emerging sri in brazil

HSBC Investments

November 2007

Emerging SRI in Brazil

Pedro Bastos, Chief Executive Officer

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HSBC Investments

Topics

1) About Brazil

2) SRI Developments in Brazil

3) Micro look: Brazilian Companies and SRI

4) Challenges and Opportunities

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HSBC Investments

About Brazil

4

HSBC InvestmentsWhat is normally associated with Brazil

OK, but Brazil is much more than this

5

HSBC InvestmentsIt 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


GDP* US$ 1708 billion


Rich in natural resources

12% of world´s freshwater

Source: IBGE; World Bank

* PPP criteria

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HSBC InvestmentsThe 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 A regional leader and an important global playerimportant global player

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HSBC InvestmentsIt 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…

0

1

2

3

4

5

6

1973 1983 1993 2003 2006

Source: Freedom House

Average Grade of Political Freedom and Civil Liberties

(1=best grade; 7= worst grade)

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HSBC InvestmentsIt 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

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HSBC InvestmentsBrazil presents strong potential economic growth for the future

Brazil is part of the selected group of “BRIC” countries

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

UK US

France Germany Japan

G6

Italy France Germany

Italy

Germany Japan

Russia

Brazil

India

China

BRICs

Italy

France

*cars indicate when BRICs US$GDP exceeds US$GDP in the G6

GS BRICs Model Projections.

Germany

Source: Goldman Sachs

T

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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 20061980 1985

1980US interest

rates hike

1982Mexico’s default

1994Mexican devaluation

Mr Cardoso becomes president

2003 Mr Lula da Silva (left) becomes president

2001Argentine default

1993Mr Cardoso (centre

right) becomes Finance Minister

The ‘Real’ plan (new currency and des-

indexation of the economy) is launched

1997-1998Asian crisis,

Russian default &

LTCM crisis

1999Floating

exchange rate

1950-1980: High GrowthBrazil's real average GDP growth reaches 7.5% p.a.

1980-1993: CrisisBrazil struggles with an

unsustainable debt burden, hyperinflation and crippling levels

of real interest rates

1994-Today: ReformsSound economic policies reduced the external vulnerability of the economy and remove some of the obstacles to

growth

TomorrowStable institutions

Sound economic policiesSustainable growth

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0

500

1,000

1,500

2,000

2,500

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Bef

ore

Rea

l Pla

n

0

5

10

15

20

25

Aft

er R

eal P

lan

Inflation has now come down to low levels

Source: IBGE

CPI(annual %)

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HSBC Investments... and the improvement of external accounts…

Source: MDIC

Trade Balance(USD billion annual)

-10

0

10

20

30

40

50

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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HSBC Investments… reduced the external vulnerability substantially

Source: Brazilian Central Bank

International reserves(USD billion annual)

0

20

40

60

80

100

120

140

160

180

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

The highest level in history

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-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

A sound fiscal policy...

Primary Fiscal Surplus(% of GDP)


Average 1999 - 2010

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HSBC Investments… and an efficient management of public debt...

Breakdown of Federal Public Debt(% of total)


-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1999 2000 2001 2002 2003 2004 2005 2006 2007

Dollar Fixed-rate

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0

10

20

30

40

50

60

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

… led to a stabilization of public debt (as a proportion of GDP)

Total Public Debt(% of GDP)


Average fiscal surplus: 3.5%

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HSBC InvestmentsStructural fundamentals of the Brazilian economy are more solid

Sovereign Risk(Embi Brazil bps)

Source: Bloomberg

0

200

400

600

800

1.000

1.200

1.400

1.600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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0

5

10

15

20

25

30

35

40

45

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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%

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HSBC InvestmentsThe end of the “stop-and-go” process is likely

GDP(% after Real Plan)

Source: IBGE; HSBC Forecast

-2

-1

0

1

2

3

4

5

6

7

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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HSBC InvestmentsIt is almost certain that Brazil will achieve Investment Grade

2007BB+

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

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SRI Developments in Brazil

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HSBC InvestmentsLast 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

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HSBC Investments

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)

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The financial market represents an important front for SRI growth…

Bovespa’s growth in past 5 years

US$ billion

Source: World Federation of Exchanges

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 jul/07

Negociated Volume (Accumulated year) Market Capitalization (end of period)

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In the Financial Market, Bovespa created different levels of Corporate Governance…

Source: Bovespa

VS: Voting Shares

NVS: Non Voting Shares

Characteristics Level 1 Level 2 Novo Mercado

Free Float Minimum 25% free float Minimum 25% free float Minimum 25% free float

Types of Shares VS and non VS VS and non VS with additional rights only VS

Administrative Council At least 3 members At least 5 members, 20% independentAt least 5 members, 20% independent

Financial Information optional US GAAP US GAAP USGAAP

Tag Along 80% tag along to VS 100% tag along to VS and 80% to NVS 100% tag along to VS

Arbitrage Council Optional Mandatory Mandatory

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HSBC InvestmentsWhich had impressive adherence from companies…

Source: Bovespa

Participation of Companies in Corporate Governance Levels

(% of total companies listed)

4%7%

9%12%

24%

32%

14%

23%19%

39%

48%

17%

46%

34%

66%

56%

25%

56%58%

23%

35%

0%

10%

20%

30%

40%

50%

60%

70%

2001 2002 2003 2004 2005 2006 2007

N of Companies Negotiated Volume Market Cap

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HSBC InvestmentsThis led to the creation of new stock market indices related to sustainability…

Source: Bovespa

IGC (Corporate Governance Index)

Companies listed under Level 1, 2 or Novo Mercado

ITAG (Tag Along Index )

Non voting shares with any percentage of Tag Along Rights

Voting Shares with more than 80% tag along rights

ISE (Sustainability Index)

•Companies that respond the questionaire prepared and “pass”

•At least 365 days negotiating int the stock market

•Mininum trading rules required

•Rebalance once a year

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HSBC InvestmentsSustainability Index started november 2005 with 28 companies...

Source: Bovespa

But sector concentration is still very high...

Sector Allocation 2006/2007 Index

Oil & Gas 26,37%

Chemicals 1,38%

Utilities 7,53%

Agribusiness 0,84%

Consumer 0,58%

Financial Services 43,76%

Steel 6,53%

Transportation 5,84%

Pulp and Paper 3,69%

Infrastructure 2,91%

Healthcare 0,58%

In the first rebalance 5 more companies joined...

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HSBC InvestmentsCreation of SRI index caused a boom in Brazilian SRI fund industry…

Source: Anbid

SRI Funds Growth in Brazil

0

1

2

3

4

5

6

7

8

2001 2003 2005 2007

Number of SRI Funds

HSBC FUND GROWTH

(Equity in US$ mm)

-

100

200

300

400

500

600

2001 2003 2005 2007

Equity of SRI Funds

0

10

20

30

40

50

60

70

2005 2006 2007

HSBC SRI FUND

SRI Fund Growth in Brazil

(Equity in US$ mm)

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Which will be further incremented with the participation of Pension Funds…

Brazilian Pension Funds

US$200 billion in Assets (July 2007)

17% of GDP

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

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Micro Look: Brazilian Companies and SRI

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HSBC Investments

Brazilian Companies are responding to this new demand…

• Receptive to SRI Demand

• Centralizing SRI Practices

• Measuring indicators

• Making Concrete Sustainability Goals

• Movement to signing PRI, Global Compact, CDP

• International Certifications ISO, OHSAS, etc..

• Commercialization of Carbon Credits

0% 20% 40% 60% 80% 100%

Social and Environmental reports

Report according to IBASE

Report according to GRI

Sarbanes-Oxley

Components of DJSI

% of Companies in SRI Index responding to SRI criteria

Source: Companies in SRI Index

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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 …

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HSBC Investments

One example is LASFF and its attempt at bringing SRI awareness to stakeholders…

Latin American Sustainable Finance Forum

Think Tank comprised of Financial Institutions, Academia, non governmental institutions, consulting companies, NGO’s

Different Roundtables: Microfinance, Capital Markets, SRI and Credit, etc…

Capital Markets Roundtables:

One of objectives: case studies to quantify value of

sustainable practices in sectors in Brazil

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Challenges and Opportunities

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HSBC InvestmentsBrazil has the opportunity and challenge of becoming a model country in SRI investment in emerging markets …

• Better centralization of sustainable practices in companies

• Pension Fund adherence to SRI investments

• Efforts from non governmental institutions, academia, capital markets…

• Government’s role in sustainability at local and international level

• Better vision of carbon and SRI market post Kyoto Protocol

Movement from all stakeholders

From niche to mainstream …

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HSBC Investments

Thank you

emerging sri in brazil

Economy & Finance