ESG reporting and e-payments see dramatic growth in Latin America’s largest country.
Brazil may be going through a turbulent political and economic period, but the country continues to be a center for innovation in Latin America. The South American powerhouse has seen revolutions in financial services, communications, agribusiness and aviation in the last few years. Nonetheless, how the nation’s government, corporates and financial institutions operate regarding environmental, social and governance (ESG) concerns remains a sticking point.
In a nation where the current administration has become identified with poor environmental practices in the eyes of domestic and foreign stakeholders, good ESG management has become an urgent matter for businesses eager to dissociate themselves from the images of deforestation and degraded biomes. In the case of Brazil’s potent agribusiness sector, transparency, innovation and high adherence to ESG best practices are the only way to stay ahead of foreign competition that politicizes the country’s environmental status. Moreover, the industry’s adoption of ESG practices is imperative if it wants unhindered access to the international market for Brazilian produce.
According to an unnamed investment fund manager who counts Brazilian agricultural producers among the fund’s credit-lending clients, Brazil has done a terrible PR job institutionally. “This definitely affects Brazilian producers and processors in their access to the international investment markets,” says the manager. “We do not yet see off-takers reducing their appetite for Brazilian commodities, but robust and transparent official information channels are much needed at this point.”
Of course, the fastest way for the country to improve its global image would be through strong government action. “Honestly, we do not foresee that happening in the near future; so it is up to market players and businesses to provide investors with data in a constant and trustable manner,” the fund manager adds.
But in many ways, corporates and agribusiness have already understood this message, according to the authors of a KPMG study titled The Time Has Come. The authors found that 85% of the 100 largest Brazilian companies already publish continuously updated ESG reports—making Brazil second in Latin America only to Mexico (which has a 100% publishing rate) for providing such timely data.
In fact, Latin America is the global leader in sustainability reporting by businesses that could threaten biodiversity, with an overall average of 31% of national top 100 companies reporting. Asia Pacific (23%) comes second, followed by Europe (22%) and the Middle East and Africa (19%), while North America (13%) trails last.
The study considers the largest 100 Brazilian companies and compares them to the largest 100 companies in other countries, according to Nelmara Arbex, KPMG’s lead partner in ESG Advisory in Brazil.
“Globally, big companies are the ones that publish the most sustainability reports,” she explains. “This shows that the biggest Brazilian companies—many of which are subsidiaries of multinationals—are aligned with the global movement on transparency. This is good. However, these companies do not represent the great majority of Brazilian companies, which mostly do not publish such reports.”
On the other hand, Arbex adds, many of those companies of all scales not publishing reports already have some sort of ESG management in place. “They do not have this information organized or coordinated with their business strategy … and they miss an opportunity to gain important reputational [value], which would enable them to enter new markets, gain access to certain types of loans, and attract talent and consumers.”
By all measures, ESG is a good investment strategy: It benefits communities and businesses while creating deeper synergies between them and their markets.
However, ESG’s benefits involve enormous investment in education, human resources, infrastructure and technology. The Brazilian Development Bank estimates that the nation will need domestic and foreign direct investment of at least $1.3 trillion by 2030 to modernize current infrastructure to be more sustainable. It is a high figure even by international standards. Global ESG investment is likely to reach up to $50 trillion by 2025, according to Bloomberg Intelligence, meaning Brazil would need to attract more than 2% of that alone.
“[Brazil] has one of the strictest environmental laws in the world. Combined with food security issues in other parts of the planet, there is no doubt we will see more investors coming [into the country]—but of course with many more ESG filters embedded into their offers,” says the investment fund manager.
ESG-linked requirements by investors are a strong national and global trend, according to KPMG’s Arbex. “For the past 15 years, investment managers have been changing their risk-assessment matrixes and increasingly inserting ESG aspects to evaluate the businesses in which they invest. In Brazil, the central bank and other regulatory bodies have published clear directives regarding such evaluation for financial institutions and investors.”
The most significant innovations in Brazil relate to alliances between private businesses, citizens and specialist organizations vying for a common goal, such as the protection of the Amazonian ecosystem, the safeguarding of public and tuition-free education, or the defense of a public health system, she adds. “At [the UN] COP26, we saw these alliances becoming very active to keep Brazil on track towards decarbonization domestically and as part of the international carbon market. These alliances are important forms of articulation and long-term projects in Brazil.”
Payment and Banking Innovations
Much attention is devoted to the private and third-sector approach to ESG and the clusters of high-tech agribusiness forming close to the country’s greenbelt, and churning out new technologies that increase agricultural productivity without expanding the size of agricultural land. However, it is impossible to speak of innovation in Brazil without looking at its financial sector.
Brazil is forging ahead nimbly in innovative banking and payment methods. The country already has a robust electronic payment system and secure financial institutions with some of the world’s largest proportional revenues.
Pix—a free, state-owned electronic instant payment system that lets people who do not hold credit or debit cards use their phones to pay for almost anything—debuted in 2020 and is already a successful market disruptor. The system has reached over 112 million users and has the fastest adoption rate among payment systems globally, reports Folha de S. Paulo, Brazil’s largest daily newspaper.
All financial institutions with more than 500,000 active customer accounts in Brazil are obliged to provide their clients access to the payments system free of charge.
The platform permits users to receive electronic bills for prescheduled payments and withdraw cash from ATMs, while enabling merchants to credit customers electronically for cash transactions. Additional functions are planned and await deployment.
The widespread use of payment machines and apps spawned by Pix has spurred further innovation. The fintech CloudWalk, which offers the InfinitePay payment terminal, recently announced its intention to start rewarding customers with cashback in cryptocurrency in return for using the company’s payment app. The company expects to hand out up to 1 million Brazilian reais (about $178,000) in cryptocurrency rewards monthly.
Fueling these fintech innovations is Brazil’s Open Banking initiative that allows customers to selectively share portions of their financial, personal and credit records with various credit bureaus and with lending and financial institutions. The client controls how much and what information is shared and can switch accounts within the same financial institution without all the red tape this usually entails.
The portable banking scheme, whose latest phase was rolled out in October, promises that cheap and nonbureaucratic credit facilities will be more amply available. For financial institutions, it means more business and better insights into the creditworthiness of individuals and companies.
Once Brazil’s financial industry completes the fourth and final phase, which should start in December, clients will be able to simultaneously send requests for credit facilities and loans to various financial institutions and receive an almost immediate response of all approved offers, with tools to compare interest rates and repayment terms. Brazilian authorities hope that Open Banking increases the competition among institutions while lowering fees for consumers and businesses—all in a faster, more secure, transparent and less bureaucratic manner.