Insights

A Week in Impact: The Amazon burns; meat feels the heat

This week, the Amazon rainforest fires elicited backlash against the meat industry, while ESG ratings came under fire from researchers and asset managers.

AS THE AMAZON BURNS, WILL THE MEAT INDUSTRY FEEL THE HEAT?

The number of fires currently ravaging the Amazon rainforest is the highest in ten years, putting the (anti-)environmentalist policies of Brazil’s president in the spotlight.

Blame "rampant capitalism,” not dry weather. President Jair Bolsonaro’s government has been accused of encouraging farmers to burn the Amazon to make way for agriculture, in particular cattle (Brazil is the world’s biggest exporter of beef, supplying 20% of global exports) and soybeans. Concludes Wired: “as long as there’s money to be made in destroying the Amazon, and so long as a complicit government is in power in Brazil, the Amazon will burn."

If we want to send the message that we won’t let deforestation continue, the answer to the question "should we boycott Brazilian beef?” is, indisputably, yes, says the Independent. Led by Finland, boycotts of Brazilian produce are already gaining steam. But it’s not so simple: since soy feeds UK livestock, including dairy farms and pigs, consumers may be inclined to avoid animal products altogether.

Asset managers have come under fire for not ditching Brazil, but perhaps critics are focused on the wrong enemy. The meat industry as a whole already "faces mounting investor challenges over environmental, social and governance concerns,” reports the FT, and, while the Amazon fires have highlighted how agribusiness companies worldwide are falling short on ESG measures, "outrage over deforestation is only part of the story: beef companies’ greenhouse gas emissions are a big problem for the environment and generational tastes are quickly shifting to favour non-meat options.”

The disruptive success of meat substitute companies has already received plenty of attention this summer, and the Amazon fires are likely to fuel the megatrend. Could meat be the next stranded asset?

THE CURIOUS CASE OF ESG RATINGS

First, the good news: an overwhelming number of CEOs and businesses believe demonstrating a commitment to ESG concerns is important. The bad news: they’re relying on sustainability ratings for guidance.

A lot has been said about the fallibility of ESG data and ratings (Stephen wrote about it back in December). Published last week, a new working paper, ‘Aggregate Confusion: the Divergence of ESG Ratings,’ documents the discrepancies between five prominent agencies: KLD, Sustainalytics, Vigeo-Eiris, Asset4 and RobecoSAM. As reported in MIT Sloan’s breakdown, the research team found the correlation among the five agencies’ ESG ratings to be, on average, 0.61. By comparison, credit ratings from Moody’s and S&P are correlated at 0.99.

All of which means “the information the decision-makers receive from [ESG] ratings agencies is relatively noisy.” This has two consequences: first, security prices are unlikely to reflect ESG performance; and second, companies are disincentivised to improve their ESG performance. According to the research team, the solution lies in transparent disclosure standards and publicly accessible data.

But where should investors get this data? State Street recently advocated AI and machine learning as the answer to rating shortfalls, touting its ability to analyse a large volume of data frequently and systematically. The FT agrees, writing that data science can access more nuanced, granular information than is available from a company disclosure—or indeed, a rating agency.