SUSTAINABILITY AND CAPITAL MARKETS IN BRAZIL: A QUARTERLY NEWSLETTER ISSUE 4: COFCO International’s Role in Brazil

17 March 2020

Authors: Michele Riotta and Matthew Piotrowski

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Issue 4, March 17, 2020 Sustainability and Capital Markets in Brazil, a newsletter published by Climate Advisers, provides quarterly analysis of political and market developments that could increase ESG-related material risks for investors in soft commodities in Brazil.

ISSUE 4: COFCO International’s Role in Brazil • COFCO International has invested USD 4 billion into its Brazilian activities in

recent years. • The company has opposed a moratorium on the use of deforested land in the

Cerrado for soy production. • Future Chinese meat demand and the company’s plans for further investments in

Brazil present enormous deforestation-related risks.

The COFCO Corporation, China’s top food company, is an unlisted, state-owned enterprise with a number of subsidiary business units active in several sectors, including the production, processing, and trading of agricultural commodities. Among these is COFCO International, COFCO’s vertically integrated trading arm. This briefing looks at COFCO International’s role in the Brazilian soy market, which is a major contributor to deforestation in the Cerrado.

COFCO International COFCO International has 11,000 employees and is based in Geneva, Switzerland. While the company in its current form began operating in 2014, COFCO International as a COFCO Corporation subsidiary has been active since 2001, when it was created as a food and beverage company.1 Today, the company is active in the production, storage, processing, trading and distribution of grains, oilseeds, and sugar. Until 2014, China, through COFCO Corporation, bought agricultural commodities from global trading houses but was not itself involved in the trading business.2 With the 2014 acquisitions of the agricultural commodities trading unit of Noble, a Singaporean trading house, and Nidera, a Dutch agricultural trader, China moved to create a global food supply chain to meet its growing domestic demand. These transactions occurred against a backdrop of growing Chinese investments into foreign firms to secure food supply and establish a food supply chain, totaling USD 8.2 billion in 2013 alone.3 Today, COFCO International has an annual revenue of USD 31 billion and handles 106 million tons of soft commodities, of which only 20-30 percent is destined for the Chinese market.4 While it is

1 “COFCO injects oils, wines units into China Foods” Reuters. January 31, 2001. 2 Thukral, N. & Thomas, D. “Exclusive: China's COFCO in talks to buy Noble's agribusiness arm – sources” Reuters. March 4, 2014. 3 Levin, N. & Kent, S. “With Cofco Acquisitions, China Builds Food Supply Chain” The Wall Street Journal. April 2, 2014. 4 Terazono, Emiko. “China’s Cofco International aims to boost grain and soyabean purchases” Financial Times. March 26, 2019.

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active in 35 countries, 60 percent of its assets are concentrated in South America.5 The company’s Board of Directors is constituted of representatives from its major shareholders: the Board Chair and six directors from COFCO Corporation, and one director each from the International Finance Corporation, China Investment Corporation, Hopu Investment Management and Temasek, Singapore’s sovereign wealth fund.6 Standard Chartered is also a COFCO International shareholder, despite its commitment to not provide direct financial services to “operations that grow, process, or trade soy from the Brazilian Amazon or Brazilian Cerrado.”7 8

Brazil Is the Top Market for COFCO International Brazil is COFCO International’s principal sourcing market: in 2018, the company exported over 13 million tons of grains and oilseeds and crushed 15 million tons of sugar cane in its sugar mills. Approximately 7,500 of the company’s 11,000 employees are based in Brazil, and the company expects to increase its Brazilian soy purchases by 5 percent annually for the next five years.9

Figure 1: Chinese Imports of Raw Agricultural Products from Brazil (USD thousand)

Source: United Nations Statistics Division

5 “China's COFCO says Brazil needs more logistics investments” Reuters. July 23, 2018. 6 COFCO International. “Board of Directors” 7 COFCO International. “Our shareholders” 8 Standard Chartered. “Sustainability. Our Position Statements. Agro-Industries.” 9 COFCO International. “Johnny Chi gives keynote address at Brazil agribusiness conference” August 5, 2019.

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750,000.00

1,500,000.00

2,250,000.00

3,000,000.00

3,750,000.00

4,500,000.00

5,250,000.00

6,000,000.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Over the past several years, soy exports have totaled between 5-7 million tons, while corn exports have been between 2.5 and 4 million tons.10 In terms of its soy operations in Brazil, COFCO International currently operates one soy crushing plant and 19 grains and oilseeds silos, as well as export facilities in Santos. The majority of the company’s physical assets are located outside of the Cerrado and less than one-third of its soy volumes are sourced from the region.11 COFCO International is looking to deepen and expand its operations in Brazil: the company has planned construction of a corn ethanol plant in the country, and it has also planned new investments in transportation logistics and silos. Investments in Brazil’s meat industry would be unsurprising given recent statements from COFCO International leadership.12 As the company has expanded in Brazil, it has faced governance difficulties. COFCO International merged its Nidera and Noble business units in 2017 but had to contend with accounting issues, which in turn affected the expansion of its Brazilian operations.13 Management issues have continued to affect the company to this day: just last month, COFCO dismissed its Brazilian logistics director for grain and oilseed and appointed a new Managing Director for Brazil.14 15

COFCO International Sustainability Commitments

COFCO International has made a wide-ranging series of commitments across the ESG spectrum that are central to its investment thesis and branding, going so far as to retain Salter Baxter, a sustainability communications firm, to produce its sustainability report. By request of the International Finance Corporation, the sustainability report also contains non-financial material information from the company’s Environmental and Social Action Plan.1617 Together with NGO partners, COFCO International has identified the following areas of its Brazilian soy operations in the Cerrado as central to its sustainability policy: deforestation and native vegetation conversion, indigenous land, land rights and conflicts, forced labor, and embargoed areas.18 Embargoed areas and moratoriums have seen increasing attention in the past year. About half of the Cerrado’s 200 million hectares of native vegetation have been lost to agricultural expansion, as its soy is used to meet demand in the EU and China and feed chickens sold to major retailers. Through their trade association Anec, major trading houses including Archer Daniels Midland Co, Cargill Inc,

10 Samora, R. & Teixeira, M. “China's COFCO says soy exports from Brazil to slump on African swine fever crisis; corn to jump” Reuters. September 24, 2019. 11 WBCSD/COFCO International. “Soft Commodities Forum Progress Report” June 2019. 12 COFCO International. “Johnny Chi gives keynote address at Brazil agribusiness conference” August 5, 2019. 13 Saul, J. & Mano, A. “Exclusive: China's COFCO overhauls Brazil business after accounting crisis – sources” Reuters. May 26, 2017. 14 “COFCO fires Brazil logistics director in ongoing shakeup –sources” Reuters. February 12, 2020. 15 “COFCO International expands executive committee, changes Brazil head” Reuters. February 6, 2020.

16 Salter Baxter. “COFCO International – Case Study” 17 COFCO International. “Sustainability Report” 18 WBCSD/COFCO International. “Soft Commodities Forum Progress Report” June 2019.

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Louis Dreyfus Corp and Glencore, as well as COFCO International, have banned financing or selling soy that was grown on land in the Amazon that was deforested after 2008. The trading firms recently affirmed their commitment to the moratorium, contesting Brazil’s President Jair Bolsonaro and the country’s association of soybean producers when they suggested last year scrapping it.19 Anec, however, has opposed a similar moratorium in the Cerrado. While the moratorium in the Amazon had a limited impact given that 80 percent of untouched land in the region was already protected under Brazilian law, regulations in the Cerrado require the preservation of less than 40 percent. Anec’s support for the Amazon moratorium and opposition to the one in the Cerrado appears to be driven in large part by business prospects in each region.2021 Companies including McDonald’s, Walmart and Unilever have called for the moratorium to be expanded in the Cerrado.22 The International Finance Corporation has pushed COFCO International to support measures that would penalize farmers who deforest illegally.23 Anec members have agreed to expand reporting on their operations in the Cerrado, but a number of investors and activists do not believe these measures are sufficient. Instead, they support expanding the moratorium to the region, which COFCO International and Anec oppose.24 COFCO International has also announced that it would link its USD 2.3 billion main bank credit facility to sustainability goals: loans from this facility would incentivize borrowers to meet ESG objectives and improvements.25 In Brazil, COFCO International is launching a program to provide financing to farmers who produce soy on the 25 million hectares of existing open land and avoid further deforestation.26

Cofco International’s Growing Risks and Opportunities COFCO International’s presence in Brazil raises risks and opportunities for the company as it continues to grow the China-Brazil trade link. While China’s population growth is slowing, rising incomes have allowed the diet of the country’s population to include more meat, and COFCO International is well-positioned to meet this demand through Brazilian beef. Researchers estimate that under current projections of future meat consumption in China, the country would cause an additional gigaton of carbon dioxide equivalents, which is greater than the entire global aviation

19 Gross, Anna. “Green Activists push soya traders on Brazil deforestation” Financial Times. March 4, 2019. 20 Ibid. 21 Ibid. 22 Ibid. 23 Ibid. 24 Ibid. 25 COFCO International. “Johnny Chi gives keynote address at Brazil agribusiness conference” August 5, 2019. 26 Ibid.

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industry.27 The company’s shareholders, IFC in particular, are concerned with the company’s carbon footprint, and contributing to such an expansion in emissions would run counter to the company’s stated policies, not to mention those of the Chinese government. Furthermore, unsustainable practices may threaten ties with European partners, which have already demonstrated willingness to sever relationships with companies that have poor environmental records. While COFCO International has a strong sustainability strategy, its future goals and recent actions in the Cerrado suggest a willingness to prioritize economic growth over environmental stewardship and would jeopardize its relationship with sustainability-conscious shareholders and partners.

27 Rossi, Marcello. “The Chinese Are Eating More Meat Than Ever Before and the Planet Can’t Keep Up”. Mother Jones. July 31, 2018.