Up until now Marcelo Bacci, Chief Financial Officer at the Brazilian pulp and paper company Suzano, wouldn’t have thought of attending a UN Climate Change Conference. But in a sign of how much time he now spends on sustainability, the scrutiny his department receives from the company’s creditors and investors and his need for fluency in key sustainability concepts, he plans to attend COP26 this November. “It is becoming more important for the company to have access and be exposed to cutting edge global sustainability concepts. We need to bring them into our work,” says Bacci, who oversees a treasury team of 20 (the wider finance department is around 400) at the Salvador-based company that uses sustainably grown wood from eucalyptus plantations to feed global demand for products like toilet tissue, nappies and paper.
Integrating sustainability begins with targets. Suzanno went public with a raft of far-reaching sustainability targets last year following three years of discussions that included harmonising goals with Fibria, a domestic forestry rival it bought in 2018. Choosing and setting targets was made easier by the fact sustainability lies at the heart of the business and is already central to how the group differentiates itself from competitors. “Our clients value the fact that we have a traceable supply chain and we only work with planted trees. The fact we only produce pulp from planted trees has a value in the pulp market, it is something very much linked to our business and differentiates the company from competitors.”
His most important piece of advice is to set targets in line with broad corporate strategy. Don’t link them to one off or particular financial transactions like, for example, a green bond, he warns. “All our sustainability targets have a business orientation and haven’t been developed to support a financial transaction. This link ensures first that our targets are genuine, and secondly that they make sense for the business.”
Once targets are set, treasury and finance departments play a central role communicating them to investors, says Bacci. “We have to explain to investors and creditors how we are going to reach our targets. It’s not just a number; we have to detail what we are going to do to get there.” Most importantly, it is a chance to differentiate Suzano from the pack.
And as more equity and fixed income investors pile into ESG and competition for assets grows, Bacci is convinced Suzano’s sustainability record will give the company an advantage. “We like this trend. We follow high standards and believe that the more attention the financial community pays to sustainable issues the better it is for Suzano - and for the world.” Around 65% of the company’s equity float is international investors of which he says a significant proportion are ESG-savvy European institutions, with whom sustainability is already an important seam of conversation. In the last year he says ESG-minded US and Brazilian investors are increasingly cropping up at investor meetings too.
Suzano’s ability to articulate its sustainability story to investors is particularly important given the company’s need to distinguish itself from sustainability laggards in Brazil’s wider agribusiness sector. Last year Nordea Asset Management delisted Brazilian meat producer JBS over transparency failings in its supply chain related to deforestation and the sharp rise in Amazon fires. Corporate destruction of the Amazon is an example of how some companies can create a reputational issue for others, or worse still in Bacci’s words, “the whole country.” It shadows the impact of Suzano’s important environmental policies that include setting aside a vast area of Brazil’s natural forest for permanent conservation, and reforesting thousands of hectares more with WWF Brazil.
But rather than calling for more regulation, he calls for better application of Brazil’s existing laws, and more standardisation. “Environmental legislation is good in Brazil. [The problem is] when the government is not clear about its ability to enforce the law. Companies that don’t follow the rules should be punished.” Moreover, he believes change is coming via influential investors allocating capital to best-in-class companies, and the steady evolution of sustainable finance linked to broad corporate targets. “Self-imposed, market forces are working,” he says.
Suzano became the first emerging market corporate to issue a step-up bond last September, selling a US$750m bond linked to the company’s ability to limit carbon emissions. The issue, which attracted bids of more than US$6bn, is tied to the company cutting its greenhouse gas emissions by 15% over ten years. Should the firm fail to reach the target by 2026, it will have to pay an additional 25 basis points on its coupon.
The finance team had to explain to investors how the bond gave the company skin in the game, says Bacci. “It took a long time to explain the strategy and structure,” he says. “Having a sustainability target linked to a financial transaction in a structure where your cost of capital goes up if you don’t reach the target is a good way to say to the world that you are serious about sustainability - to say that you are willing to pay the price financially and reputationally if you don’t achieve the targets. It’s very efficient, and treasury is closely linked to this process.”
The bond issue has also broadened the company’s investor base. “We had a significant number of ESG dedicated investors looking to buy this security in addition to our normal investor base.” That said, although ESG investors were notably present during roadshows, he does note that it is difficult to distinguish the pockets of ESG investors from mainstream investors at the big investment houses like BlackRock.
In a bid to sharpen stakeholder communication, Suzano has created an internal task force comprising the company’s communications and marketing departments with investor relations and treasury. “In the past we didn’t need to consolidate these efforts. But different parts of the company communicate with different stakeholders, and we need to make sure the strategic message is the same.”
Meeting targets involves investment, once again placing treasury at the heart of a company’s ESG integration. “Our finance department is intimately linked because in order to achieve some of our sustainability targets, we need to make investments,” explains Bacci.
Suzano invests around 1% of its annual revenue (equivalent to around US$50-60m) in sustainability under the umbrella of a bio-strategy focused on business development and R&D. It spans investment in new technologies around planting and harvesting, as well as developing cutting-edge products designed from pulp. For example, the company has created a lignin-based product line (a material found in wood that is responsible for supporting and protecting trees) that can also serve the resin, rubber and plastic markets.
Elsewhere, Suzano has entered the textile industry with an equity stake in Spinnova, a Finnish company that develops environmentally sustainable technologies for the production of fabrics using wood fibres. “Given the renewable nature of our product, we believe that pulp can be used to produce other things and will be able to substitute plastic and fossil fuels as we bring sustainability as well as product functionality to market. In our case this link is very clear.”