Harnessing Growth: Brazil’s Transportation Innovators Move Towards Sustainability

Negative headlines in Latin America (LatAm), and in particular Brazil, have undermined recent ESG-related progress that has been made in the region. Within LatAm, Brazil is leading in the ESG space, paving the way for sustainable investing across the region.

The portfolio companies in the VanEck Emerging Markets Equity Strategy are leaders, innovators and disruptors across sectors and industries in emerging markets countries around the world, Brazil included. ESG risks and opportunities are integrated into business models and decision making. Company engagement is the very core of the investment approach and two portfolio companies – VAMOS¹ and Rumo SA² – showcase our differentiated approach to collaborative engagements, the depth and breadth of our Research Team and alpha delivered over time.

LatAm and Its ESG Agenda – Sustainable Growth Ahead

There are abundant opportunities for companies to embrace ESG practices in Latin America as a result of the following factors: 1) 30% of global biodiversity is in the region; 2) most LatAm countries signed the Paris Agreement on Climate Change,³ with most committing to 20-30% in greenhouse gas reductions and Brazil, one of the most ambitious, committing to a 43% reduction by 2030; and 3) a blue (or maritime) economy is important for the region, as Brazil, Peru and Chile are among the world´s largest fish producers.⁴

From the ESG company engagement standpoint, it is trending upwards in the region. The number of the Principles for Responsible Investment (PRI) members grew seven times over the last couple of years, as outlined in the chart below.

ESG Company Engagement Is Growing in LatAm

Source: BTG Pactual Global Research, PRI. Data as of 26 February 2021.

Brazil Paves the Way for Sustainable Investing in the Region

Brazil has been very exciting to watch, as it paves the way for sustainable investing in the region. It currently ranks #3 out of 24 countries according to the JPM ESG momentum score, a significant improvement to the country’s ESG scores. This rank is built from a bottom-up perspective, considering companies' positioning with regards to eight ESG factors, as highlighted below.⁵

Brazil Rises up in the ESG Rankings

Please note, lower number is better, indicating a country’s improvement in ESG scores.

Source: J.P. Morgan. Data as of 4 February 2021.

Brazil & ESG Today: Laying the Groundwork for a Greener Tomorrow

Source: J.P. Morgan. Data as of 4 February 2021.

Brazil’s Innovators and Their Journey to Sustainability

VAMOS – Sustainable Business Model Aligned with ESG Principles

VAMOS (0.50% of Strategy assets) is the leader in the truck, machinery and equipment rental in Brazil. The company offers customized solutions to clients with long-term contracts (five years).

Our Structural Growth Thesis:

• We believe this sector has solid fundamentals that support sector growth and an extensive addressable market.
• VAMOS is the largest player with 80% market share in the underpenetrated market.⁸
• In Q1 2021, we initiated our position in the company because of its forward-looking, sustainable and structural growth business model, responsible management team and very attractive valuation. We first engaged with VAMOS in 2020 and have met with company management four times since then.

ESG Tilt:

VAMOS is fully committed to ESG from the company’s business model and decision-making perspective. The issuer has a dedicated Sustainability Committee responsible for working closely with the Board of Directors on the sustainability of the business, by means of (i) monitoring the implementation of policies, strategies, actions and projects related to the sustainable development of the business, including socio-environmental management and communication, and (ii) evaluating reports issued by regulating agencies, especially regarding sustainable development.

VAMOS ESG initiatives include the following:

• Environmental: The main initiatives implemented by the company include: (i) conscious consumption and intelligent use of natural resources, (ii) fleet renewal and modernization (low average fleet age contributes to less emission of atmospheric pollutants), (iii) issuance of Sustainability Linked Bond by SIMPAR, its parent company, with commitment to reduce the intensity of greenhouse gases (emitted by 2030), and (iv) positive influence on the supply chain of VAMOS suppliers, among others.
• Social: Julio Simões Institute was established to centralize and enhance the social initiatives made by the controlling family. The company has also developed several initiatives such as promoting a diverse workspace, improving the safety and well-being of employees and aggregate truckers, and is committed to the inclusion of women and people with disabilities.
• Governance: VAMOS is listed in the Novo Mercado level of corporate governance, which includes the highest standards in Brazil. Additionally, the company has established best practices and related-party agreements aiming to guarantee the highest standards of corporate governance. In our view, this is an important point of discussion as some of SIMPAR’s subsidiaries operate in similar business activities.

Source: J.P. Morgan. Data as of 9 March 2021.

More recently (as of 29 April 2021), as the company is expanding its portfolio of products, VAMOS just announced its acquisition of BYD 436 electric forklift trucks, further reiterating its commitment to sustainability and alignment with ESG goals.⁹

Overall, we strongly believe that VAMOS is well positioned as a forward-looking, sustainable and structural growth company, fully equipped to capture sector growth and further expansion in Brazil, given its leadership position, platform and scale advantage and low industry penetration level. Its business model and company management are leading ESG standards in the space, naturally contributing to the reduction of polluting gases and to healthy, safe and efficient businesses.

Rumo SA – All Aboard Towards a Greener Future

Rumo SA (0.53% of Strategy assets) is the largest railway operator in Brazil, offering logistic services for rail transportation, port elevation and warehousing. The company owns and operates a large asset base, including a rail network consisting of five concessions with approximately 13,500 kilometers of lines, 1,200 locomotives and 33,000 wagons, as well as distribution centers and storage facilities.¹⁰

Our Structural Growth Thesis:

• Agricultural products have enormous growth potential. The country has a 40% share in the global trade of grains, and 25% of all exported grains are shipped by Rumo, which covers 80% of exporting regions. The planted area in Brazil should continue growing in the coming years.
• Rumo represents a play in capacity expansion in the Brazil grain region. Transportation of grains accounts for 82% of the company’s total operations volume¹¹ and is expected to continue growing.
• We have been invested in Rumo since 2018. It is a high conviction name because of its forward-looking, sustainable and structural growth trajectory. We engaged with company management five times last year.

ESG Tilt:

Rumo is fully committed to ESG from the company’s business model and decision-making perspective. The company’s sustainability strategy can be summarized in two pillars:

• Reduce carbon emissions from its operations through new, more efficient locomotives and rail cars, improvements¹² in the railway infrastructure and technology to help reduce fuel consumption.
• Improve the quality of raw materials,¹³ providing greater durability and less maintenance. For example, replacing wood ties (which last for six years) with concrete or steel ties (which last for 30 years).

Rumo’s ESG initiatives include the following:

The company is aligned with nine UN Sustainable Development Goals (SDGs), including three long-term goals related to CO2 emissions.

• Environmental: One of the most important impacts is the fact that Rumo, through its railway expansion, reduces the circulation of hundreds of trucks on the road, thereby reducing carbon emissions and the number of accidents, improving traffic in cities and increasing the safety of its population. Rumo is committed to reducing greenhouse gas emissions from locomotives by 15% by 2025 (already reduced by 26% from 2015 to 2019). Currently, the company is the largest semi-automatic train operator with 156 locomotives that consume 10% less diesel and reduce transit times by 3% versus non-automated ones. In addition, the company began operating double-stack railcars, which increase container capacity by 45% in each locomotive. With regards to waste management, 83% of waste generated in 2019 was recycled, including reuse of ties as rural fences, re-refining of used oil and recycling of tracks and other metals. And lastly, Rumo is the first company to issue green notes in Latin America: they issued $500M (maturing in 2028)¹⁴ to finance new investments in green projects that will result in further expansion of Brazil’s railway network and added efficiency. The company is constantly investing in innovation and modernization, seeking greater efficiency and mitigation of environmental impacts.
• Social: As it relates to employee safety, from 2015 to 2019, lost time injury frequency (LTIF) decreased from 2.06 to 0.13, and Rumo is committed to keep an average of 0.15 between 2020 and 2025. Employee satisfaction level reached 78% in 2019, and the company is committed to increase it to 82% by 2025. With regards to relationship with communities, Rumo generates local jobs and supports local suppliers/vendors. In addition, its other initiatives with local communities focus on education and health programs.
• Governance: Rumo has been listed on B3 since 2015 at Novo Mercado, the highest level of corporate governance. In 2020, the company established a dedicated Diversity Committee, as the Board focused on the issue. The recruitment process encourages hiring of women, and in 2018 Rumo implemented the “Women Can Work in Railways, Too” program. The company encourages female employees to apply and join leadership and operations positions within the organization.

Source: Santander Research, Company Data. Data as of 5 January 2021.

Overall, we believe Rumo is well positioned as a forward-looking and sustainable company, fully equipped to deliver structural growth in Brazil, while contributing to the reduction of the hundreds of trucks on the road, thereby reducing carbon emissions and the number of accidents, improving traffic in cities and increasing the safety of its population.

Conclusion

The VanEck Emerging Markets Equity Strategy is a long-term investor in forward-looking, sustainable and structural growth companies across sectors and industries in emerging markets around the world, LatAm included. Within LatAm, Brazil is leading in the ESG space, paving the way for sustainable investing in the region which is of utmost importance, given the region’s footprint in the global ecosystem.

Given our bottom-up approach to investing, the VanEck Emerging Markets Equity Team strives to analyze all risks and opportunities, including ESG, as they pertain to an investment in an issuer.

One consequence of the Strategy’s investment philosophy, process and approach is that the Portfolio Manager and Investment Team seek to avoid exposure (direct or indirect) to a number of controversial sectors, for example, fossil fuel, weapons manufacturing and tobacco companies. (Their list of exclusions is consistent with that from Norges Bank used by our UCITS vehicle.)

In addition, since VanEck is both a signatory to the Principles for Responsible Investment (PRI) and in compliance with the most recent Sustainable Finance Disclosure Regulation (SFDR) in Europe, the VanEck Emerging Markets Equity Strategy’s ESG factors can often align with those of such important global initiatives as the UN Sustainable Development Goals (UN SDGs)¹⁵, the Task Force on Climate-Related Financial Disclosures (TCFD)¹⁶ and EU Taxonomy¹⁷, among others. Under the SFDR regulation effective as of 10 March 2021, the Strategy’s UCITS vehicle is categorized as “light green” or Article 8.

Emerging markets investing is for the long haul and we strongly believe that the Strategy is well positioned to capture the forward-looking, sustainable and structural growth in the EM space globally.