To waste one good crisis is sad. To waste two is unconscionable. But will investors in Brazil make good use of the apparently separate crises over water and corruption?
São Paulo, a city where drinking water was, until recently, used to flush toilets, wash cars and clean pavements, has faced its worst drought for 84 years. The knock-on effects – hydro-electricity shortages, for example – could be dire. Why should Brazil, which produces 12% of the world’s fresh water, be so short of this critical resource in its most economically important city?
São Paulo’s water utility, Sabesp, was asleep at the wheel, but, as with other preventable surprises, a lack of warning wasn’t the core problem. It was rather denial about plausible worst-case scenarios, and the undervaluing of prevention and resilience. As highlighted by Brazil’s most respected climatologists, “If deforestation in the Amazon continues, São Paulo will probably dry up – if we don’t act now, we’re lost”.
On corruption, Brazil has a strong legal framework and is seen as an emerging market role model. But it was ranked 69th out of 175 countries in the 2014 Corruption Perceptions index. As with sustainability, there is a big gap between ‘walk’ and ‘talk’.
The Petrobras scandal could still become systemic. A leading construction company has filed for bankruptcy, while others are missing debt payments. With $139bn (€130.7bn) in total debt, Petrobras is the world’s most indebted oil producer. If it loses its investment-grade rating, inevitable government action might in turn affect the country’s credit rating.
Nor is this problem limited to Petrobras. A senior federal police official says: “It seems as if we’re facing a business model that is repeated in contracts around Brazil’s public sector.”
Nor is this just a problem for Brazil: Argentina, Chile and Mexico also have corruption scandals. Frank Vogl, co-founder of Transparency International, says that, in the midst of virtual economic stagnation, “Latin America is being drained on a massive scale of ‘dirty’ cash flowing overseas to be laundered on behalf of tax evaders, criminal networks and corrupt politicians and public officials”. Global Financial Integrity puts illicit financial flows out of Latin America at around 3% of GDP annually, whilst real economic growth in the region was an estimated 0.4% for 2014.
Both issues were ignored in the boom. Some corporates have taken action, but changes are incremental.
Who is really leading the fight to resilience? On water, it is small NGOs and plucky journalists. And on corruption, it is again courageous journalists, prosecutors and judges.
Investors and corporations have largely been AWOL on both crises. That investors share responsibility for safeguarding the beta – ‘universal ownership’ or ‘fiduciary capitalism’ – is a long way from investor boardroom consciousness. Chasing alpha, today’s version of flat-earth thinking, remains the obsession in financial centres globally.
But investors could so easily be part of the solution. A major Brazilian livestock company acted on water scarcity following a clear request from its leading corporate client.
Investors need no more evidence to require Brazilian companies to implement credible water management and whistleblowing systems, reporting on actual impact annually. Enough tummy-tickling engagement! On some issues, it’s time for ‘forceful stewardship’, using resolutions if needed.
With a large home-country bias, coordination among a handful of big investment firms would have impact. And corporate Brazil could then challenge international investors to trigger similar action in other countries, ensuring the country is rewarded for being a first mover.
Raj Thamotheram is CEO at Preventable Surprises and a visiting fellow at the Smith School, Oxford University; Gustavo Pimentel is managing director at Brazil’s SITAWI Finance for Good
No comments yet