by: Michel Riemersma
29 October 2018

The election of the ex-military far-right politician Jair Bolsonaro as Brazil’s next president puts the country’s economy on the path to heavy deregulation. Bolsonaro’s campaign promises include backing off from the Paris climate agreement, the abolishment of the Brazilian ministry of environment, stripping indigenous peoples’ land rights and opening the Amazon to mining and agriculture. In face of a government withdrawing from its environmental and social responsibilities in the Amazon and the Cerrado regions, both with a unique biodiversity, companies and investors who are committed to the fight against deforestation and land grabbing will have to develop alternative due diligence mechanisms.

The election of Bolsonaro threatens to further deepen the crisis in environmental regulation in Brazil. The current government policies and practices to counter deforestation in the Amazon and the Cerrado are far from sufficient: deforestation in the Amazon reached an 11-year high in 2018. NGO La Ruta Del Clima notes that under current president Temer “the budgets for the environment ministry and environmental enforcement agencies, Ibama and ICMBio, were cut dramatically as his administration attempted to handle a growing deficit”.

But that is not the only reason for the shift in politics. In a recent report on European and US downstream companies involved in controversial Brazilian supply chains, Amazon Watch stated that “agribusiness has built tremendous financial and political clout, which is reflected in its power to shape Brazilian politics. The industry has also led a campaign, enacted by the ruralista bloc, to gain access to arable land to expand farming operations, and to build and upgrade export-related infrastructure to increase profits”.

While the corruption tainted ruralista bloc (politicians promoting the interests of large scale farmers and land owners) lost some seats in the Congress, their potential alliance with Bolsonaro and his party could become an even greater risk to the environment. With no decent licensing process for land acquisition and deforestation in place, all companies sourcing soy, beef, timber and other commodities from Brazil should increase their own due diligence regarding their supply chains. It will become less and less possible to rely on government regulations and law enforcement.

Opening up the Amazon will also require huge infrastructure investments. With Brazilian construction giant Odebrecht still suffering the consequences of the corruption scandal it was entangled in, foreign construction companies and investors are likely to play a major role in paving roads and building railways in the Amazon. A lot of the investments required will come from China. China included Brazil in its One Belt, One Road initiative and has increased its investments in Brazil in 2017.

Furthermore, while European soy importers are shifting from Brazilian to US imports, the US-China trade war has increased the Chinese demand for Brazilian soy. Therefore Chain Reaction Research concludes that “due to the impact of the U.S.-China trade war, the outcome of the Brazilian election, and the effects of increased soy acreage growth on deforestation, investments in the soy supply chain might be affected going forward: although profitability in the Brazilian soy supply chain will likely rise, investors may also have to confront growing ESG risks”.

Amid the political turmoil in Brazil, it is up to companies and investors to take a stance and show their customers and stakeholders what the value of their deforestation and human rights commitments is. Ensuring a deforestation-free supply chain or portfolio will become increasingly difficult in this uncertain environment. Companies that are committed to stop deforestation and human rights violations will have to strengthen their supply chain due diligence. Investors that have signed the Cerrado Manifesto, the Investor Initiative for Sustainable Forests or have made other zero-deforestation commitments, should enhance their due diligence and increase the engagement with the companies they are investing in.

Photo: Pedarilhos