Conservation finance: How to save the Amazon

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By:
Rob Dwyer
Published on:

Deforestation – and the cattle farming that largely drives it – has caught the world’s attention. While some environmentalists suggest punitive measures to make Brazil a better steward of the forest, there are already more constructive, private-sector responses to the challenge. Can they scale quickly enough to save the Amazon?

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IN ADDITION        

We had a visit from a German student recently. She said she was here researching for a doctorate in some environmental course or other. But she thought that she had all the answers already.”

The farmer pauses to drain his breakfast espresso. “She told me we should be planting trees. All farmers – half their land.” He laughs afresh at the idea. “I told her,” he says, leaning across the table as he nears the rhetorical climax, “take that sheet of paper you’re writing on. And fold it in half. Will you still be able to do all the writing you need to do on it?”

The farmer clearly thinks this ends discussion about reforestation and it seems churlish to ask for the German’s response. Her visit clearly made quite an impression on the small town of Alta Floresta in the Brazilian state of Mato Grosso, near the frontier of the Amazon.

The German student’s visit is brought up by several people who talked to Euromoney, probably because she seemed to provocatively challenge the use of the land that is the basis of the region’s economy.

This chance encounter in a cafe takes place a few weeks before the spike in fires in the Amazon that lit up the world’s media.

It’s possible the farmer would now concede that the international concern was valid but, at the time, he was pretty dismissive about restricting the rights of Brazilians to turn territory into productive farms, mines, or whatever best serves the country’s economic development.

After all, there are still high levels of poverty in the region and “Europe cut down all its forests – so why should we have to keep all of ours?”

Tipping point

It’s a question of perspective of course. While locals seek to make money to sustain their families, the international community looks at scientists’ reports that suggest the Amazon – the largest carbon sink on the planet and an ecosystem that accounts for 20% of the world’s oxygen – is approaching a tipping point.

Some 17% of the Amazon has been razed. The tipping point comes when the level of deforestation reduces its capacity to recycle moisture sufficiently and triggers its conversion into savanna.

Estimates range between the relatively reassuring 60% and the more alarming 20% – in which case catastrophe is looming.

But instead of acting in the face of the environmental emergency, the Brazilian government is – perhaps unsurprisingly – aligned to the local perspective.

President Jair Bolsonaro has emboldened raids on the Amazon through plain-as-day signalling to Brazilians seeking to destroy large swathes of forest to open up cattle ranching and other agricultural activities that the authorities would be looking in another direction.

Now fires have led to a large spike in deforestation in Brazil and, though less well publicized, in the neighbouring countries of Bolivia and Colombia.

Of all activities, cattle ranching is the largest driver of deforestation and accounts for about 80% of the annual destruction of the Amazon. Approximately 200 million cattle are now farmed on 450,000 square kilometres of deforested Amazon in Brazil.

Typically cattle are the first phase of illegal land use – to be replaced by crops such as soy when these farms become established – leading the cattle farmers deeper into the forest. The steady push into the forest has established Brazil as the second largest beef producer in the world, with 14% of global production in 2016, just behind the US’s 15%.


The speed of destruction is accelerating: 73,000 forest fires were recorded in Brazil in the first eight months of the year – the highest number for any year since 2013 

And the speed of destruction is accelerating: 73,000 forest fires were recorded in Brazil in the first eight months of the year – the highest number for any year since 2013. Most were in the Amazon, and deforestation in the Brazilian Amazon rainforest rose more than 88% in June 2019 compared with the same month in 2018.

However, as bad as these numbers are, arguably so is the Brazilian government’s response: a mix of denials, insults about the French president’s wife and protestations of sovereignty.

Bolsonaro also at one point said indigenous peoples “don’t speak our language, but they have managed to get 14% of our national territory” – claiming these reserves are a barrier to the development of agribusiness.

The president only finally and reluctantly began to change his approach when it became clear that there are likely to be wider political and economic ramifications from the environmental destruction.

The recently announced trade deal between Mercosur and Europe now looks problematic, with France and Ireland threatening not to ratify the agreement. There has been bilateral impact, too, with Norway and Germany both suspending their payments to fund Amazon protection in Brazil.

Meanwhile, Finland has specifically targeted the meat industry by proposing a complete ban on imports of Brazilian beef.

Fallout

Alongside the environmental damage being done by this year’s fires in the Amazon, there is also going to be a big impact on Brazil’s trade and industry.

The fallout has also moved beyond sovereigns, with some multinationals boycotting Brazilian products from supply chains as international approbation continues to mount. Some asset managers and pension funds have issued warnings or have already ceased purchases of Brazilian government bonds, while some companies have stopped purchases from Brazil – such as the decision of US clothing company VF Corporation to stop buying Brazilian leather.

The potential financial fallout is apparent to many Brazilians.

Marcello Brito is chief executive of Agropalma and president of the Brazilian Association of Agribusiness, which represents an industry worth about R$1.2 trillion ($287 billion) or 20% of GDP. In late August, Brito told local business newspaper Valor that the environmental destruction would be an own goal and “would cost Brazil dearly in its effort to regain the trust of international markets”.

This private-sector warning was also echoed by the Brazilian association of beef exporters, Abeic.

But trust need not be the answer. Some large Brazilian companies have introduced policies that ensure their activities don’t create deforestation. These claims are audited – supported by technology that can trace all elements of production from first origin to the market – to guarantee deforestation-free produce.

Market innovator

In this respect, Pecsa (Pecuaria Sustentavel de Amazonia) is the market innovator in beef production. The company, based in Alta Floresta in the north of Mato Grosso, manages six farms and is planning another funding round to expand its operations.

Laurent Micol, director of governance and investment at Pecsa, welcomed Euromoney to his headquarters in July. This was before the Amazon fires burnt into global headlines in August, but the issue of developing sustainable beef production in Brazil is a long-standing one – and one that Pecsa was created to address.

The first plank of the business strategy, Micol explains, is the ability to prove that no cattle that Pecsa produces come from any farm that has been created through deforestation (in recent times anyway – go back a generation and the entire farming region was created by deforestation).

Importantly, this not only covers the point of sale of cattle from Pecsa to the slaughterhouse but also those cattle’s entire lives.

Many farms in Brazil do not have certification – created as they were by illegal deforestation. There are already rules about this; slaughterhouses can’t buy those animals. Unsurprisingly there is a steady business of ‘cattle-laundering’, where ‘illegal’ cattle are sold to farms that have the correct documentation and then laundered and sold on.

Pecsa uses microchip ear tags on all its farms that carry the complete history of an animal. It has also created a subsidiary embryo business to increase the control of all stages of the cattle life-cycle.

The second main plank of the Pecsa proposition is that it reduces the need for deforestation.

Speak to nearly anyone in these rural states in Brazil and they will point to the need for deforestation to create farms that drive the economy and meet the growing global demand for protein. However, many of these farms are hugely unproductive – the land has been degraded to such an extent that it can only feed relatively sparse herds.

Pecsa’s first step is to use relatively simple technology to grow lush and hardy pastures that are capable of sustaining much larger herds. The gain in production through these techniques means that production on Pecsa farms averages between 700 and 750 kilos a hectare a year.

The average for the area is about 72 kilos per hectare a year. In other words, Pecsa can increase productivity by almost 10 times, which takes the pressure off the need to open up new land to meet demand.

As Euromoney travels around the large swathes of farmland, studded with strips of forest (largely hilly landscapes left for propriety’s sake), we pass through an 80-hectare farm that belongs to a man known only as ‘Gaucho Preto’.

Locals believe he is aged over 70 and lives alone. He has no family – he never married – and his land lacks official legal status despite his presence on it for decades.

What will happen to the farm when he dies? Euromoney asks. Despite its dilapidated state, the land must be valuable. Our guide shrugs, surprisingly uninterested, pulling the 4x4 up to a gate that marks the end of Gaucho Preto’s informal, although universally respected, ownership and the beginning of a Pecsa-managed project.

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Cattle are kept in the fields and fed during the dry season


The Pecsa farm

The superficial difference of a Pecsa farm is immediately evident. New fencing creates quadrants of land that contain either lush grass (we are deep in the dry season) or cattle grazing on less-lush grass but still land covered by vegetation.

Each quadrant has food and water troughs. Calm cows watch as we pass, their ear tags hinting at the modernity running through the farm. Numbers branded on the cows indicate the month they will be sent for slaughter – a rudimentary but still-effective technology.

Each farm follows the same approach: it is divided into patches that enable the grass to grow (but not too much) and cows to feed without the need to move for either food or water and therefore expend calories needlessly.

A mix of horses and technology maintain the infrastructure. Labourers wear dusty shirts adorned with the Pecsa logo. The emphasis on efficiency is total: onsite food is provided for the workers and we join lunch, served early because the day starts at first light.

Despite the patchwork of unofficial smallholdings, most of the land that encircles Alta Floresta has become legal farmlands and there is a huge opportunity to increase its productivity.

“We are talking about millions of hectares [being used for cattle farming in Mato Gross] and you don’t need to change [the productivity] of it all,” says Micol, “just change a few hundred thousand hectares, intensify them, and you tackle this land use challenge. We don’t need more area.

“It would mean zero deforestation.”

He isn’t talking of factory farming – the cattle are kept in the fields. They are fed during the dry season.

Many local farms do not do that, which means that cows lose weight because of the lack of vegetation during this time. To maintain control of quality and cost, Pecsa has opened a factory on the outskirts of town that produces feed for the farms, which it also sells to third parties.

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Pecsa produces its own cattle feed

There are other subsidiary benefits: Pecsa brings the water to the cows, rather than them going to natural lakes or rivers as elsewhere, which again means the Pecsa cows walk less (and therefore gain weight more easily) and retains the integrity of these water sources. In other farms cows defecate and urinate on the banks while drinking.

Micol also claims that Pecsa could easily extend its practices to produce carbon-neutral meat. He says the range of farming practices (for example, the specific type of grassland used on the farms sequesters large amounts of carbon) reduces carbon emissions by 90% and the remaining 10% could be offset with reforestation in certain areas.The implementation of Pecsa’s management techniques is just one half of the company’s proposition; the other is finance.

The Pecsa model requires considerable up-front capital investment – something that many farmers don’t have. While they are sitting on valuable land assets, their liquidity situation is challenging and there is not much interest for the size of loans this development requires from financial institutions.

To be able to provide this capital Pecsa uses startup investment partners.

Althelia funds invested €11.5 million to create Pecsa in 2015. Mirova (a subsidiary of Ostrum Asset Management and an affiliate of Natixis Global Asset Management) retained this investment when it bought 51% of the impact investment company in 2017.

Pecsa injects the capital and runs the implementation risk (Pecsa enters into revenue-sharing agreements with farms, not profit-sharing, and so takes on a large amount of the performance risk).

The smallest farm Pecsa manages has 535 hectares of grassland and the largest is 4,000 hectares; and with up-front set-up costs averaging around $1,000 per hectare the investment required can be large.

“They don’t have [capital] and the bank won’t give it – it’s too much for one person, even if they put the land against the value of the loan,” says Micol. “Agricultural financing is subsidized, but there is a limit to the amount, so owners can’t get the full amount. And even if they could, would they? Implementation is not very difficult, but most individual landowners are just not able to do it.”

To date margins have been thin for a considerable effort, admits Micol. A large part of this has been due to the necessity to agree lower returns for Pecsa to secure contracts that provide ‘proof of concept’ projects.

The best marketing, he says, is becoming these successful projects.

Micol says he is exploring branding solutions to try to generate pricing power – from consumers in Europe and elsewhere, who would pay more for beef whose brand guaranteed it came from farms that hadn’t contributed to deforestation of the Amazon.

As well as the direct benefits from these companies, Micol says there is also an important impact on the local economy.

“The next round of investment will be worth €80 million in 10-year projects; we have calculated that the multiplier effect is 10 times,” he says. “So that will be the equivalent to €800 million extra going into the local economy in the next decade, which is a really big contribution. We saw with our first €14 million investment that new suppliers have emerged to meet the new demand from Pecsa – there have been many new jobs created – it’s quite a big impact.”

Engagement

Many experts in conservation finance believe in an optimistic future only if corporations assume their responsibility and that private-sector initiatives, such as Pecsa, are crucial to highlight the opportunity for profitable answers to the deforestation crisis.

“We will never achieve our objectives unless we achieve full engagement with the private sector,” says Costa Rica’s minister for the environment Carlos Manuel Rodríguez, who has visited the Brazilian region many times. “Private companies make up 80% of the economy, so alignment [with sustainable goals] from the public sector won’t be enough.”

Rodríguez believes that regulation is needed to encourage that engagement.

“We need governments to create the proper conditions, the proper tax incentives for positive behaviour and disincentives to stop activities with negative environmental impact,” he says. “Ultimately the government needs to make CEOs understand that it should be in their corporate DNA to conserve nature, because otherwise there won’t be resources and their business will be over.”

Long-term loans for better land use

In August last year Banco Santander Brasil, the Nature Conservancy (TNC) and commodities trader, Bunge, announced the development of a programme to prevent further deforestation in the Cerrado in south central Brazil by making better use of land already cleared.

The savanna is home to 5% of the planet’s animals and plants, according to the World Wide Fund for Nature.

The programme, which hopes to announce sign-ups by the end of 2019, provides long-term loans to farmers willing to commit to farm on cleared land. The programme expects to make available $50 million in loans, 65% of which will be provided by Santander.

Most of the loans currently available to soy farmers to finance their annual crop costs are for less than a year. The new mechanism will offer loans of up to 10 years, recognizing that investments in land acquisition and preparation have a long-term payback.

“The savannas of Brazil are one of the most important soy producing areas in the world,” says Greg Fishbein, director, agriculture investments at TNC.

“They also play a critical role in storing carbon and are home to some of the most diverse species on the planet. Responsible economic development and soy production can be achieved while protecting this native habitat.

“In the Cerrado, for example, there are more than 25 million hectares of already cleared land that could be used for soy expansion. Providing long-term finance and incentives to produce soy more sustainably is smart for farmers’ bottom line and smart for conservation.”

According to the US Department of Agriculture, more than half of all the cultivated crop area in Brazil is dedicated to soybeans. An increase in the planted area to 37 million hectares is expected for 2019/20, despite a slowdown in demand due to US-China trade issues. More than 40,540 square miles of wild vegetation have been destroyed in the Cerrado since 2008.

by Helen Avery

Can transition bonds help the beef industry?

“If you look at the corporate green bond market, more than half of issuance is from utilities. Agriculture has been largely absent in the sustainable bonds market, and it makes sense to include the sector,” says Anjuli Pandit, sustainability coordinator for the bond and loans business at BNP Paribas. “For one, investors are asking for more diversity.”

Transition bonds may be a way to bring agriculture to the table, and to help educate investors on the cost and importance of transitioning to sustainable farming practices. In July this year, BNP Paribas was a bookrunner alongside ING and Santander for beef supplier Marfrig’s $500 million transition bond.

Brazil’s Marfrig is the world’s second-largest beef supplier, with operations across south America and the US. For the last decade the company has been committed to not buying cattle from newly deforested areas in the Amazon.

It wants to make its rules even stricter and share the story with investors. The company is under pressure as awareness of the greenhouse gas emissions caused by livestock farming has grown and meat alternatives such as Beyond Meat gain popularity.

The proceeds of the bond will be used to buy cattle from ranchers in the Amazon region who not only comply with non-deforestation but also other sustainability criteria, such as animal welfare and fair labour practices.

It’s an education for investors, says Pandit, who adds that as a result of the roadshows, “we’ve now talked to hundreds of investors about biodiversity and supply chain. The core of sustainable finance is using non-financial information to help investors and companies make financial decisions.”

by Helen Avery