Shareholder Activism: Can Cattle Ranching Investors Help Stop Deforestation in Brazil?

The expansion of agriculture is the leading driver of deforestation in the tropics. But can investors help break the link between agriculture and deforestation?

Brazil is the world’s largest beef exporter and a key part of the national economy, with more than 2.5 million farmers raising cattle– but the sector also has a darker side. Cattle ranching in Brazil is the single largest driver of forest loss globally – 20% of all commodity-driven deforestation in the tropics is linked to cattle farming in Brazil. Forests are cleared to make way for new pasture, releasing roughly 540 million tonnes of carbon annually into the atmosphere in the process.¹

Usually, the blame for this destruction is laid at the feet of farmers and criminal gangs who clear land (before sowing grass seed to create pastures) to make a profit. 

Public Funds: Financial Support For Cattle Ranching in Brazil

Historically, the Brazilian cattle sector has been a big recipient of financial support from the national government. A recent study by Instituto Escolhas, a sustainability think-tank, found that Brazilian cattle ranching received 27.4 billion euros in subsidies, incentives, and debt relief between 2008 and 2017.²  In some years, the cattle sector received even more from the public purse than it paid in taxes. 

Until recently, the Brazilian development bank was a large stakeholder in some of Brazil’s biggest beef-producing companies, including JBS and Marfrig - two meatpackers that handle 37% of all Brazil’s beef exports.³ In early 2020, the Brazilian development bank sold 425 million euros worth of Marfrig shares and plans to sell its 21% stake in JBS.⁴ With the government stepping back financially from Brazil’s beef enterprise, private finance is now moving in.

Can Private Investors Make Cattle Ranching More Sustainable?

According to Chain Reaction Research, a non-profit consultancy specialising in sustainability risk analysis, this has opened the gap for several “controversial investors” with links to corruption and illegal deforestation.⁴ Others see this wave of private investment as an opportunity to tackle the issue of deforestation: if new investors, including European and American banks and pension funds, see deforestation as a reputational and financial risk, they can put pressure on the invested companies to clean up its supply chains–an example of ‘shareholder activism’.

Shareholder Activism: A New Model

Professor Sandra Waddock is Galligan Chair of Strategy at the Boston College School of Management and has decades of experience working in sustainable business. She points out, “There have been some successes with shareholder activism in the past around issues like equity policies in companies and, early on, divestment from South Africa when the Apartheid regime was in full swing - as a measure to counter that regime.” Can this model now be replicated for agriculture? 

Monitoring the Environmental Impact of Brazilian Agriculture

One of the largest soy traders in Brazil, Bunge, responded to shareholder activism by committing to zero deforestation in the Cerrado region, a vast savannah which is the hotspot for soy expansion.⁵

But in truth, most shareholders and fund managers are unaware of the sustainability performance of the companies they invest in. One reason for this is the lack of standardized data on the environmental impact of beef-producing companies.

This is changing, however, with 2.55 trillion euros now invested into existing monitoring systems, which score companies on environmental, social and governance (ESG) indicators. However, the quality of this data is often criticized for being unreliable, as it is based in part on what environmental policies companies say they do, which may not necessarily reflect what they put into practice.⁶  

Positive Environmental Pressure From Private Investors

In July 2020, seven major European investment firms threatened to divest from Brazil, including its cattle ranching sector, if deforestation was not brought under control. In fact, Nordea Asset Management (a 230 billion euro investment firm) have already dropped its stake in JBS.⁷ This prompted 38 Brazilian companies, including Marfrig, to write to the Brazilian government and call for improved enforcement of existing policies to control deforestation. While companies must step up efforts to eliminate deforestation in their supply chains, they argue they cannot do it alone; the government also has a key role in discouraging deforestation.⁸ 

But will pressure from investors lead to real change? “Shareholder activism is one part of the picture”, said Professor Sandra Waddock, “but such activism is insufficient by itself to bring about necessary change. We need policymakers to bring mandates that require significant changes in company practices. Media attention is also an important factor, along with shifting industry standards and norms, as well as competitive pressures brought by customers demanding greater sustainability”.