Can Lula Revive Brazil's Deteriorating ESG Reputation?

Lula, as the president-elect is widely known, is expected to advance reforms aimed at promoting sustainable investment in Brazil, with a particular focus on curbing deforestation in the Amazon. But there are limits to what he can accomplish.

Facing financial hardships that include rising prices and a labour market slowly recovering from the pandemic, many Brazilians are more concerned with putting food on the table than with ESG issues. Strongly intervening to reverse the main ESG risk that flourished under Bolsonaro, environmental deregulation, is of little concern to many Lula voters, including those in the centre-right who joined his narrowly-winning coalition, if doing so hinders economic growth. And with the strong presence of Bolsonaro’s conservative, agribusiness-backed allies in Congress, Lula’s anticipated green reform programme could meet stiff political opposition.

Brazil, the tenth-largest economy in the world, has long been a major recipient of FDI, its manufacturing, services and agricultural sectors the main beneficiaries. Yet over the course of Bolsonaro’s tenure, international investors worried that his disregard for ESG issues left them exposed to criticism from shareholders and activists – especially more recently as the sustainability of international investments face greater scrutiny in the post-Covid era.

During Bolsonaro’s time in office, deforestation of the Amazon hit a 15-year high, with environmental regulations rolled back, funding for regulatory agencies slashed, and commercial logging and mining in the region encouraged. Under international pressure, Bolsonaro pledged to reduce Brazil’s carbon emissions and eliminate illegal deforestation by 2030, but took no concrete steps to make that happen.

While his poor environmental record loomed large, investors have also been concerned about supply chain labour issues – including allegations of child labour and slave labour in the acai and cocoa industries, among others – as well as a failure to address endemic and historical racism. This is starkly evident in domestic business, where Black Brazilians make up a tiny percentage of corporate directorships, despite comprising around 50 percent of the population.

FDI investors, feeling international pressure, sought to mitigate ESG risks even in the absence of a requirement to do so. This included, for example, supporting carbon offset projects and by implementing diversity-promotion policies in portfolio companies. Without an on-the-ground presence in the country, FDI investors have increasingly relied on due diligence to verify the human rights, community relations, and environmental records of potential partners or investments.

Having shown himself to be a pragmatic leader, willing to seek out and work with international partners, Lula appears to be aware that ESG issues are highly important to many contemporary international investors. Attracting the FDI he needs to help boost Brazil’s sluggish economy requires having ESG policies in place that appeal to foreign investors. And given Brazil’s largely commodities- and resource-dependent economy, increasing sustainability in those sectors will arguably attract further international investment.

On the campaign trail, Lula courted the environmental and indigenous vote, signalling his intention to champion a ‘Green New Deal’ and enhance indigenous rights. In terms of specific policies, he has proposed conserving large swathes of the Amazon, subsidising sustainable farming practices, increasing environmental enforcement, and reforming the tax code to benefit a green economy. Indeed, these proposed policies go much further than those he previously pursued as president between 2003 and 2010, when he notably put the brakes on deforestation.

As he did in his previous two terms as president, Lula will look to improve social conditions in Brazil, hoping that rising commodity prices will help to provide at least some of the necessary funds. That means he cannot afford to impose too many restrictions on the revenue-generating mining and agribusiness sectors in pursuit of his ESG agenda. Moreover, if he does, Bolsonaro allies, close to a majority in both houses of congress, will very likely push back.

In the short term, Lula will likely aim to reverse at least some of Bolsonaro’s deregulation, primarily concerning the environment. Many investors will likely regard this direction of travel, however modest initially, on ESG issues as encouraging and reassuring. Given the political and economic challenges of enacting Lula’s larger agenda, however, investors will still need to pay close attention to a changing and potentially uncertain regulatory framework around ESG policies in Brazil as the Lula presidency gets underway.

This article was first published in fDi Intelligence.