Brazil’s Lula Embraces ESG Just As World Starts To Hate It

Brazil’s government is getting in on the Western world’s climate grift at a time when people are starting to question it.

It is a mystery why Brazil wants foreign entities to base their trade and finance decisions on how many trees are standing in Amazonas or how many women are on the Board of Directors. Prediction: Brazil’s ESG embrace will go down one day as a lesson learned.

President Lula campaigned on a pro-environment platform. That mainly was done to appease off-the-books European donors to the Workers’ Party who hated President Jair Bolsonaro. To them, Bolsonaro was just another “tropical Trump”. And while deforestation in the Amazon rose under Bolsonaro, it was no higher than in the Lula years.

Lula can only say that deforestation fell under his watch and rose under Bolsonaro’s, but neither man had any say in that. Lula was not out banning chainsaws and matches, and Bolsonaro wasn’t handing them out, either.

When a windstorm took smoke from Amazonas wildfires into Sao Paulo city and turned day into night in 2019, Bolsonaro became the Latino climate villain. He was responsible for the “lungs of the earth burning,” which was the narrative out of Paris and Hollywood.

So Lula is back and has vowed to reduce deforestation in the jungle. He also promised to capitalize on Brazil’s hydropower to put the country on a path to sustainable development — though Brazil is so underdeveloped that this is more political banter for United Nations meetings in Manhattan in autumn. (Brazil has lower electricity prices than Europe, but its electricity prices per kilowatt hour are more expensive than all of the BRICS countries.)

“There are clear signs that the administration is finally moving forward with its energy-transition agenda,” analysts from TS Lombard in Brazil wrote in a note on Friday. “The government’s success (in the Amazon) will contribute to a significant improvement in Brazil’s image abroad and demonstrate that with the right plan, it is possible to reduce deforestation in the Amazon, despite the high cost and logistical challenges.”

In August, Finance Minister Fernando Haddad, also from the Workers’ Party and a former Sao Paulo governor, launched the Ecological Transition Plan. The plan aims to increase investment in environmentally sustainable segments of the economy while reducing social inequality.

TS Lombard said the plan is the backbone of the government’s broader reindustrialization plan, “which seeks to leverage the country’s abundant, cheap renewable power to revamp Brazil ‘s moribund industrial sector.” (Sorry, still too expensive versus BRICS rivals and Mexico.)

As part of the Ecological Transition Plan, Brazil’s Treasury Department is preparing to issue “green bonds” this year. These bonds will be used to finance ESG-related projects and will likely be used as a way to woo European lenders to buy the debt. That’s it.

ESG stands for Environment, Social and Governance.

Treasury officials will be doing roadshows this month to pitch the issuance of the ESG bonds to foreign investors. The total amount of issuance has not yet been announced, but TS Lombard said that Treasury Secretary Rogério Ceron is planning to channel around $2 billion to another fund they call “The Climate Fund,” operated by Brazil’s Social and Economic Development Bank.

Brazil’s government, including Lula in previous years, has long said that if the Europeans, who barely have any forests left, want the Brazilians to preserve the Amazon, they should pay for it. This might be the way.

In 2022, the volume of ESG-related debt issuance reached 63 billion Brazilian reals, down from 92 billion reals in 2021, according to TS Lombard. From January to August of this year, some 28 billion reals in new financing for “ESG-related projects” was handed out, according to Brazilian ESG consulting firm Natural Intelligence.

“This is a niche market that is still in its early stages in Brazil, and the country has strong potential to develop it into a leading market among emerging markets in the coming years,” writes Elizabeth Johnson of TS Lombard.

Brazil may eventually discover that ESG investing will come with strings attached, not unlike IMF loans in the 1990s during the bad ole days of the Washington Consensus. (Though it might be a good way to fund EV charging station infrastructure in Sao Paulo, for example. Or a wind farm somewhere.)

Moreover, other than hydropower, Brazil’s moribund industrial base is not remotely equipped to become a green tech power. Instead, it will import solar from China or have Chinese multinationals set up shop to do so in Brazil. It won’t have an EV industry, except one powered by China, the only one that is likely to come close to the price points Brazilians can afford.

Hydropower is complicated, as Lula already knows, with the Belo Monte dam built when he was first president. That dam became the source of a short documentary by Avatar director James Cameron, who likened its construction to the Earthlings attacking Pandora.

Brazil’s iron-ore giant Vale, steel giants like Gerdau, and commodity producers like Cosan will all be seen as the enemy one day by ESG financiers; you wait.

The United Nations-initiated Principles for Responsible Investment (PRI) is going after Australia, a country not all that different from Brazil. It is a huge commodity producer.

Western money managers in the PRI want Australia to accelerate its decarbonization plans because they say climate change adds to investor risks regarding the country’s debt. I cannot imagine Rio Tinto and BHP Group liking this.

If climate change is risky to investment-grade Australian bonds, imagine Brazil’s speculative-grade bonds?

I hope Lula is ready to accept the Keep Amazon Green policy or face a capital squeeze or a call on its green bonds. (I just made that up. There is no such thing as Keep Amazon Green, as far as I know. But there will be.)

Australia is the first country the Collaborative Sovereign Engagement on Climate Change initiative is targeting, The Straits Times of Singapore reported today.

Their ESG overlords are punishing them.

To them, Australia “has underperformed other Organization for Economic Cooperation and Development countries significantly in terms of climate indicators,” said Mr Peter van der Werf, a PRI committee member.

Brazil’s embrace of ESG, even if it is just a way to grift off European lenders, comes at a time when even former ESG fans in the U.S. are thinking twice.

Vanguard quit the Net Zero Asset Managers Initiative last year. Reuters said it was because of Republican pressure. That’s too easy of an argument. Vanguard quit it because it’s not a bar they will reach.

BlackRock
BLK
is backing off from ESG, too. It’s become too politicized, which is true.

But perhaps the best way to look at ESG is a tool for private capital control of markets and sovereign nations that benefit large, global conglomerates. It is also potentially a type of private sanction — either you are with this policy on the climate, or you’re not getting our business. When one or two companies are like this, that is fine. You can go to someone else. When a group of big finance all think the same way, mostly from the U.S. and Europe, emerging markets like Brazil can be impacted negatively.

Investors can put the squeeze on countries for not following climate orders or some other social justice issue of the day. It is worth noting that global manufacturing powers like China and India do not comply with ESG. China might play lip service to it. Same with India.

In the U.S., the political landscape for ESG is pretty bad. I suspect the same will happen statewide in Brazil, especially in states unfriendly to the Workers’ Party.

Texas law bans insurance companies from using any ESG metric on whether or not to insure a company. Many of these insurance companies are European-owned, and these guys are ESG fanatics.

Florida Governor Ron DeSantis banned public pension funds from using ESG in its investment decisions. If pension funds were allowed to do that, they might not invest in a fossil fuel producer, for example. Or maybe they would balance their portfolio to have a certain percentage of companies run by minorities. These metrics often go against the fiduciary duties investment managers are bound to when managing other people’s money.

Vivek Ramaswamy, who is running against DeSantis in the Republican Presidential primary and is the founder of Strive Asset Management, is anti-ESG. The asset manager explicitly seeks to pressure companies to abandon their pursuit of U.N.-recommended ESG goals in favor of just making a profit for shareholders instead, the Financial Times reported.

More than one-third of states in the U.S. have passed anti-ESG laws in 2023.

Anti-Lula states in Brazil could easily do the same, as Brazil loves to copy the U.S.

Most ESG-related shareholder proposals here have failed to garner majority support. New lawsuits have been filed challenging companies’ ESG-related activities and decisions, with companies like BlackRock now distancing themselves from the term “ESG” itself.

Brazil, you have been warned.