At the annual ABRAPP (Associação Brasileira das Entidades Fechadas de Previdência Complementar, the organization representing pension fund managers in Brazil) conference, sustainability was one of the headline topics. The conference allowed for in-depth discussions with Brazilian institutional investors, regulators, officials from B3 (formerly known as Bovespa and now the largest exchange in Latin America), trade groups promoting sustainability, and various asset managers. The conversations with the referenced parties centered on ESG issues in Brazil and the future of ESG investing in that particular market. What was apparent from our meetings with these market participants is that there is a great deal of genuine interest in ESG backed with extensive knowledge on the topic. Here are the key takeaways from those conversations.
Timing Is Right for Interest in ESG-Driven Solutions
Brazil finds itself coming out of the country’s biggest corporate scandal, called Lava Jato (“car wash”), which involved Petrobras (Brazil’s largest state-owned enterprise), large contractors who were paying bribes to Petrobras to procure bids, and senior government officials who received payouts from Petrobras executives. According to Brazilian authorities, the payouts and fees associated with Lava Jato exceed USD 2 billion. There is clear momentum given this backdrop and it appears that corporate governance and shareholder value maximizing (i.e., long-termism or the “G” aspects of ESG) are on the top of the priority list for market participants. In fact, the agenda and topics covered in the ABRAPP conference centered mostly on governance issues. Given that Brazilian interest rates are coming down and stabilizing, the environment makes sustainability-driven, multi asset class solutions attractive to market participants.
Education and Brazil Focus Approach Are Instrumental to Success of ESG in Brazil
There was considerable appetite for knowledge sharing and most market participants shared that they desired to start the process of implementing sustainability in their portfolios but did not know exactly where to start. The success of ESG in Brazil, or for that matter, anywhere, will be largely dependent upon the extent to which the active parties in the field of sustainability offer sufficient research and data on local companies and whether the right investment solutions exist. In both cases, a more Brazil-oriented approach is needed rather than a pan-Latin American approach. Brazilian institutional investors realize the importance of ESG investing and accept the fact that it is here to stay, and therefore the age-old misconception that ESG is return detractive did not come up as an obstacle for ESG. What appeared to be more of a hindrance was some confusion as to how to start this process more than whether to do so.
Where to Start?
Although asset managers noted that market participants have not demanded ESG products per se, asset owners then complained that there were little ESG products or offerings for them to access. However, one area that has the potential for growth in the immediate future is green bonds. Overall, green bond issuance in Brazil accounts for 0.2% of the total bond market in Brazil, compared to 4.0% of issuance in the global bond market. Brazil has made considerable progress in the past three years on green finance despite suffering a recession, and it is estimated that the second half of 2017 will see approximately USD 800 million in green bond issuance in Brazil for wind energy generation projects.
Given that many of the Brazilian market participants with whom we met are signatories to the Principles for Responsible Investment, for ESG driven investment solutions to take greater adoption will require implementation of the Principles and actually having sound ESG policies and practices in place. As leaders in the passive ESG solution space, sharing our collective knowledge at S&P Dow Jones Indices with the Brazilian market will help speed up this process and help promote investor engagement across the globe.