Opinion – Rodrigo Tavares: After two years of the ESG bubble in Brazil, what are the results?

When it ended, the feeling of the participants was unanimous: it was the best ESG event ever organized in Brazil. With dozens of relevant national and international experts, the Converge Capital Conference, held in February 2020 in Rio de Janeiro, marked the beginning of seismic activity around ESG.

In the two years that followed, possibly no other country witnessed as much public activity—themed events, corporate announcements, press coverage—on this topic. Brazil was no neophyte in corporate sustainability. The first initiatives date back to the 1980s. But the eruption of the ESG agenda, with the respective nationalization of the agenda, is very recent.

In 2022 the euphoria ended. Fabio Alperowitch, from Fama Investimentos, one of the main ambassadors of ESG themes, participated last year in 128 events dedicated to sustainability or ethics. But “in 2022, this volume dropped by around 80%. We are in the mood for the end of the party. One of the positive consequences is that the debate around sustainability has been released. In the financial market, it is no longer seen with derision or in an ideological way. But we have to make an evaluation of results,” said the manager.

First do it and then celebrate or first celebrate and then do it? Brazil opted for the second path. Promises came first, then announcements, followed immediately by celebrations. The press reported. With prominence, very, disproportionate. And an ESG bubble was created, a distorted vision between discourse and practice.

Four managers contacted by the column pointed out that the interest of Brazilian clients in portfolios managed from an ESG perspective has not grown. “Interest was non-existent and remains limited,” said one from London. Brazilian managers continue to avoid integrating ESG data, practices and policies in a systematic and systemic way in asset management and focus their activities on product launches. And even these start to be less common in 2022. In the last two years, only a handful of managers, among the approximately 650 that operate in the Brazilian market, have done laudatory work in sustainable finance.

Pension funds —the instigators of the ESG agenda in countries such as Canada, the United Kingdom, the Netherlands or Japan— despite public commitments and informal signals of interest, in Brazil continue without transposing their flows towards sustainability. Banks have been restless and have made several announcements of new lines of credit with an ESG bias. But this type of loan only populates a small portion of the portfolio.

“ESG grew in Brazil under the expectation that the flow of capital from abroad to these products would be significant. But this flow did not arrive. Neither Brazil is interested in ESG nor ESG investors are interested in Brazil,” says Alperowitch.

In 2021, the upturn in commodities such as soybeans, sugar, meat, iron ore or copper fueled the traditionalism of managers and companies. If it’s possible to make money without sustainability, why risk it? In addition, Brazil is going through a phase of deterioration in the political, economic and fiscal situation. Again, why risk it?

There are, however, many companies that have looked at sustainability not as a daring detour, but as an opportunity to maximize value. Natura is no longer an island in an ocean of unsustainables. More and more Brazilian corporations are adopting sustainability practices in their culture, operations and strategy. The ISE (Corporate Sustainability Index) portfolio has dozens of companies. In the DJSI World there are nine Brazilian companies. Outside of the indexes, there are many more.

Almost everything still needs to be done to encourage SMEs, which correspond to 99% of the Brazilian business fabric, to be more sustainable, but organizations such as Fecomercio are aware of the problem and are discussing internally how to tackle it.

In these two years, one of the highlights was the issuance of ESG debt securities. According to consultancy Sitawi, there were 109 operations of this type, totaling R$ 84.5 billion. In 2020, there were 43 operations totaling BRL 30 billion (BRL 147.6 billion). At a global level, in 2021, this market reached US$ 1.6 trillion, or US$ 763 billion in 2020 (R$ 7.87 trillion and R$ 3.8 trillion, respectively). Only “green bonds” were US$ 620 billion (R$ 3 trillion) in 2021.

Another highlight was Anbima’s launch of prerequisites for sustainable funds and funds that integrate ESG aspects into their management. It was one of the first regulators in the world to do so. These guidelines are the best antibiotic against “greenwashing” (appropriation of environmentalist virtues by organizations or individuals).

But there is still a need to invest heavily in education. In these two years, several executive courses of a few days in corporate sustainability or sustainable finance have germinated, but Brazilian business schools still do not have a broad curricular offer on these topics. In contrast, Wharton has 27 MBA electives dedicated to sustainability. INSEAD, 10; the Nova SBE, 30.

The lack of information is a brake on the growth of the ESG market in Brazil. It is still common to think that investing according to an ESG logic only means investing to generate a positive impact on society or the environment. Or does it mean investing only in companies with good ESG credentials. Currently, my research focus at the university is on mathematically demonstrating that, in fact, channeling capital to high-end ESG companies means sacrificing profitability opportunities.

The lack of knowledge is not an exclusively Brazilian mark. In 2021, a global survey by Natixis indicated that 41% of investors do not invest capital in ESG funds “because they do not have mastery of the subject”.

While in Brazil the feeling is that the party is over, in Europe, the USA and the Gulf countries the feeling is that the party is just beginning. Climate risks are increasingly a decisive factor in corporate decision-making and European and US ESG legislation is increasingly tight.

In addition, ESG data, products with sustainability labels, technical standards for sustainable products and product traceability are expected to become ubiquitous. And the work of the ISSB (International Sustainability Standards Board) will lead to the fusion of accounting data and sustainability data.

The latest data from the Annual ESG Manager Survey shows that 100% of UK managers, 97% of European managers (excluding UK) and 95% of Canadian and Australian managers already explicitly integrate ESG data into investment practices.

My optimism about Brazil also re-emerges. Starting in January 2023, the new residents of Alvorada and Jaburu will take Brazil out of the prison of sustainability, a new flow of capital will arrive in Brazil as the taps to the Russian capital market are closed, and the end of the ESG euphoria is more conducive to stability and professionalism.

But it will not be a path without challenges. “After two years of the boom and euphoria of the ESG agenda in Brazil, it’s time for the ecosystem to have the difficult conversations about the actions and investments really necessary to make effective advances in social development and green transition”, said Marina Cançado, the creator from the Converge Capital Conference.

Will there be people interested in participating in these conversations?