosure and governance are aligned with international best practices. If they take part in a government bidding process, we point out that they need to ensure everything is monitored and reported back to investors, to give them comfort. Many companies lost a lot of investors [because of corruption scandals] and they want to get these guys back on the register.
What are current practices like in terms of ESG engagement?
It’s still early stages. That’s one of my biggest struggles – trying to educate companies on why ESG engagement is an important thing to do. It became a more urgent topic when international investors started bringing ESG analysts to meetings, and they would ask questions the IR teams didn’t know how to answer. Now we are seeing companies think about how to better integrate their sustainability and IR department to get the messaging right.
Traditionally, local investors have been more short term-focused but they are also thinking more about how to improve engagement with companies, especially on governance and other ESG-related issues.
This is something that accelerated in 2020 as companies realized they needed to look at ESG more closely. We’re starting to see a few companies putting independent board members in front of investors – that was previously unheard of in Brazil.
What might be particular areas of focus for the 2021 proxy season?
Board composition has always been a topic here in Brazil. We’ve seen comments from ISS and Glass Lewis, as well as from investors that tend to be more open about their requirements, on their policies for the coming year. They are calling for higher minimum levels of board independence and diversity.
For starters, a big problem we need to solve is to have more women on boards. And then to add to that discussion, there was the spill-over impact of the Black Lives Matter movement. Brazil is historically a country with huge inequality in terms of income and education, not only racial injustice. So diversity is a much larger issue, not just about gender and race, but also about access to education.
Naturally, remuneration is also an issue. We are miles away from what is considered best practice disclosure in terms of executive compensation. A couple of years ago, companies started disclosing the maximum, minimum and average compensation of their top executives. There’s no company that will publish an individual director’s compensation scheme. (There’s been a claim in the past that it is a security issue.) But there is increased pressure on companies to improve their disclosure, especially around KPIs and the frameworks for long-term incentives.
What happened to retail investment in Brazil during 2020?
We have seen a 90 percent rise in the number of retail investors on the stock market. We used to have very high interest rates, so everyone would invest in fixed income. Last year, given everything that happened with the economy, the rates dropped to a historically low 2 percent. This investment is obviously not as attractive, especially for retail.
There are a lot of new platforms. The large banks have significantly rebuilt their offerings to target this new audience. A lot of funds were created as well – with some you can invest from as little as R$10 ($2). It has obviously created a lot of discussion about regulation... but, generally speaking, this is a positive for the country as it will boost the development of the capital markets.
Are the new retail investors influencing how companies think about ESG?
The participation of retail in shareholder voting is minimal. Last year, however, we saw a surge in the number of social media influencers – focused on retail investors – who give opinions on stocks or criticize what companies are doing. This can create a huge PR problem for the company, which in turn can generate problems in terms of how the governance is perceived by institutional investors. It’s an area of attention, for sure. Some companies are concerned about finding better ways to engage with retail investors.
