In our discussions with Minerva, we’ve found the company to be quite committed to ESG issues. It has taken significant steps to address deforestation risks in its supply chain. Not only does Minerva have the lowest rates of nonconformities among leading meatpackers in audits of its direct cattle purchases, but it also provides more leeway than peers to a third-party provider, NicePlanet, for determining the areas marked for noncompliance.
In July 2020, we wrote a letter to Minerva’s management, asking whether the company includes ESG targets as part of management compensation. Although the company responded that it doesn’t currently include ESG targets in compensation plans, we believe that the correspondence is the start of a dialogue that will encourage Minerva to adopt clear ESG targets for management to promote more sustainable sourcing practices.
Engaging with Government and NGOs
Engaging with government is also important. In meetings with Brazilian Treasury representatives, our fixed-income analysts have highlighted our concerns regarding deforestation. At AB, ESG considerations are considered important risk factors and are incorporated into the assessment of sovereign credit fundamentals.
Our investment teams plan to deepen the engagement with companies, with a focus on identifying key metrics to assess progress. We also plan to broaden our engagement to related companies and industries, including food retailers, a key domestic sales channel, and producers of other proteins.
Meanwhile, we’re engaging with nonprofit organizations, including the EM Investors Alliance and relevant nongovernmental organizations (NGOs) such as the National Wildlife Federation, to improve our understanding of monitoring the Brazilian cattle supply chain. These organizations provide insight on which companies are living up to their commitments and which are not. They also provide a platform for dialogue with other investors who are focused on deforestation to facilitate information-sharing and best practices.
ESG Integration: Saving the Forests Supports Return Potential
These engagement efforts are a key component of our investment research. Investors and consumers alike are increasingly demanding that companies align products and services with global emissions-reduction goals. Beef producers that fail to properly address deforestation face many potential risks, including reduced market access due to the loss of customers and contracts, lower credit ratings, or litigation. In addition, the entire value chain is under pressure; for example, French supermarket chain Casino was accused by NGOs in September of selling beef linked to deforestation and not doing enough to monitor the source of its Brazilian-produced meat.
Over time, we believe that the global focus on deforestation will increase and that pressure will mount on meatpackers to disclose how they’re addressing the problem and de-risking their businesses.
As global pressure on Brazil grows, we believe that investors have an important role in curbing deforestation. By engaging with Brazilian beef producers, our portfolio teams can help capture attractive investment return potential by promoting meaningful change that affects not only the profits of beef companies but the capacity of the Amazon rainforests to continue to function as the lungs of planet earth.