The challenges of investor engagement in Paraguay

Paraguay is often overlooked in the deforestation debate despite hosting some of the highest rates in the world over the past decade. For 2019, Trase tracked over 200,000 hectares of deforestation associated with beef and soy exports in 2019 – an area larger than Greater London. This low profile has resulted in too little scrutiny of the finance linked to soft commodity trade and allowed financial institutions to skimp on the type of country and biome level policy commitments often applied to higher profile locations.

Contrasting regional risks

Breaking down this exposure, the national picture is broadly split in two parts. In the east, soy-driven deforestation in Paraguay’s Atlantic Forest has slowed significantly, but not yet halted, since the introduction of a zero-deforestation law in 2004. Financial exposures linked to soy production in this area are modest in scale but quite widely held, linked largely to the so-called ‘ABCD’ traders (Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus). While the absolute numbers of deforestation exposure may be low, the Atlantic Forest in Paraguay is one of the most highly threatened biomes in South America. Financial institutions need to be especially mindful of this, as well as the legal requirements in this region when conducting their due diligence processes.

The vast majority of deforestation in Paraguay is on the frontier in the west, where it is primarily linked to the expansion of pasture for beef. Destruction in the Chaco biome has been left largely unchecked by weaker environmental legal protection leading to losses that rival or surpass anything recently seen in Brazil. A 2019 study by Paraguay’s forestry agency, Instituto Forestal Nacional (Infona), highlighted that 76% of the deforestation in this region in the year up to August 2018 was legal.

Trase data for the Chaco shows that beef exports are dominated by a small number of traders. The top five groups account for 86% of trade volumes, and just one name – Minerva – accounts for almost half. In a list otherwise dominated by private, local players, Minerva is the only international, publicly listed trader, making it the stand out name in terms of global financial institution exposure.

Key investors revealed

Looking at equity investors in the beef trade, Minerva’s top shareholders are SALIC, owned by the Saudi public investment fund, the Vilela De Queiroz Family, which founded the company, and Minerva itself. Between them they control a majority interest with the remaining 43% dispersed among many shareholders including more semi-sovereign entities such as Banco do Brasil (asset management) and Abu Dhabi Development holdings.

This does not mean that household names in finance are free from exposure – large fund managers such as Blackrock and Vanguard are particularly prominent. These take on equity exposure through their (often passive) index offerings – a familiar, difficult to address theme, but one that brings important responsibilities which these firms are only just beginning to recognise.

There are also some less familiar names such as Costanera Management via Compass Group holdings and a few Brazilian fund operators too, such as Itaú Unibanco Holding. Pension fund interest is also on show with Dutch government/education employee fund Stichting Pensioenfonds ABP a particularly notable example.

Turning to soy, additional deforestation exposure is more limited in scale but is inherited across a broader range of holdings. Alongside many of the same fund managers as above, Capital group, FMR, State Street and State Farm Insurance feature high up the exposure table.

Challenges for investor engagement

Looking at both Paraguayan beef and soy, semi-sovereign entities that have limited public accountability or regulatory requirements to manage environmental impacts top the exposure list. Family/self-owned holdings, which could be loosely termed ‘insiders’, represent the second biggest investor class and have a strong element of ‘insulation’ from external pressure. Together, they dominate reported holdings, limiting the leverage that shareholders with publicly traded shares have to change company behaviour. Moreover, large index-linked fund managers in this group often lack a credible disinvestment threat given index-tracking requirements, further lessening their influence.

While it is important to understand these limitations, this does not give investors carte blanche to ignore their exposure. Indeed, the pressure on financial institutions to formalise credible strategies on their nature risk management will only escalate over the next couple of years as requirements on nature-related non-financial disclosure reporting ramp up.

Deforestation exposure via debt

For debt, data reporting is very patchy, allowing only an incomplete picture. The bond side tends to be dominated by insurance companies and annuity providers such as Prudential, AIG, Lincoln National, as well as big corporate debt fund operators, although these names tend to be more visible, owing to regulatory reporting requirements from the US Securities and Exchange Commission.

Similarly for loan facilities, data reporting is often incomplete regarding which institutions are providing the funds and what proportion of the loans they hold. On the data that is available, the usual large US, European and Japanese investment banking groups including BoA, Sumitomo, JPM, ING, Rabo, Mitsubishi UFJ are all prominent.

Lack of transparency over local lending

There are plenty of loans where the lenders or their contributions are not recorded, which in many cases will involve local banks. For instance, Frigorífico Concepción SA (the fourth highest deforestation risk from beef) has no registered counterparties to its loan and bond instruments, but its annual report highlights Paraguay’s Banco Nacional de Foment (BNF) as a source of sub one-year finance.

Banco Regional (one of the largest financial institutions in Paraguay) and Sudameris Bank (Paraguayan, but actually owned by the Ireland-based Abbeyfield Group) are the biggest providers of longer term financing. Outside of the top five global traders, a lot of financing for the smaller private operators comes from local financiers and likely trade finance-related operators (Banco de Crédito del Perú, BCP).

Some modest efforts have already been made to harmonise local banks’ approaches to ESG through the ‘Roundtable for Sustainable Finance Paraguay’ supported by four major banks (Banco Continental, Banco Regional, Sudameris Bank and Visión Banco). The Roundtable may present a forum through which the ambition and breadth of local initiatives could be extended, focusing on deforestation and nature-related impacts.

No excuses for inaction

The characteristics of soft commodity financing in Paraguay raise some obstacles to active engagement. This may ultimately require policy advocacy at the international level to address, particularly with respect to the large semi-sovereign interests which may otherwise be immune to ESG responsibilities.

For global financial institutions, minority interest does not provide the excuse for inaction. It is crucial that they give Paraguay and the Chaco biome far more prominence in their policy commitments, screening and due diligence processes than seen at present. In terms of engagement, even when confronted with the roadblock of majority private and sovereign equity controlling interests, major institutions can still use their credibility to highlight the materiality of deforestation and other nature-related risks to future operations and the business case for change.