How LatAm mining, oil firms could avoid a ‘tobacco moment’

Growing demand from global investors for companies in key economic sectors to follow ESG (environmental, social, and governance) best practices is forcing mining, oil & gas and power sector firms to implement changes in their business models.

Progress is being followed closely by asset managers and adopting these practices will ensure the survival of many projects, according to Marcelo Nantes de Souza, co-CIO at Bradesco Asset Management, who spoke with BNamericas about the latest ESG trends in Latin America.

Bradesco Asset Management is a unit of Brazilian lender Banco Bradesco and it has 515bn reais (US$95bn) in assets under management and 264 companies in its investment portfolio.

BNamericas: As one of the largest asset managers in Latin America, what practices have you adopted to meet increasing ESG demands from investors?

Souza: ESG practices are not new for us within the management team. We have carried out an assessment of the companies we have invested in by using ESG criteria since 2007.

We prepare and review the criteria of our portfolio once a year, where we consider the three aspects that encompass the practice of ESG.

This review takes into account the public information that the companies themselves disclose, but it is not limited to that. We visit the companies, talk to the executives, in order to understand if in fact they are complying with what they have disclosed.

After this process, we use our own evaluation criteria to make a ranking with the position of each company, which takes into account not only the company's operational issues, the potential return, but also the practices that it adopts on the ESG side.

Ultimately, we will allocate more funds into companies with the best ESG practices.

Now, responding directly to your question, what has changed is that the ranking we have been doing privately since 2007, we will now start to make public.

BNamericas: Could you talk a little bit about how many companies we are talking about and the assets you have under management?

Souza: We have assets under management totaling 515bn reais and these assets refer to equities and also debt instruments issued by companies.

In our investment portfolio we have 264 companies and we already evaluate the ESG practices of 99.3% of these companies.

We are signatories to several global agreements, so following sustainability and governance best practices is an obligation that we have had for some years in terms of our investment policy.

An important issue about the ranking I mentioned, which we will start to disclose to the public, is that this information was already available to major investors, but now, small investors will be able to better follow companies' sustainability practices and also use it as a criteria for their investment decisions.

It will be an inclusive process, where we want both companies and investors to be more aware of practices related to sustainability. We are also concerned with helping companies evolve in their practices.

BNamericas: When companies in a sector suffer a public image crisis and major investor aversion, it is known as the ‘tobacco moment’. Do you believe there is a tobacco moment risk for sectors like mining, oil and gas, and energy?

Souza: There is a fundamental issue here that makes me believe that none of these sectors will see the strong investor aversion that the tobacco sector did.

Tobacco has never been an essential product for humanity, it is a superfluous one.

Oil, mining, and energy in general, on the other hand, are fundamental to our society.

Today, despite efforts towards renewable energy, I cannot see the world without fossil fuel. In the mining industry, we cannot live without metals, so I do not believe that these sectors will experience some kind of tobacco moment.

But what we see in the conversations we have with managers of the companies in which we invest, is that everyone is working to change their respective business models.

Oil and gas companies are already attentive to changes, with the fleet of cars in the world increasingly using electric power. They are already working on the so-called energy transition.

In mining, we are already seeing projects where companies use more efficient mining methods, using less energy, generating less tailings. 

In terms of energy, we already see power plants using less coal and more gas, that is, there are a series of developments taking place in the different sectors.

BNamericas: Could the outcome of the upcoming presidential election in the US have an impact on ESG?

Souza: ESG demands are currently stronger from European investors than from US or even Asian investors.

If the US election results in a victory for the Democratic candidate, demands for ESG practices will increase in the US since this is an issue that has been advocated by the Democratic Party for years.

That said, and although the current US administration does not have a strong focus on this, I would like to emphasize that ESG practices are already an important element in investment funds there.

A Democratic election victory would expand it on the government side as well. And I believe it would reduce the European and US gap in terms of ESG demands. 

BNamericas: In terms of financing costs for companies, does adopting ESG practices help to reduce these costs?

Souza: Initially, adopting ESG practices reduce the financing costs for a company since it gains access to different investors.

In the medium term, I would say that adopting ESG practices or not becomes a matter of advancing or not with a project, or an investment.

Today, when I start evaluating the issue of governance, if I do not have enough information about a company I simply do not invest.

BNamericas: With Latin America being a major producer of commodities, how can the region show the world that it follows the best ESG practices?

Souza: This point is very important. Let us use the mining sector as an example. Mining activity will not disappear, it will be transforming and this is the chance for the sector and the whole region to show the world that they can adopt sustainable practices.

We have a great opportunity here in Latin America to show the world our commitments to sustainability.

Global capital is demanding this and I believe that we do have a good opportunity to show good initiatives. For example, look today at agriculture in Brazil and Argentina, which can already show highly sustainable techniques.

BNamericas: There is a local and global investor discussion about the proliferation of the ESG issue and whether there is an index that can be used as a benchmark to measure companies' ESG practices. Do you follow any global index?

Souza: We decided to develop our own evaluation system, which is the ranking I mentioned at the beginning of our conversation. We do not outsource this, so we can do our own analysis, following our criteria.