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  • Emerging Markets Equity

    Harnessing Growth: Brazil’s Transportation Innovators Move Towards Sustainability

    Patricia Gonzalez, Senior Analyst
    David Semple, Portfolio Manager, Emerging Markets Equity Strategy
    Oksana Miller, Product Manager
    May 14, 2021
     

    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 – VAMOSand Rumo SA– 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,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

    ESG Company Engagement Is Growing in LatAm

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

    Brazil Rises Up the ESG Rankings

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

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

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

    Environmental
      Emissions & Waste
    • Brazil ranks 13 out of 213 countries in terms of highest CO2 total emissions.
    • Waste collection increased on a year over year basis, better than waste generation.
      Environmental Policy
    • Brazil’s Forest Code establishes rules and limits for the exploration of lands, areas that must be preserved and which regions are allowed to be used for agribusiness activity. The latest Forest Code (from 2012) demands that all rural properties must protect and preserve a minimum percentage of its land; in the Amazon the minimum required is 80% and 20% in the other biomes.
    • PNMA (National Environment Program) is the most important initiative, providing support to institutions and reinforcing environment management on federal, state and municipal levels.
    • IBAMA (Brazilian Institute for the Environment and Renewable Resources) and ICMBio (Chico Mendes Institute) are the two main regulators, responsible for national environment policy and management of research programs and preservation initiatives, respectively.
      Resource Efficiency
    • Brazil has the most sustainable energy grid in the world – hydroelectric is the largest source for both generation and installed capacity.
    • Sewage collection is on the path of providing universal access to treated water by 2033.
    Social
      Human & Labor Rights
    • Full time employees (56% of workforce) are supported by Labor Law that grants benefits for all sectors’ employees. Part-time employees are not protected by the law but can contribute to social security.
    • Labor reform in 2017 allowed flexibility in labor relations, leading to a deceleration in the number of lawsuits.
      Customer & Community Satisfaction
    • Brazil stands at 132 out of 180 countries in terms of happiness, decreasing 17 positions relative to the latest poll.
      Employment Policy
    • In 2019, women accounted for 19% of leadership positions, while 58% of Brazilian companies listed on B3did not have women on their Board of Directors.
    Governance
      Risk & Controls
    • B3 has five listing segments to develop the national capital market and offer options to companies with different business segments. The most important segment option is Novo Mercado.7
    • There are B3 indices related to corporate governance and sustainability comprising companies that adhere to specific requirements, such as CO2 emission, management quality and sustainability, among others.
      Capital Management
    • Listed companies insist on migrating to one share class.
    • Corruption continues to be an issue.

    Source: J.P. Morgan. Data as of February 4, 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 March 9, 2021.

    More recently (as of April 29, 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:

    1. 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.
    2. 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 January 5, 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 March 10th, 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.

    DISCLOSURES

    VAMOS is 0.50% of Strategy assets as of March 31, 2021.

    Rumo SA is 0.53% of Strategy assets as of March 31, 2021.

    The Paris Agreement on Climate Change is an agreement within the UN Framework on climate change mitigation, adaptation and finance. The agreement's language was negotiated by representatives of 196 state parties at the 21stConference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC) and adopted by consensus in 2015. As of March 2021, 191 members of the UNFCCC are parties to the agreement.

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

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

    B3, which stands for Brasil, Bolsa, Balcão, formerly BM&FBOVESPA, is a stock exchange located in São Paulo, Brazil, and the second oldest of the country.

    In Brazil, B3 Novo Mercado is considered the highest standard of corporate governance, L1 and L2.
    Source: BofA Global Research. Data as of February 10, 2021.

    Source: Company Data. Data as of March 31, 2021.

    Source: Banco Bradesco BBI S.A. Data as of April 29, 2021.

    10 Source: Company Data, Framework and Overview. As of March 31, 2021.

    11 Source: Company Data. As of March 31, 2021.

    12 Railway improvements can be improvements from the raw material used to build and renovate the tracks to technology used to control locomotives. Source: Company Data, Framework and Overview. As of March 31, 2021.

    13 Improvements of the quality of raw materials are aligned with the UN SDG 12 – Responsible Consumption and Production –it is directly correlated with positive impact with regards to safety and reliability of operations.
    Source: Company Data, Framework and Overview. As of March 31, 2021.

    14 Source: Company Data. As of March 31, 2021.

    15 The Principles for Responsible Investment (PRI) provides research and education, and facilitates collaboration, to help investors align their responsible investment practices with the broader sustainable objectives of society – as currently best defined by the UN SDGs.
    Norges Bank expectations of companies largely coincide with the UN SDGs as well.
    The EU Sustainable Finance Disclosure Regulation (SFDR) – on 25 September 2015, the UN General Assembly adopted a new global sustainable development framework: the 2030 Agenda for Sustainable Development (the “2030 Agenda”), which has at its core the UN SDGs. The EU Commission Communication of 22 November 2016 on the next steps for a sustainable European future links the SDGs to the Union policy framework to ensure that all Union actions and policy initiatives, both within the Union and globally, take the SDGs on board at the outset. In its conclusions of 20 June 2017, the Council confirmed the commitment of the Union and its Member States to the implementation of the 2030 Agenda in a full, coherent, comprehensive, integrated and effective manner, and in close cooperation with partners and other stakeholders.

    16 Task Force on Climate-Related Financial Disclosures (TCFD) are included in the PRI Reporting under climate-related risks, climate-related opportunities, physical climate risks and transition risks.

    17 EU Taxonomy is a part of the SFDR Regulation mentioned above, scheduled to roll out in 2022 and 2023:

    • January 2022: Climate change mitigation and adaptation.
    • January 2023: Circular economy, pollution, water and ecosystems.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources is believed to be reliable and has not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. Strategy holdings will vary.

    Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

    ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

    ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

    Van Eck Associates Corporation

  • Authored by

    Patricia Gonzalez
    Senior Analyst

    David Semple
    Portfolio Manager, Emerging Markets Equity Strategy

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    Oksana Miller
    Product Manager