Pioneering Study Measures Alignment of Brazilian Asset Manager Portfolios with Climate Scenarios

Portfolios exhibit a significant exposure to assets that may need to be phased out in the medium term to address climate change effectively.

Brazil’s ratification of the Paris Agreement in 2016 commits the country to reducing greenhouse gas emissions and limiting global temperature increases. Part of achieving the agreement’s goals requires aligning investment and financing with the necessary rapid transition. While Brazil has made progress in aligning financial flows with the goal of limiting global temperature rise, there are still gaps in compliance, measuring climate-related risks, integrating climate-related topics in strategic decisions, and making an impact in the transition to a low-carbon economy.

A study made by 2° Investing Initiative (2DII) and RMI, in partnership with the Securities and Exchange Commission of Brazil (CVM), and the German International Cooperation Agency assessed the alignment of Brazilian funds’ portfolios with the Paris Agreement goals. The study analyzed 5,385 funds’ portfolios from 638 different asset managers based in Brazil, with approximately US$150 billion in assets under management, representing 10 percent of the sector’s total net worth. The data assessed contains assets classified as “Other Codified Assets” and is available on CVM’s website.

The funds under analysis were grouped into six different categories based on guidance provided by CVM and under the general funds’ classification established by ANBIMA: Ações Indexados (Indexed equity funds), Ações Ativo (Active equity funds), Ações ESG (Equity ESG funds), Multimercado Alocação (Multimarket allocation funds), Multimercado Estratégia (Multimarket strategy funds), Renda Fixa Crédito Privado (Fixed income funds).

Key Findings: High Exposure to fossil fuels and power sectors; opportunity to align production plans with a net-zero pathway

One key finding of the study is the high concentration of Brazilian asset managers’ portfolios in climate-relevant sectors, with around 30 percent of listed equities and corporate bonds allocated to such sectors. Although comparison among countries should be taken carefully, in other jurisdictions where a similar study was conducted, the percentage of total equities and bonds portfolios in climate-relevant sectors is 10 percent on average. Of the 30 percent allocated to climate-relevant sectors in Brazilian asset managers’ portfolios, fossil fuels, power, and steel account for 90 percent of this allocation. While this concentration is expected given the structure of the Brazilian financial market, it presents challenges and opportunities for managing climate-related risks and promoting a low-carbon economy.

Another noteworthy finding is that environment, social, and governance (ESG) funds do not demonstrate superior or inferior performance compared to non-ESG funds. This means that ESG-classified funds are also as exposed to high-carbon technologies and perform the same alignment patterns as non-ESG funds. This finding emphasizes the need to assess alignment measures and engagement strategies in order to prevent greenwashing.

However, the study also revealed that asset managers’ portfolios have a high exposure to assets that will need to be phased out in the medium term to address climate change, such as oil and gas. Additionally, the production plans of invested companies are significantly misaligned with a net-zero scenario, suggesting potential financial losses for asset managers in the event of a late and sudden transition to a low-carbon economy.

On a positive note, Brazil is home to global companies operating in climate-relevant sectors, and asset managers hold a significant ownership stake in these companies through their financial assets. If policymakers encourage and monitor credible joint engagement between asset managers and these companies to align their production plans with a net-zero pathway, it has the potential to create a substantial impact on the real economy.

Recommendations for Brazil’s financial sector to impact progress toward climate targets

To advance the global sustainable finance agenda, the study recommends the following to Brazilian financial authorities: (1) invest in capacity building, (2) incorporate complementary non-greenhouse gas (GHG) metrics and standards into reporting requirements, (3) continuously monitor climate-related risks, and (4) encourage and unlock the potential of the financial sector to make an impact in the real economy’s transition towards a low-carbon economy.

Brazil’s large-scale industrial production in climate-relevant sectors, combined with the vulnerability of its biodiversity and natural resources, poses a global risk to achieving the objectives of the Paris Agreement. However, by implementing credible and enforceable climate actions, Brazil has the potential to become a leader in the sustainable finance agenda and make a positive impact toward meeting global warming targets.

The newly released report sheds light on the urgent need for aligned financial flows and investments to accelerate the nation’s transition toward a more sustainable future. Access the full report here.