NINT: Deforestation-related risks in the Brazilian meatpacking industry

Provide a short overview of the research innovation being proposed for the award, including how it is innovative.

We assessed the level of exposure of Brazilian meatpacking companies to deforestation-related financial risks. The relevant companies are JBS, Marfrig, and Minerva. We also assessed how the companies are responding through new policies, commitments, and anti-deforestation programmes.

In terms of innovation, the study uses discounted cash flow analysis to estimate how the companies would be affected in different scenarios. We estimated the financial impacts from the following ESG drivers: 1) reduced sales due to boycotts; 2) increased cost of capital; and 3) reputational costs related to deforestation in the Amazon and Cerrado biomes:

1. We considered the background of each company regarding trading embargoes, impacts on beef prices, and exports to more restricted countries (access through government databases).
2. We assessed ESG performance for investors and creditors of each company, and estimated how each company might be affected by a rising cost of debt (data from Bloomberg).
3. We used geoprocessing information to assess the area potentially deforested by direct and indirect suppliers.

The outcomes of this study will help equity and credit fund managers to better understand the potential risks arising from the Brazilian meatpacking industry regarding deforestation-related issues.

 

Provide a description of why you decided to undertake this approach.

Deforestation in the Amazon and Cerrado has been on the Brazilian ESG agenda over recent years. The cattle and beef industry are the main drivers of deforestation in the Amazon and Cerrado.

Investors are increasingly concerned about how deforestation-related risks might affect the value of companies in the cattle and meatpacking industry.

Most of the available analysis and reports focused on understanding the link between deforestation in the Amazon and beef production and do not provide investable ideas.

Fundamental analyses based on discounted cash flow are easily integrated into traditional financial models. Therefore, the outcomes of this study can be promptly used by equity researchers and portfolio managers.

All financial impacts relating to ESG issues have already impacted the covered companies in the past.

 

Provide an outline as to:

1. The value this approach has provided or a summary of the key conclusions.
2. What you have learned from this approach or report that can be applied more broadly.

The main conclusions of the study are presented below.

Quantitative outcomes

Optimistic Scenario: The impact on the enterprise value of JBS is -0.2%, Marfrig is -1.9%, and Minerva is -0.7%.

Pessimistic Scenario: The impact on the enterprise value of JBS is -2.3%, Marfrig is -4.8%, and Minerva is -7.7%.

Qualitative outcomes

Among the biggest meatpacking companies in Brazil, Minerva is most exposed to deforestation-related financial risks in its supply chain. The company has the highest exposure to beef, and exported about 140 thousand tons of beef from the Amazon and Cerrado in 2021. In addition, its direct and indirect suppliers might have cleared about 50 thousand hectares of natural vegetation in the Amazon and Cerrado since 2019.

All companies are highly exposed to banks and investors who have already demonstrated concern regarding deforestation issues. Over 30% of creditors of the assessed companies have anti-deforestation policies or commitments. This means that the companies may be exposed to higher interest rates and less access to credit if they fail to achieve their deforestation goals. Recently, Marfrig took a sustainability-linked loan of USD 30 million, on which the interest rate will rise by 100 basis points if the company fails to offer full traceability of its supply chain by 2025. In October 2021, JBS issued another bond with similar targets that incorporated a step up of 25 basis points.

Access to external markets will become more restricted if the meatpacking companies fail to achieve their deforestation-free commitments. Non-tariff barriers are a big issue in the meatpacking industry. Almost all countries that import from Brazil have implemented sanctions over sanitary issues. As international pressure to reduce deforestation in the Amazon increases, it is likely to constitute a reason for new barriers. In addition, big food retailers have been reinforcing their commitments to tackle deforestation. This may also lead to boycotts and embargoes against meatpacking companies.

JBS has the most ambitious commitment regarding deforestation in the supply chain. Although the three assessed companies may be negatively affected by deforestation-related risks, the commitment and efforts they are putting in place may change the level of the impact considerably. JBS currently has the most ambitious commitment, aiming to eliminate deforestation in its supply chain by 2025. Minerva and Marfrig aim to achieve zero deforestation by 2030.

What can be applied more broadly

The approach adopted for this study can be applied to assess deforestation-related risks for companies that produce, supply, or trade commodities, such as soy, palm oil or eucalyptus, as well as other protein sources such as poultry or swine.

What we have learnt

Despite many investors and companies stating that they do not do direct or indirect sourcing of products relating to deforestation in the Amazon, this cannot be guaranteed. In addition, public databases provide a reasonable quality of information to assess ESG risks in the supply chain, even though the information provided by the companies on this issue is very limited.