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Emerging SRI in Brazil

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Pedro Bastos, CEO - HSBC Investments - Brazil.

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Emerging SRI in Brazil

  1. 1. HSBC Investments November 2007 Emerging SRI in Brazil Pedro Bastos, Chief Executive Officer
  2. 2. Topics 1) About Brazil 2) SRI Developments in Brazil 3) Micro look: Brazilian Companies and SRI 4) Challenges and Opportunities
  3. 3. About Brazil
  4. 4. What is normally associated with Brazil OK, but Brazil is much more than this
  5. 5. It is a country with large numbers Population 189 million 5º largest in the world (Sao Paulo is one of top five cities in world in terms of population) Area 8,5 million km² 5º largest in the world GDP* US$ 1708 billion 9º largest in the world Rich in natural resources 12% of world´s freshwater Source: IBGE; World Bank * PPP criteria
  6. 6. The most important economy in Latin America Countries ranked by GDP* Brazil 1708 billion Mexico 1193 billion Argentina 618 billion Colombia 363 billion Chile 208 billion Venezuela 203 billion Peru 188 billion Source: World Bank * PPP criteria A regional leader and an important global player
  7. 7. It is a stable democracy … and is in a good position in terms of political rights and civil liberties when compared to other emerging countries Brazil has gone through a successful process of democratization since the eighties… Source: Freedom House Average Grade of Political Freedom and Civil Liberties (1=best grade; 7= worst grade)
  8. 8. It respects the world environment and is not involved in geopolitical tensions 1994: Climate Change 1990: Ozone Layer 1990: CFC Control 1994: Law of the Sea 1994: Biological diversity 2002: Kyoto Protocol 1975: CITIES 1997: CCD 2004: Stockholm Convention Brazil signed many environment treaties… … and does not have geopolitical tensions Source: World Bank
  9. 9. Brazil presents strong potential economic growth for the future Brazil is part of the selected group of “BRIC” countries Source: Goldman Sachs T
  10. 10. 1995 Financial system 1998 Partial social security reform 1999 New economical policy framework: floating exchange rate, inflation targeting, fiscal austerity 2000 Fiscal Responsibility Law 2002 Election of president Lula reduced the political risk 2003 Public sector social security reform During this period: openness of the economy and privatizations Important reforms were implemented during the last decade 1975 1990 1995 2000 2006 1980 1985 1980 US interest rates hike 1982 Mexico’s default 1994 Mexican devaluation Mr Cardoso becomes president 2003 Mr Lula da Silva (left) becomes president 2001 Argentine default 1993 Mr Cardoso (centre right) becomes Finance Minister The ‘Real’ plan (new currency and des-indexation of the economy) is launched 1997-1998 Asian crisis, Russian default & LTCM crisis 1999 Floating exchange rate 1950-1980: High Growth Brazil's real average GDP growth reaches 7.5% p.a. 1980-1993: Crisis Brazil struggles with an unsustainable debt burden, hyperinflation and crippling levels of real interest rates 1994-Today: Reforms Sound economic policies reduced the external vulnerability of the economy and remove some of the obstacles to growth Tomorrow Stable institutions Sound economic policies Sustainable growth
  11. 11. Inflation has now come down to low levels Source: IBGE CPI (annual %)
  12. 12. ... and the improvement of external accounts… Source: MDIC Trade Balance (USD billion annual)
  13. 13. … reduced the external vulnerability substantially Source: Brazilian Central Bank International reserves (USD billion annual) The highest level in history
  14. 14. A sound fiscal policy... Primary Fiscal Surplus (% of GDP) Source: Brazilian Central Bank Average 1999 - 2010
  15. 15. … and an efficient management of public debt... Breakdown of Federal Public Debt (% of total) Source: Brazilian Central Bank
  16. 16. … led to a stabilization of public debt (as a proportion of GDP) Total Public Debt (% of GDP) Source: Brazilian Central Bank Average fiscal surplus: 3.5%
  17. 17. Structural fundamentals of the Brazilian economy are more solid Sovereign Risk (Embi Brazil bps) Source: Bloomberg
  18. 18. In this context, the decline in interest rates is sustainable Interest rate (Real Selic rate -effective and forecast- in red and grey and inflation –effective and forecast- in blue) Source: Brazilian Central Bank; HSBC Forecast Real interest rates below 10%
  19. 19. The end of the “stop-and-go” process is likely GDP (% after Real Plan) Source: IBGE; HSBC Forecast
  20. 20. It is almost certain that Brazil will achieve Investment Grade 2007 BB+ 2006 BB 2004 BB- 2002 B+ 2001 BB- 1999 B+ 1997 BB- 1995 B+ 1994 B Rating for Long-Term Debt (S&P) INVESTMENT-GRADE Highest quality AAA High Quality AA+ AA AA- Strong payment capacity A+ A A- Adequate payment capacity BBB+ BBB BBB- SPECULATIVE-GRADE Likely to fulfill obligations, BB+ ongoing uncertainty BB BB- High-risk obligations B+ B B- Only one notch! Source: Bloomberg
  21. 21. SRI Developments in Brazil
  22. 22. Last decade foundation for SRI industry in Brazil was created… 1997: Ibase:Creation of Brazilian SRI Reporting standard 2001: Novo Mercado Created 2001: First SRI Fund in Brazil 2001: New SA’s Law 2005: IGC, ITAG, and ISE indices launched 2005: BM&F begins certifying CERS 2007: BM&F Carbon Exchange launched 2007: LASFF launched 2007: Rio + 15 conference Participation of government, institutions, markets… Source: Bovespa, BM&F, Ibase
  23. 23. Initiatives came from many different fronts … Media ... - Valor Econômico - Carta Capital - Exame Academia ... - FGVCES – (Fundação Getulio Vargas Center for sustainability studies) -LASFF- (Latin American Sustainbable Finance Forum) . Non governmental Organizations ... - IBASE (Brazilian Institute for Social and Economic studies) - IBGC (Brazilian Institute For Corporate Governance) Capital Markets… - CVM (Regulator) - BOVESPA (São Paulo Stock Exchange) -BM&F (futures stock exchange)
  24. 24. The financial market represents an important front for SRI growth… Bovespa’s growth in past 5 years US$ billion Source: World Federation of Exchanges
  25. 25. In the Financial Market, Bovespa created different levels of Corporate Governance… Source: Bovespa VS: Voting Shares NVS: Non Voting Shares Mandatory Mandatory Optional Arbitrage Council 100% tag along to VS 100% tag along to VS and 80% to NVS 80% tag along to VS Tag Along USGAAP US GAAP optional US GAAP Financial Information At least 5 members, 20% independent At least 5 members, 20% independent At least 3 members Administrative Council only VS VS and non VS with additional rights VS and non VS Types of Shares Minimum 25% free float Minimum 25% free float Minimum 25% free float Free Float         Novo Mercado Level 2 Level 1 Characteristics
  26. 26. Which had impressive adherence from companies… Source: Bovespa Participation of Companies in Corporate Governance Levels (% of total companies listed)
  27. 27. This led to the creation of new stock market indices related to sustainability… Source: Bovespa <ul><ul><li>IGC (Corporate Governance Index) </li></ul></ul><ul><ul><ul><li>Companies listed under Level 1, 2 or Novo Mercado </li></ul></ul></ul><ul><ul><li>ITAG (Tag Along Index ) </li></ul></ul><ul><ul><ul><li>Non voting shares with any percentage of Tag Along Rights </li></ul></ul></ul><ul><ul><ul><li>Voting Shares with more than 80% tag along rights </li></ul></ul></ul><ul><ul><ul><li>ISE (Sustainability Index) </li></ul></ul></ul><ul><ul><ul><li>Companies that respond the questionaire prepared and “pass” </li></ul></ul></ul><ul><ul><ul><li>At least 365 days negotiating int the stock market </li></ul></ul></ul><ul><ul><ul><li>Mininum trading rules required </li></ul></ul></ul><ul><ul><ul><li>Rebalance once a year </li></ul></ul></ul>
  28. 28. Sustainability Index started november 2005 with 28 companies... Source: Bovespa <ul><ul><li>But sector concentration is still very high... </li></ul></ul>In the first rebalance 5 more companies joined... 0,58% Healthcare 2,91% Infrastructure 3,69% Pulp and Paper 5,84% Transportation 6,53% Steel 43,76% Financial Services 0,58% Consumer 0,84% Agribusiness 7,53% Utilities 1,38% Chemicals 26,37% Oil & Gas   Sector Allocation 2006/2007 Index
  29. 29. Creation of SRI index caused a boom in Brazilian SRI fund industry… Source: Anbid SRI Funds Growth in Brazil HSBC FUND GROWTH (Equity in US$ mm) SRI Fund Growth in Brazil (Equity in US$ mm)
  30. 30. Which will be further incremented with the participation of Pension Funds… <ul><li>Brazilian Pension Funds </li></ul><ul><li>US$200 billion in Assets (July 2007) </li></ul><ul><ul><li>17% of GDP </li></ul></ul>2005-06 PREVI – largest and only Latin American Pension Fund to participated in elaboration of UN’s Principles for Responsible Investment (PRI) 2007 Three more Brazilian pension funds signed PRI 2007 Large pension funds already have in-house SRI analysis 05/2007 First major event organized by academia (FGV and LASFF) to discuss performance of SRI investment with Pension Funds in Brazil
  31. 31. Micro Look: Brazilian Companies and SRI
  32. 32. Brazilian Companies are responding to this new demand… <ul><li>Receptive to SRI Demand </li></ul><ul><li>Centralizing SRI Practices </li></ul><ul><li>Measuring indicators </li></ul><ul><li>Making Concrete Sustainability Goals </li></ul><ul><li>Movement to signing PRI, Global Compact, CDP </li></ul><ul><li>International Certifications ISO, OHSAS, etc.. </li></ul><ul><li>Commercialization of Carbon Credits </li></ul>% of Companies in SRI Index responding to SRI criteria Source: Companies in SRI Index
  33. 33. However there are still a lot of work to be done… RISKS Euphoria, FADS with no concrete post movements Sporadic SRI movement but no strategic decisions regarding SRI Difficulty in quantifying value of sustainable practices suppresses demand … therefore ENGAGEMENT is key …
  34. 34. One example is LASFF and its attempt at bringing SRI awareness to stakeholders… <ul><li>Latin American Sustainable Finance Forum </li></ul><ul><li>Think Tank comprised of Financial Institutions, Academia, non governmental institutions, consulting companies, NGO’s </li></ul><ul><li>Different Roundtables: Microfinance, Capital Markets, SRI and Credit, etc… </li></ul><ul><li>Capital Markets Roundtables: </li></ul><ul><ul><ul><li>One of objectives: case studies to quantify value of </li></ul></ul></ul><ul><ul><ul><li>sustainable practices in sectors in Brazil </li></ul></ul></ul>
  35. 35. Challenges and Opportunities
  36. 36. Brazil has the opportunity and challenge of becoming a model country in SRI investment in emerging markets … <ul><li>Better centralization of sustainable practices in companies </li></ul><ul><li>Pension Fund adherence to SRI investments </li></ul><ul><li>Efforts from non governmental institutions, academia, capital markets… </li></ul><ul><li>Government’s role in sustainability at local and international level </li></ul><ul><li>Better vision of carbon and SRI market post Kyoto Protocol </li></ul><ul><li>Movement from all stakeholders </li></ul>From niche to mainstream …
  37. 37. HSBC Investments Thank you

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