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FinalReportApril2009

IFCSustainableInvestmentCountryReports:

SustainableInvestmentinBrazil2009

w w w . t e r i e u r o p e . o r g


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IFCSustainableInvestmentCountryReports:

SustainableInvestmentinBrazil2009

FINALREPORT

APRIL2009

Preparedfor

InternationalFinanceCorporation(IFC)AMemberoftheWorldBankGroupwww.ifc.org

IFCTaskManager

BrunnoMaradei,ProjectOfficer,Environment&SocialDevelopmentDepartmentPreparedby

TERIEuropewww.terieurope.orgWrittenandeditedby

RituKumarandDanSiddy

Copyright2009InternationalFinanceCorporation2121PennsylvaniaAvenue,NWWashington,DC20433Allrightsreserved.

Thefindings,interpretations,andconclusionsexpressedinthispublicationshouldnotbeattributedinanymannertotheInternationalFinanceCorporation,toitsaffiliatedorganizations,ortomembersofitsboardofExecutiveDirectorsorthecountriestheyrepresent.NeithertheInternationalFinanceCorporationnorTERIEuropeguaranteethedataincludedinthispublicationandneitherpartyacceptsresponsibilityforanyconsequenceoftheiruse.Thematerialinthisworkisprotectedbycopyright.Copyingand/ortransmittingportionsorallofthisworkmaybeaviolationofapplicablelaw.TheInternationalFinanceCorporationencouragesdisseminationofitsworkandherebygrantspermissiontotheuserofthisworktocopyportionsfortheirpersonal,noncommercialuse,withoutanyrighttoresell,redistribute,orcreatederivativeworkstherefrom.AnyothercopyingoruseofthisworkrequirestheexpresswrittenpermissionoftheInternationalFinanceCorporation.Forpermissiontophotocopyorreprint,pleasesendarequestwithcompleteinformationto:InternationalFinanceCorporation,c/otheWorldBankPermissionsDesk,OfficeofthePublisher,1818HStreetNW,Washington,DC20433

Allqueriesonrightsandlicensesincludingsubsidiaryrightsshouldbeaddressedto:InternationalFinanceCorporation,c/otheOfficeofthePublisher,WorldBank,1818HStreet,NW,Washington,DC20433,Fax:+12025222422


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TERIEurope

TERIEuropeisanotforprofitorganisationspecialisinginthelinksbetweensustainabledevelopmentinemergingmarketsandtheroleofbusinessandinvestment.TERIEuropespartnersandsponsorsinclude

IFC,theEuropeanCommission,theUKForeign&CommonwealthOffice,theUKDepartmentforInternationalDevelopment,UnileverandtheAssociationofBritishInsurers.TERIEuropeisbasedinLondon.www.terieurope.org

TheauthorsRituKumarisdirectorofTERIEuropeandasustainableinvestmentadvisorwiththeemergingmarketprivateequityfirm,Actis:[email protected]

DanSiddyisanassociatefellowatTERIEuropeanddirectorofDelsusLimited,aspecialistadvisoryfirmonESGinvestmentinemergingmarkets:[email protected]

AboutIFCIFC,amemberoftheWorldBankGroup,createsopportunityforpeopletoescapepovertyandimprovetheirlives.Wefostersustainableeconomicgrowthindevelopingcountriesbysupportingprivatesectordevelopment,mobilizingprivatecapital,andprovidingadvisoryandriskmitigationservicestobusinessesandgovernments.OurnewinvestmentstotalledUS$16.2billioninfiscal2008,a34percentincreaseoverthepreviousyear.Formoreinformation,visitwww.ifc.org.IFCsSustainableInvestingTeam

Forthepastfouryears,IFC'sSustainableInvestingteamhasdeliveredtechnicalandfinancialsupportforprojectsthataimtomobilizesustainablecapitalflowsintoemergingmarkets.ThegoalistoincreasethevolumeofmainstreaminvestmentthatusesESGanalysisasastandardpracticeintheirinvestmentdecision.IFCsapproachistwofold: Tocatalyzecapitalmarketflowsintosustainableinvestment,IFCworksto(a)promotethebusinesscasefor

sustainableinvestmentbydrawinglessonsfromIFCsownportfolio,(b)establishframeworkstoidentify

andassessnewsustainableinvestmentopportunities,and(c)developnewfinancialproducts(e.g.Sustainabilityindices);and

Tosupportfundmanagersinvestinginsustainablecompanies,IFCworks(a)withprivateequityfundsin

IFCsportfoliotoassistthemtoestablishESGanalyticalprocesses,and(b)withcapitalmarketactorstoimprovetheenablingenvironmentforthemarkettorecognizeandvaluesustainabilityincorporatevaluation.

IFCiscommittedtocontinueitsworkinpartnershipwithkeymarketactorstoimprovetheenablingenvironmentandaddressbarrierstosustainableinvestmentinemergingmarkets.Inordertodothis,IFCsworkiscenteredinthreeareas:policiesandstandards,knowledgemanagementandinvestmentvehicles.TheSustainableInvestingteamispartofIFCsEnvironmentandSocialDevelopmentDepartment,andbenefitsfromthegenerousfinancialsupportofIFCandtheGovernmentsofJapan,theNetherlands,Norway,Canada,SouthAfricaandSwitzerland.Formoreinformation,pleasevisittheSustainableInvestingwebsiteatwww.ifc.org/sustainableinvesting.


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TableofContents

ACKNOWLEDGMENTS....................................................................................................................... i

GLOSSARYOFABBREVIATIONS ........................... ......................... ........................ ........................ .....ii

EXECUTIVESUMMARY.....................................................................................................................iii

1.INTRODUCTION........................................................................................................................... 1Objectives ........................................ ............................................ ........................................... ................. 1Scope ....................................... ............................................ ............................................ ........................ 1Asnapshotintime................................................................................................................................... 2Exchangeratesused ....................................... ............................................ ............................................ . 2Structureofthereport .......................................... ............................................ ...................................... 2

2.COUNTRYOVERVIEW ............................. ........................ ......................... ........................ ............ 3Summary.................................................................................................................................................. 3

Brazilseconomy...................................................................................................................................... 3Thestockmarket ........................................... ............................................ .............................................. 3Keyindustriesandcompanies ........................................ ............................................ ............................. 4Keyenvironmentalandsocialissues ...................................... ............................................ ..................... 4

3.CORPORATESUSTAINABILITYINDEX ........................................................................................... 5History ..................................................................................................................................................... 5Objective.................................................................................................................................................. 5Managementandgovernance................................................................................................................. 5Eligibility .................................................................................................................................................. 6Sustainabilitycriteriaandmethodology.................................................................................................. 6Portfoliocomposition ............................................ ............................................ ...................................... 7Usebyinvestors .................................................................................................................................... 11

ResearchintoanISEpremium............................................................................................................. 11Corporatebuyin ................................................................................................................................... 12

ReactiontoanduseoftheISE ........................................................................................................... 12NoninclusionofPetrobras ................................................................................................................ 12Questionnaireresponserate.............................................................................................................. 12

Commercialbusinessmodel.................................................................................................................. 14Futuredirections ................................................................................................................................... 14

4.ASSETMANAGERS......................................................................................................................15 Marketoverview ................................................................................................................................... 15Statusofsustainableinvestment .......................................................................................................... 18

5.RETAILFUNDS ........................... ......................... ........................ ........................ ........................ 19

Marketoverview ................................................................................................................................... 19Statusofsustainableinvestment .......................................................................................................... 19

6.PENSIONFUNDS.........................................................................................................................25 Marketoverview ................................................................................................................................... 25Statusofsustainableinvestment .......................................................................................................... 25

7.FOREIGNINVESTMENT...............................................................................................................29 Marketoverview ................................................................................................................................... 29Statusofsustainableinvestment .......................................................................................................... 29

8.OTHERMARKETPARTICIPANTS..................................................................................................33 BrazilianDevelopmentBank.................................................................................................................. 33

Overview............................................................................................................................................ 33Statusofsustainableinvestment....................................................................................................... 33

HighNetWorthIndividuals ................................................................................................................... 35


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Overview............................................................................................................................................ 35Statusofsustainableinvestment....................................................................................................... 36

9.ENABLINGENVIRONMENT .........................................................................................................38Regulatoryandpolicyframeworks........................................................................................................ 38

Environmentallegislationandenforcement...................................................................................... 38

Pensionfundtransparency ......................................... ............................................ ........................... 39Nonfinancialdisclosurerequirements ....................................... ............................................ ........... 39Listingrulesandguidelines................................................................................................................ 40

Voluntarynonfinancialreporting ......................................... ............................................ .................... 40Sustainabilityreporting ..................................................................................................................... 40CarbonDisclosureProject .......................................... ............................................ ............................ 44GlobalCompactCommunicationsonProgress.................................................................................. 45

Indices,equityresearchandratings...................................................................................................... 45SpecialisedindicesinadditiontotheISE ........................................................................................... 45DowJonesSustainabilityIndex.......................................................................................................... 45Independentsustainabilityresearchandratingproducts ......................................... ........................ 46Sellsideequityresearchonsustainabilityissues............................................................................... 46

Networksandassociations ............................................ ............................................ ............................ 46Industrybodies .................................................................................................................................. 46UNEPFI ........................................ ............................................ ................................................... ........ 47LASFF ................................................................................................................................................. 47UNPRI................................................................................................................................................. 47

Developmentfinanceinstitutions ......................................................................................................... 49Languagebarriers ........................................... ........................................... ............................................ 49Greenconsumerism .............................................................................................................................. 49

10.BUILDINGONSUCCESS.............................................................................................................51 Overallmarketsize ......................................... ............................................ ........................................... 51

ConsolidatedestimatesofSRIassetsundermanagement ........................................ ........................ 51BrazilianSRIinaglobalcontext......................................................................................................... 52

Strengthsandweaknesses .................................................................................................................... 52Strongcommitment........................................................................................................................... 52Strongbusinesscase.......................................................................................................................... 52Contributiontosustainabledevelopment ......................................................................................... 52Strategicchallengesandrisks............................................................................................................ 53

Issuesonthehorizon............................................................................................................................. 53TheISEparadox .......................................... ............................................ ........................................... 53Limitedresearchcoverage................................................................................................................. 54Stagnationintheassetmanagementsector ............................................ ......................................... 55Limitedinvolvementofforeignportfolioinvestors............................................................................ 56Fragmentationandoverlapinmarketleadership ............................................ ................................. 56

Recommendations................................................................................................................................. 56

UpdatetheISEscommercialbusinessmodel.................................................................................... 56MakegreateruseofISEdata............................................................................................................. 57CreateacommercialmarketforESGresearch .......................................... ........................................ 58Develophumancapital...................................................................................................................... 58Implementaninternationalstrategy................................................................................................. 58Investinresearchanddevelopment.................................................................................................. 59Fostercompetitionandinnovation.................................................................................................... 60

Organisingforsuccess ........................................... ............................................ .................................... 61

APPENDIXA:COUNTRYPROFILE.....................................................................................................65 Profile .................................................................................................................................................... 66MillenniumDevelopmentGoals............................................................................................................ 69Economy ......................................... ............................................ ................................................... ........ 70

GDPgrowth ....................................................................................................................................... 70Valueadded....................................................................................................................................... 70


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Foreigntrade ....................................... ............................................ ............................................ ...... 70Privatecapitalflows .............................................................................................................................. 71

Internationalcontext .......................................... ............................................ ................................... 71Brazil.................................................................................................................................................. 71

Thestockmarket ........................................... ............................................ ............................................ 73Marketsize ........................................................................................................................................ 73

Corporategovernancesegments....................................................................................................... 75Keycompaniesandindustries............................................................................................................ 76Capitalraising.................................................................................................................................... 78Performance ........................................ ........................................... ............................................ ....... 80Marketparticipants ........................................... ............................................ .................................... 80

Keyenvironmentalandsocialissues ...................................... ............................................ ................... 81Principalissues................................................................................................................................... 81Newnationalplanonclimatechange ........................................ ............................................ ........... 82

APPENDIXB:EXAMPLESOFESGISSUESINTHEINTERNATIONALMEDIA.........................................83

APPENDIXC:SWOTANALYSIS.........................................................................................................88

APPENDIXD:SUSTAINABILITYINBRAZIL'SPRIVATEEQUITYMARKET ............................................92Marketoverview ................................................................................................................................... 93

FundraisingActivity ........................................................................................................................... 93InvestingTrends................................................................................................................................. 95ExitTrends ......................................................................................................................................... 95DevelopingBrazilsventurecapitalindustry...................................................................................... 96

Statusofsustainableinvestment .......................................................................................................... 96Mainstreamprivateequity ......................................... ............................................ ........................... 97Cleantechnologyandventurecapital ............................................................................................... 98Sustainableentrepreneurs................................................................................................................. 99


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SUSTAINABLEINVESTMENTINBRAZIL2009 i

ACKNOWLEDGMENTSParticularthanksareduetoBrunnoMaradeiatIFCforhispatientandeffectivemanagementofthisstudy,andtoBrunoErbisti(Votorantim),LuizMaia(TriPod)andGladisRibeiro(Pereni)inBrazilwhoprovidedwisecounselandopenedmanydoors.

Actis:BeatrizAmaryandDonaldPeckAIGCapital:CristianoGioiaAmazonia:GustavoPimentalBancoReal:PedroVillaniandEugeniadosSantosBuosiBM&FBovespa:IzalcoSardenberg,MuriloRobottonFilho,IvanWedekin,AlvaroAffonsoMendonaandRogrioMarquesCESFGV:MarioMonzoniandPatriciaBerardiCVM:SergioWeguelinDelsusLtd:RachelMew,JoeRoland,ColinHedgesandDougalBensonDGFInvestimentos:SidneyChameh,AntnioJosDuarte,HumbertoCasagrandeandFredericoGreveEcoinvest:CarlosMartinsEcoSecuritiesBrasil:MauriciodeMouraCostaGreenvest:MarcoGalhardoHSBC:PaulaPeirodeOliveiraIADB:LuizRosIFC:EuanMarshall,BrunnoMaradei,CeciliaBjerborn,BeritLauridsen,MariaDeloresHermosilloandMiguelMartinsMercerLimited:DanyelleGuyattandHelgaBirgden

NewCarbonFinance:CamiloTerranovaPereniSoluesSustentveis:GladisRibeiroPREVI:SergioRosa,LuizCarlosAguiarandRafaelSoaresRibeirodeCastroRioBravo:FabioOharaIshigami,DiogoCaiubyNovaes,MarceloRomeiroandAntonCastanheiraSantaFPortflios:PauloBattistellaBuenoStratus:OrenPinskyandCarlosKokronSustainCapital:LuziaHirataTriPodInvestment:LuizMaiaandElisabethLernerUNPRI:JamesGifford,NarinaMnatsakanianandMarcelaZonisVotorantimAssetManagement:BrunoErbistiWorldFederationofExchanges:ThomasKrantz,PeterCliffordandSibelYilmazWRI:VirginiaBarreiroandEllaDelio


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GLOSSARYOFABBREVIATIONSABRAPP BrazilianAssociationofPensionFundsABVCAP Brazil ianPrivateEquityandVentureCapitalAssociationADR AmericanDepositoryReceiptANBID NationalAssociationofInvestmentBanksAPIMEC AssociationofCapitalMarketsAnalystsandInvestmentProfessionalsASRIA AssociationforSustainable&ResponsibleInvestmentinAsiaAUM AssetsundermanagementBNDES BrazilianDevelopmentBankCDP CarbonDisclosureProjectCESFGV CenterforSustainabilityStudiesattheFundaaoGetulioVargasbusinessschool,SoPauloCVM BrazilianSecuritiesandExchangeCommissionDJSI DowJonesSustainabilityIndexEMDP EmergingMarketsDisclosureProject

EMPEA EmergingMarketPrivateEquityAssociationESG Environment,socialandgovernanceFDI ForeignDirectInvestmentFBDS BrazilianFoundationforSustainableDevelopmentFINEP BrazilianInnovationAgencyGDP GrossDomesticProductGP Generalpartner(managerofaprivateequityfund)GRI GlobalReportingInitiativeHNWI HighNetWorthIndividualIADB InterAmericanDevelopmentBankIBAMA BrazilianInstitutefortheEnvironmentandNaturalRenewableResourcesIBGC BrazilianInstituteofCorporateGovernanceICGN InternationalCorporateGovernanceNetworkIFC InternationalFinanceCorporationIGC BovespaCorporateGovernanceIndexIMF InternationalMonetaryFundINOVAR VenturecapitaldevelopmentprogramoperatedbyFINEPIPO InitialPublicOfferingISE BovespaCorporateSustainabilityIndexLAVCA LatinAmericanVentureCapitalAssociationLASFF LatinAmericanSustainableFinanceForumLP Limitedpartner(investorinaprivateequityfund)MDG MillenniumDevelopmentGoalsMIF MultilateralInvestmentFund(partofIADB)N1 Nivel(Level)1ofBovespas differentiatedcorporategovernancelevels N2 Nivel(Level)2ofBovespas differentiatedcorporategovernancelevels NAV Netassetvalue

NM NovoMercadoOM OpportunitiesfortheMajorityP/E Price/earningsratioPE PrivateequityPREVI PensionfundofBancodoBrasilROE ReturnonequitySEC UnitedStatesSecuritiesandExchangeCommissionSME SmallandmediumsizedenterprisesSRI SociallyResponsibleInvestmentUKSIF UKSustainableInvestmentForumUNCTAD UnitedNationsConferenceonTradeandDevelopmentUNEPFI UnitedNationsEnvironmentProgramFinanceInitiativeUNPRI UnitedNationsPrinciplesforResponsibleInvestmentVC VentureCapitalWRI WorldResourcesInstitute


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SUSTAINABLEINVESTMENTINBRAZIL2009 iii

EXECUTIVESUMMARYThisreporthasbeenpreparedbyTERIEuropeforIFCto(a)provideanuptodateassessmentofthelandscapeofsustainableinvestmentinBraziltoday,and(b)stimulatediscussiononthefutureevolutionandneedsofthismarket.Sustainableinvestmentreferstoportfolioequityinvestmentinpubliclylistedcompanies,usingstrategiesthattakeintoaccountenvironmental,socialandgovernance(ESG)issuesandtheireffectonshareholdervalue.Brazilistheworldstenthlargesteconomy.TheSoPaolostockexchange(operatedbyBM&FBovespa)hasamarketcapofsomeUS$585billion,havingfallenbyabout50percentoverthelastyearincommonwithmostmarketsaroundtheworld.Thestockmarketisdominatedbythefinancialsector,oil&gas,miningandsteel.34percentofthebenchmarkIBOVESPAIndexisconcentratedin

justtwostockstheoil&gascompanyPetrobrasandtheminingcompanyValeRDoce.Domesticsavingshaveincreasedsignificantlyinrecentyears:thetop40assetmanagersinBrazilcontrolaboutUS$500billioninmutualfundsandotherproducts,whilstthecountrys278pensionfundshavecombinedassetsofaboutUS$185billion.Foreignportfolioinvestmenthasalsobecomeincreasinglyimportanttotheeconomy:thetotalstockofsuchinvestmentstoodataboutUS$232billionattheendofAugust2008.Inaddition,AmericanDepositoryReceipts(ADRs)issuedbyBraziliancompaniesandtradedontheNewYorkStockExchangehaveatotalownershipvalueofafurtherUS$110billion.Uniquelyamongstemergingeconomies,ESGissueshavehadaprominentplaceintheBrazilianfinancialandinvestmentcommunityfornearlyadecade.BovespaintroduceditscorporategovernancethemedNovoMercadolistingsegmentin2001andinthesameyearBancoReallaunchedBrazilsfirstsociallyresponsibleinvestment(SRI)mutualfund,FundoEthical.AkeyfeatureinBrazilssustainableinvestmentlandscapeisBM&FBovespasCorporateSustainabilityIndex,theISE.LaunchedinDecember2005,theISEwasswiftlyfollowedbyadramaticincreaseinthenumberand

sizeofBrazilsretailSRIfundsandhasgenerallymatchedtheIBOVESPAbenchmarkinperformance.Today,tenassetmanagersofferretailSRIfundswithcombinedassetsundermanagementofaboutUS$315million.Severaloftheseassetmanagerscametogetherin2006tocreatetheLatinAmericanSustainableFinanceForum(LASFF)inassociationwithCESFGV,aspecialistcentreofexcellenceforsustainabilitystudieswithinBrazilsleadingbusinessschool.CESFGVisalsothedataproviderfortheISEanddesignedtheindexsESGmethodology.SeedfundingfromIFCplayedacriticalroleinthecreationofboththeLASFFandtheISE.BrazilspensionfundshavetakenaproactivestanceonESGissues,largelyduetotheleadershipoftheirlargestmember,PREVI.18pensionfundshavesignedtheUNPrinciplesforResponsibleInvestment(PRI).TogethertheyrepresentcombinedassetsofUS$110billion,orabout60percentofthecountrystotalpensionfundcorpus.Althoughimplementationisstillatarelativelyearlystage,

momentumishighandissupportedstronglybytheUNPRISecretariat,whichhashelpedtoestablishaPRIBrazilNetworkaidedbyaparttimeincountrycoordinator.ThePRIBrazilNetworkhasnowdevelopedawellorganisedworkprogramfocusingonshareholderengagement,ESGintegrationandrecruitmentofnewsignatories.ShareholderengagementonESGissuesisstillinitsinfancy,andcurrentlyfocusesonlabourstandardsincharcoalproducersassociatedwithBrazilsironandsteelindustry.ThisengagementinvolvescooperationwithsomeinternationalPRIsignatoriesaswellasLASFFmembersandBrazilspensionfunds.Ingeneral,though,foreignportfolioinvestorshavethusfarnotbeenactivelyengagedinBrazilssustainableinvestmentmarketandhaveshownlittleinterestinusingtheISEindex,forexample.However,quantitativedataonthispointareextremelylimited;intheabsenceofhardfacts,TERIEuropehasusedaworkingassumptionthatESGinvestmentstyles

accountforabout1percentofforeignportfolioinvestmentandinvestmentinBrazilianADRs,i.e.approximatelyUS$2.2billion.


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OthermarketparticipantsmayalsoberelevantforthefutureofBrazilssustainableinvestmentmarket.TheBrazilianDevelopmentBank(BNDES),forexample,hasstakesinover30publiclylistedBraziliancompanies;thisportfolioisworthaboutUS$16billion.BNDESfollowsenvironmentalandsocialpoliciesforitsprojectfinanceoperations,butisunclearwhetherorhowtheseareappliedtoitsequityholdings.Thewealthmanagementmarketmayalsobeimportant:Brazilhas143,000highnetworthindividuals(HNWIs)constitutingamarketofaboutUS$1.4trillion.About16percentofLatin

AmericanHNWIsallocatesomepartoftheirportfoliotogreeninvestmentssuchascleantechnologyandalternativeenergy.However,moredetailedinformationisnotcurrentlyavailable.TheenablingenvironmentforsustainableinvestmentinBrazilisrelativelystrongcomparedtolargeemergingeconomiessuchasIndiaorChina,particularlyintermsofvoluntarynonfinancialreportingbycompanies.About60percentofcompaniesintheIBOVESPApublishsustainabilityreports,manyofwhicharebasedontheinternationalgoodpracticeguidelinesissuedbytheGlobalReportingInitiative(GRI).ThenumberandqualityofcorporateresponsestotheannualsurveyoftheinternationalCarbonDisclosureProject(CDP)isalsoimproving.Nevertheless,furtherprogressisneededonESGrelatedtransparencyanddisclosure,especiallyinrelationtoregulatoryfilingsandIPOprospectuses.Furthermore,Brazilianstocksdonotreceivemuch

ESGcoveragefrominternationalsustainabilityresearchfirmsorequityanalysts.LackofcommercialdemandonthedomesticfrontalsomeansthatBrazilhasnotyetdevelopedanyhomegrowninfrastructureinthisrespect,despitethecapacitybuildingeffortsoforganisationssuchastheAssociationofCapitalMarketsAnalystsandInvestmentProfessionals(APIMEC).OtherBrazilianindustryassociationstakingaproactiveadvocacypositiononsustainableinvestmentincludetheBrazilianAssociationofPensionFunds(ABRAPP)andtheNationalAssociationofInvestmentBanks(ANBID).Lookingtothefuture,sustainableinvestmentinBrazilfacessomeimportantchallenges.Manyoftheseareessentiallyaboutadaptingtosuccessthroughanewphaseofmarketevolution.Thekeyissuesinclude:

UpdatingtheISEscommercialbusinessmodel MakinggreateruseoftheunderlyingISEdata CreatingdemandforthecommercialprovisionofESGresearch Developinghumancapital Moreeffectiveoutreachandengagementwithinternationalinvestors Investmentinresearchanddevelopment Fosteringrenewedcompetitionandinnovationintheassetmanagementindustry BuildingonLASFFandthePRIBrazilNetworktoincreasetheeffectivenessofnational

cooperationinthesustainableinvestmentcommunity.Thereportprovidesdetailedanalysisandrecommendationsoneachoftheseissues,whichareinterrelatedandlargelyinterdependent.Astrategicvisionisthereforerequiredwhichcombinesthelong

terminterestsofallstakeholders.OnepossiblevehiclefororganisingforsuccesscouldbethecreationofafullyequippedBrazilianSustainableInvestmentForum(BRASIF)asanevolutionaryreplacementforLASFF.Thisnewentitywhichwouldcomplement,ratherthanduplicateorcompetewiththeexistingPRIBrazilNetworkwouldservethecommonneedsofarangeoforganisations,includingPRIsignatories,nonPRIsignatoriesandotherimportantinstitutionsinthevaluechainsuchasBM&FBovespaandAPIMEC.ItwouldalsoactasanationalfocalpointforsustainableinvestmentinBrazil,includingpromotinginwardsustainableinvestmentfromoverseas.Ultimately,therightwayforwardforBrazilmustcomefromabottomup,demanddrivenprocessratherthanthroughatopdownblueprintimposedfromoutside.TheanalysisandrecommendationsinthisreportareofferedforconsiderationanddiscussionbyallparticipantsinBrazilssustainableinvestmentmarket.Thefinalrecommendationofthisreportisthereforetosuggestthatitmightbeusefulforrelevantstakeholderstocometogetherinsometypeofroundtablediscussionthattakesstockoftheprogressmadeoverrecentyears,andenablesdebateonthestrategicdirectionandneedsofthemarketoverthenextfiveyearsorso.


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SUSTAINABLEINVESTMENTINBRAZIL2009 1

1.INTRODUCTION

ObjectivesEnvironmental,socialandgovernance(ESG)issueshavebeenaprominentconcernandanimportantcommercialdifferentiatorintheBrazilianfinancialandinvestmentcommunityfornearlyadecade.Thecommitment,depthandsophisticationofthismarketevolutionareprobablyuniqueamongtheworldsemergingeconomies,andinthiswayBrazilhassetexamplesandpioneeredbusinessmodelsthathavereceivedinternationalattentionandadaptation.Despitetheprogressthathasbeenmade,Brazilssustainableinvestmentmarketisstillinitsrelativeinfancyandfacescontinuedchallengesandfreshobstaclestonewopportunities,especiallytakingintoaccountthecountrysenvironmentalandsocialproblemsandthescaleofdomesticandforeigninvestmentinwhatisnowtheworldstenthlargesteconomy.Againstthisbackground,thisreportaimsto: DeterminethecurrentstateofdevelopmentofsustainableinvestmentinBrazilbymeasuring

themarketonanumberofindicators;and Stimulatediscussionbyallmarketparticipantsandstakeholdersonthefutureevolutionand

needsoftheBraziliansustainableinvestmentmarket.ThereporthasbeenpreparedbyTERIEuropebasedoncomprehensivedeskresearch,extensiveinterviewsconductedinSoPauloandRiodeJaneiroinSeptember2008,andsubsequentdiscussionswithanumberoforganisationsandindividuals.ThestudywassponsoredbytheInternationalFinanceCorporation(IFC)throughtheSustainableInvestingProgramofitsSustainabilityBusiness

Innovator(adivisionofIFCsEnvironment&SocialDevelopmentDepartment)aspartofawiderIFCprojectthatalsocoversthemarketsofIndia,ChinaandSouthAfrica.

ScopeThetermsustainableinvestmentcanmeandifferentthings.Intheinterestsofclarity,thescopeofsustainableinvestmentascoveredinthisreportisdomesticandforeigninvestmentinBrazilspubliclyquotedcompaniesusingstrategiesthattakeenvironmentalandsocial(sometimescombinedwithgovernance)issuesintoconsideration.Thisincludesnegativescreening,positivescreening,bestinclass,shareholderactivismandsimilarsociallyresponsibleinvestmentstyles,togetherwithintegratedapproachessuchasengagementandnonfinancialriskanalysis.

PrivateequityandventurecapitalfundsinvestinginBrazilareasecondaryfocusofthisstudy.Specifically,thereportcovers(a)theuseofenvironmental/socialduediligencepoliciesandproceduresbymainstreamprivateequityandventurecapitalfunds(b)privateequityandventurecapitalfundsthatarebasedonsustainabilitythemessuchascleantechnologyandclimatechange.ThereportdoesnotcoverothersegmentsofthesustainablefinanceandinvestmentmarketsuchastheEquatorPrinciples,ESGrelatedbankingproductsormicrofinance.Ascontext,however,itisessentialtonotethat(withthepossibleexceptionofmicrofinance)thesethemesarealsoastrongfeatureoftheBraziliancapitalmarket:mostleadingBrazilianbankshavecommittedtoimplementtheEquatorPrinciplesforprojectfinanceandseveralhavesuccessfullyintroducedinnovativesustainablelendingproducts,whileatthesametimepioneeringmanyofthesustainableinvestment

initiativescapturedinthisreportaspartofthesameoverarchingcorporatestrategiesandethicalvalues.


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AsnapshotintimeThisreportmustbeseeninthecontextoftheglobalfinancialcrisesthathaveunfoldedduring2008andwillcontinuetoevolvefortheforeseeablefuturefollowingtheemergenceofproblemsintheUSsubprimemortgagemarketin2007.TheauthorshavedonetheirbesttopresentanaccurateandbalancedsnapshotofBrazilssustainableinvestmentmarketinthisfastchangingandturbulentenvironmentandtoframeconclusionsandrecommendationsthatwillholdtheircurrencyforthenext612months.Wehavesoughttousethemostuptodatedataavailable,butacknowledgethatsomeoftheinformationandcorrespondinganalysiscontainedinthisreportmayhaveanunavoidablyshortshelflifeintheseexceptionalcircumstances.

ExchangeratesusedUnlessotherwisestated,theexchangerateusedinthisreportisR$2.315totheUS$(therateprevailingasofDecember31,2008).

StructureofthereportAsimportantcontextfortherestofthereport,Chapter2beginswithabriefoverviewofBrazilsdevelopmentprofile,economyandstockmarket(theBM&FBovespa),alongwithasummaryofthekeyindustriesandcompaniesthataretradedonthestockmarketandashortdiscussiononESGvaluedriversinBrazil.MoredetailedinformationontheseissuesisprovidedinAppendicesAandB.OneofthemostimportantcentrepiecesofthesustainableinvestmentlandscapeinBrazilisBM&FBovespasCorporateSustainabilityIndex,theISE.DetailedinformationontheISEsmethodologyandimpactispresentedinChapter3.Chapter4providesanintroductiontotheleadingassetmanagersinBrazil,theirmarketshareandassetsundermanagement,andtheircurrentinvolvementinsustainableinvestment.Chapters58thenanalysesustainableinvestmentactivityacrossdifferenttypesofmarketparticipant,focusingprimarilyonBrazilianmutualfunds,Brazilianpensionfundsandforeigninstitutionalinvestors.TheenablingenvironmentforsustainableinvestmentinBrazilisanalysedinChapter9andincludespublicpolicyandregulation,corporatetransparencyanddisclosurepractices,equityindicesandresearchcoverage.Chapter9alsohighlightstheindustryassociationsandsimilarnetworksthatplayakeyroleincreatingtheframeworkconditionsforsustainableinvestmentinBrazil,particularlytheUNPrinciplesforResponsibleInvestment(UNPRI)andtheLatinAmericanSustainableFinanceForum(LASFF).

Finally,Chapter10providesaforwardlookingdiscussiononthecurrentstatusofsustainableinvestmentinBrazilandthefutureopportunitiesandrisksthismarketfaces.ASWOTanalysisisalsopresentedinAppendixC.Chapter10concludeswithanumberofrecommendationsthatstakeholdersinBrazilssustainableinvestmentmarketmaywishtotakeforwardforfurtherconsideration.InformationonsustainableinvestmentpracticesinBrazilsprivateequityandventurecapitalmarket(asecondaryfocusofthisreport)isprovidedinAppendixD.


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2.COUNTRYOVERVIEW

SummarySustainableinvestmenttrendsinBrazilhavetobeunderstoodinthewidercontextofBrazilsoveralleconomicandsustainabledevelopment.AppendixAprovidesdetailedinformationonBrazilsdevelopmentprofile,economyandstockmarket(theBM&FBovespa),alongwithdataonthekeyindustriesandcompaniesthataretradedonthestockmarketandadiscussiononESGvaluedriversinBrazil.Thekeypointsforcontextaresummarisedbelow.

Brazilseconomy

BasedontheIMFs2008estimatesofworldwideGDP,Brazilistodaytheworlds10thlargesteconomy.Characterizedbylargeandwelldevelopedagricultural,mining,manufacturing,andservicesectors,Brazil'seconomyoutweighsthatofallotherSouthAmericancountriesandisexpandingitspresenceinworldmarkets.BrazilbecameinvestmentgradeattheendofApril2008,whenStandard&PoorsupgradedBrazilssovereigndebtratingtoBBBfromBB+.EconomicgrowthinBrazilincreasedfrom3.8percentin2006toexceedexpectationsat5.4percentin2007.Thistrendcontinuedoverthefirstsevenmonthsof2008whenGDPgrewbysome6.1percent.Aswithalmostallcountries,Brazilhassubsequentlybeenimpactedbytheglobalfinancialshocksthatdominatedtheglobaleconomysincethesecondhalfof2008.Brazilhasathrivingcapitalmarketbolsteredbysignificantdomesticsavingsandpensionfundassets.ForeignportfolioinvestmenthasalsobecomeincreasinglyimportanttotheeconomyandBrazilsshareofnetportfolioequityflowstoalldevelopingcountriessurgedtonearly25percentin2007.Netforeignportfolioinvestmentflowshaveincreaseddramaticallyinthelastfewyearsandby2007theyreachedUS$34billion,almostmatchingthevolumeofFDI.ThetotalstockofforeignportfolioinvestmentamountedtosomeUS$214billionattheendof2007andstoodataboutUS$232billionbyAugust2008,thelatestdateforwhichreliabledataareavailable.

ThestockmarketTheSoPaolostockexchange,operatedbyBM&FBovespa,isthe13

thlargestmarketintheworldby

marketcapitalization,followingadramaticincreaseinsizeoverthelasttwodecades.Incommonwiththerestoftheworld,Brazilsmarketcapitalisationhasexperiencedasharpdecreaseinthelast12monthsasaresultoftheglobaleconomiccrisisandtheworldwidefallinequityprices.AsoftheendofNovember2008,themarketvalueofBM&FBovespalistedcompaniescametoR$1,355billion(US$585billion).BrazilsbenchmarkindexistheIBOVESPA.AvitalfeatureoftheSoPaolostockexchangeisthatitmaintainsdifferentlistingsegmentsforcompanies,basedondifferentiatedlevelsofcorporategovernance.InadditiontotheTraditionalBovespasegment,theseincludetheNovoMercado(NM)andtwofurtherdifferentiatedcorporategovernancecategories,Level(Nivel)1andLevel(Nivel)2.NovoMercadocompaniesrepresentabout33percentoftotalmarketcapitalisation.BrazilhasexperiencedasurgeofIPOsandsecondarypublicofferingsinrecentyears.SomeUS$35billionworthofnewdealswerecompletedovertheperiodJune2007June2008.ThemajorityofIPOsarenowontheNovoMercado.


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Figure1:SectoralbreakdownoftheIBOVESPAIndex

KeyindustriesandcompaniesAsoftheendofNovember2008,393companieswerelistedontheexchange.Figure1showsthesectoralbreakdownoftheIBOVESPAindex,whichisdominatedbythefinancialsector,oil&gas,miningandsteel.TheBrazilianstockmarketishighlyconcentrated:thetoptencompanieswiththehighestmarketvaluemakeupabout50percentoftotalmarketcapitalisation.

Itisparticularlyimportanttounderstandthatapproximately25percentofthetotalvalueoftheoverallmarketisconcentratedinjusttwocompanies,Petrobras(oil&gas)andValeRDoce(mining);thesetwofirmsalsorepresent34percentofthenotionalIBovespaportfolio.ThecapitalstructureofbothPetrobrasandValeRDoceincludespreferenceaswellascommonsharesandthusneitherfirmislistedontheNovoMercado.

KeyenvironmentalandsocialissuesCorporationsandtheirinvestorsinBrazilfaceawideandoftencomplexrangeofsocialandenvironmentalissuesthatpresentpotentiallysignificantrisksandopportunitiestoshareholdervalueandcorporatereputation.Atthecurrenttimetheredoesnotappearanysinglesourcethat

synthesisesthisinformationintoaninvestorfriendly,comprehensiveanalysisofkeysustainabilityrelatedbusinessdriversintheindustriesthatmakeupBrazilsstockmarket.Adetailedassessmentisbeyondthecurrentscopeofthisreport,buttheprincipleissuesarediscussedfurtherinAppendixAandareillustratedbyexamplesofrecentmediacoveragethatareprovidedinAppendixB.OneimportantrecentdevelopmentistheBrazilianGovernmentsNationalPlanonClimateChange,publishedinDecember2008.Themeasuresinthisactionplanmayhavepotentiallysignificantimplications(bothpositiveandnegative)acrossanumberofkeyBrazilianindustrysectors,includingoil&gas,biofuels,mining,steel,powerandpulp&paper.FurtherinformationisprovidedinAppendixA.

Financial21.6%

Oil and gas

19.8%

Mining 15.2%

Steel 11.1%

Electric utilities

7.3%

Telecom 4.8%

Transportation

4.1%

Other 16.1%


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3.CORPORATESUSTAINABILITYINDEX

HistoryBrazilsCorporateSustainabilityIndex(theISE)wascreatedin2005bytheSoPaulostockexchange,Bovespa(nowBM&FBovespa),inresponsetothecountrysgrowinginterestinsustainableinvestmentandsustainablefinance.TheindexwasdevelopedwithtechnicalinputfromCESFGVandwithgrantfundingfromIFCsformerSustainableFinancialMarketsFacility.TheindexwaslaunchedinDecember2005atamajorinternationalconferenceonthethemeofemergingmarketsustainableinvestment,organisedbyCESFGVandagainsponsoredbyIFC.Atthetime,itwasonlythesecondemergingmarketsustainabilityindexintheworld.ItisstilltheonlyindexofitskindinLatinAmerica,andhasplayedanimportantroleinstimulatingthedevelopmentofotheremergingmarketsustainabilityindicesinIndia,theMiddleEast,Africaandelsewhere.

ObjectiveTheISEmeasuresthetotalreturnonatheoreticalportfoliocomposedbystocksissuedbycompanieshighlycommittedtocorporatesustainabilityandsocialresponsibility.ThemaximumnumberofcompaniesthatcanbeadmittedtotheISEis40.TheirstocksareselectedfromamongBM&FBovespasmostactivelytradedsecuritiesintermsofliquidity,weightedaccordingtotheoutstandingsharesmarketvalue.TheindexprovidesavaluablebenchmarkforinvestorsandisalsointendedtopromotegoodpracticesintheBraziliancorporatecommunity.TheISEindexisrebalancedannuallyinDecember.

ManagementandgovernanceTheISEisoperatedbyBM&FBOVESPA,whichisresponsibleforindexcalculationandtechnicalmanagement.BM&FBOVESPAhascontractedCESFGVtoundertakethecollectionandanalysisofthenecessarycorporatesustainabilitydata.TheISEispresidedoverbyanindependentDeliberativeBoardcomposedofrepresentativesfromthefollowingorganisations:

BrazilianAssociationofPensionFunds(ABRAPP) NationalAssociationofInvestmentBanks(ANBID) AssociationofCapitalMarketsAnalystsandInvestmentProfessionals(APIMEC) BM&FBOVESPA BrazilianInstituteofCorporateGovernance(IBGC) IFC EthosInstituteofSocialResponsibility BrazilianMinistryoftheEnvironment UnitedNationsEnvironmentProgramme(UNEPFI)

TheEthosInstitutehasbeentemporarilysuspendedfromtheBoardforleakinginformationtothemediaabouttheexclusionofPetrobraspriortotheofficialannouncementofthe2008/2009portfolio.


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EligibilityStocksadmittedtotheISEmust:

beamongthe150bestclassifiedstocksinthenegotiabilityindex,measuredinthetwelvemonthsprecedingthebeginningofthereevaluationprocess;

haveatradingsessionpresenceofatleast50percent,measuredinthetwelvemonthsprecedingthebeginningofthereevaluationprocess;and

meetthesustainabilitycriteriaapprovedbytheISEBoard.

SustainabilitycriteriaandmethodologyTheISEssustainabilitycriteriaandmethodologyweredevelopedbyCESFGVandapprovedbytheISEBoard.DatafortheISEarecollectedbymeansofadetailedquestionnaire(around140questions)sentbyCESFGVeachyeartoupto150ofBrazilslargestandmosttradedpubliclyquotedcompanies.CESFGVdesignedasetofcriteriabasedonthetriplebottomlineconcepti.e.theintegratedanalysisofenvironmental,socialandeconomicalaspects.Inaddition,themethodologytakesintoaccountgeneralissues(forexample,acompanyscommitmenttotheUNGlobalCompact),thenatureofthecompanysproductorbusinessactivity(forexample,risktoconsumerhealth)andcorporategovernancecriteria.Theenvironmental,socialandeconomiccriteriaaredividedintofourgroups:

policies(commitmentindicators); management(program,targetandmonitoringindicators); performance;and legalcompliance.

Slightlydifferentenvironmentalcriteriaareappliedtocompaniesinthefinancialsector.Realsectorcompaniesareweighteddifferentlyonenvironmentalcriteriadependingonwhethertheyareclassifiedashighimpactormediumimpact.CESFGVcarriesoutclusteranalysisofthedatasettoidentifygroupsofcompanieswithsimilarperformanceandtoselectagroupwithbettergeneralperformance.SubjecttotheapprovaloftheISEBoard,thecompaniesincludedinthelattergroupareadmittedtotheISEportfolio.Nomorethan40companiesmaybeincludedintheISE.Thisprocessiscarriedoutannuallytorebalancetheportfolio.However,theISEBoardhasthepowertoexcludeacompanyfromtheISEportfolioatanytimeifanyeventalterssignificantlyacomponentcompanyssustainabilitylevel.

TheISEsmethodologydoesnotuseanexclusionlistofsinsectorssuchasdefence,tobacco,alcohol,nuclearpowerorgambling.InISEsfirstyearofoperation,companieswerenotrequiredtopresentdocumentstoprovetheirsustainabilitypolicies.Inthesecondyear,verificationbegantobecarriedoutonlyafterdisclosureoftheportfolio.OnlycompaniesthatprovidedproofoftheirpracticeswereselectedfortheISEinthelatestrebalancing.


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PortfoliocompositionThecurrentISEportfoliocameintoeffectonDecember1,2008andisvaliduntilNovember30,2009(Table1).NewadmissionstotheISEincludeCelesc,Duratex,Odontoprev,TIM,TelemarandUnibanco.Aracruz,CCRRodovias,Copel,IochpeMaxion,PetrobrasandWEGweredroppedfromtheindex.Figure2illustratesthenewISEportfolioweightingsandprovidesacomparisonwiththecurrentIBOVESPAuniverseof59stocks.Figure3illustratesthechangestothenewISEportfolio,whichwiththeadditionofTelemarandTIMnowincludestelecomstocksforthefirsttime.Figures4and5showtheindustrybreakdownoftheISEforthe2007/2008and2008/2009periodsrespectively.TheISEisnowheavilyweightedtowardsbankingstocksandinparticulartowardstwobanks(BradescoandIta)whichtogethermakeupmorethan40percentofthenotionalISEportfolio.Asnotedonpage16,thetwotitansoftheBraziliancorporatesectoraretheoil&gascompanyPetrobrasandminingfirmValeRDoce.ValeRDocehasneverbeenacomponentoftheISE.ThedecisiontoexcludePetrobrasfromtheISE2008/2009portfoliomeansthattherebalancedsustainabilityindexnowdifferssignificantlyfromtheIBOVESPAindex.Table1:ISEportfolio2008/2009(source:BM&FBovespa)

Company Industry IBovespa?MarketcapUS$

millionISEweight(%)

AESTIETE Electricutilities 2,236 0.703BRADESCO(N1) Financialintermediaries 27,966 22.302BRASIL(NM) Financialintermediaries 15,969 3.934BRASKEM(N1) Petrochemicals 1,207 0.504CELESC(N2) Electricutilities 663 0.415CEMIG(N1) Electricutilities 6,123 4.883CESP(N1) Electricutilities 1,908 1.339COELCE Electricutilities 708 0.293CPFLENERGIA(NM) Electricutilities 6,191 2.047DASA(NM) Medicalproducts 552 0.640DURATEX(N1) Wood 773 0.470ELETROBRAS(N1) Electricutilities 12,379 4.847ELETROPAULO(N2) Electricutilities 1,704 1.204EMBRAER(NM) Aerospace 2,791 3.215ENERGIASBR(NM) Electricutilities 1,536 0.635GERDAU(N1) Steel 8,584 5.278GERDAUMET(N1) Steel 3,430 3.017ITAUBANCO(N1) Financialintermediaries 30,708 20.330LIGHTS/A(NM) Electricutilities 1,908 0.321NATURA(NM) Cosmetics 3,486 1.035ODONTOPREV(NM) Medicalproducts 263 0.248PERDIGAOS/A(NM) Meat,poultry&others

2,634 1.987

SABESP(NM) Waterutilities 2,706 1.614SADIAS/A(N1) Meat,poultry&others 1,162 0.727SUZANOPAPEL(N1) Pulp&paper 1,627 0.894TELEMAR Telecommunications 5,763 5.403TIMPARTS/A Telecommunications 3,628 1.227TRACTABEL(NM) Electricutilities 5,181 1.871UNIBANCO(N1) Financialintermediaries 15,755 7.808VCP(N1) Pulp&paper 1,545 0.810


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Figure2:ComparisonofcurrentISEandIBovespaindexconstituents(Source:BM&FBovespa)

0 5 10 15 20 25

BRADESCO

ITAUBANCO

GERDAU

UNIBANCO

TELEMAR

CEMIG

ELETROBRAS

BRASIL

EMBRAER

CPFL ENERGIAPERDIGAO S/A

TRACTEBEL

SABESP

CESP

TIM PART S/A

ELETROPAULO

NATURA

SUZANO PAPEL

V C P

SADIA S/A

AES TIETE

DASA

ENERGIAS BR

BRASKEM

DURATEX

CELESCLIGHT S/A

COELCE

ODONTOPREV

COMGAS

TELESP

ARACRUZ

ROSSI RESID

KLABIN S/A

TRAN PAULIST

COSAN

ULTRAPAR

B2W VAREJO

JBS

GAFISA

TAM S/A

SOUZA CRUZLOJAS RENNER

CCR RODOVIAS

CYRELA REALT

P,ACUCAR-CBD

NOSSA CAIXA

COPEL

VIVO

GOL

ALL AMER LAT

LOJAS AMERIC

REDECARD

BRADESPAR

NET

BRASIL TELEC

AMBEV

SID NACIONALUSIMINAS

ITAUSA

BMF BOVESPA

VALE R DOCE

PETROBRAS

% of index

ISE

IBOV


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Figure3:ChangesinISE2008/2009portfoliocomparedto2007/2008(source:BM&FBovespadata)

Figure4:ISE2007/2008industrybreakdown(source:BM&FBovespa)

UNIBANCO

TELEMAR

ITAUBANCO

BRADESCO

ELETROBRAS

TIM PART S/A

CESP

PERDIGAO S/A

GERDAU

BRASIL

CPFL ENERGIA

CEMIG

TRACTEBEL

NATURA

DURATEX

GERDAU MET

ELETROPAULO

SABESP

COELCE

ODONTOPREV

ENERGIAS BR

AES TIETE

DASA

LIGHT S/A

CELESC

SUZANO PETR

BRASKEM

IOCHP-MAXION

SUZANO PAPEL

SADIA S/A

EMBRAER

AM INOX BR

V C P

COPEL

CCR RODOVIAS

WEG

ARACRUZ

PETROBRAS

-30.00 -25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00

Financials

39.1%

Oil and gas

25.0%

Electric utilities

12.4% Steel

7.7%

Transportation

5.0%

Wood and paper

4.4%

Consumer non-cyclical

3.1%

Water utilities

1.3%

Machines and

equipment

1.2%

Petrochemicals

0.8%

Other

15.8%


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Figure5:ISE2008/2009industrybreakdown(source:BM&FBovespa)

PerformanceOverthethreeyearssinceitslaunch,theperformanceoftheISEhascloselymatchedthatofBrazilsmainbenchmarkindex,theIBOVESPA(Figure6).Bothindicesmadeverystronggainsin2007(partlyasaresultofseverallargeIPOs)buthavefallensharply(byaround40percent)overthelastsixmonthsof2008duetothewidereffectsofglobaleconomicturmoil.

Asaresult,cumulativeperformanceoverthethreeyearssincetheISEslaunchisrelativelylowataround11percentfortheperiodDecember2005December2008.Figure6:PerformanceofISEindexcomparedtoIBOVESPA,Dec2005Dec2008(source:

Bloomberg)

Financials

54.4%

Electric utilities

18.6%

Steel

8.3%

Telecomms

6.6%

Consumer non-cyclical

4.6%

Transportation

3.2%

Wood and paper

2.2%

Water utilities

1.6%

Petrochemicals

0.5%

Other

12.1%

0%

20%

40%

60%

80%

100%

120%

140%

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

IBOVESPA ISE


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UsebyinvestorsTheISEhasbeenwellreceivedbyBrazilianinvestorsinterestedinsustainabilityissuesandhasleddirectlytoasubstantialincreaseinthenumberandsizeofSRImutualfundsavailableinBrazil(seeChapter5).ThemanagersofthesefundscurrentlyusetheISEfreeofcharge.TheISEiscurrentlythemaintoolusedbyPREVIandotherpensionfundsthatareseekingtoimplementthePRIacrosstheirlistedequityportfolios.PREVIhasindicatedthatitiskeentoseethedevelopmentofamoresophisticatedtoolthantheISE,whichcanonlybeusedforscreeningpurposesanddoesnotenablecomparisonorrankingofcompaniesandindustrysectors.TheISEdoesnotappeartobewellusedorwellknownbyforeignportfolioinvestors.

ResearchintoanISEpremiumEventhoughtheISEisarelativelyyoungindex,thereisalreadyasmallbutgrowingbodyofacademicresearchintothepossibilitythatstocksadmittedtotheISEtradeatapremiumasaresultoftheirsuperiorsustainability(i.e.environmental,socialandgovernance)performance. ProfessorJosLuizRossiJniorhasusedtheISEtoassesswhethercorporatesocialresponsibilityhasanimpactonthevalueofBrazilianfirms 1.ProfRossianalyzeddatafrom2005to2007onasampleofnonfinancialBraziliancompaniestoassesswhethercorporatesocialresponsibility(measuredusingISEinclusionasaproxy)hasanimpactonfirmvalue.HeshowedfoundthatcompaniesincludedintheISEhaveahighermarketvaluecomparedtootherpubliclytradedcompanies,implying(butnotproving)thatsustainabilityisthecausalfactorforthispremium.BogaetalconductedaneventstudytodetectunusualchangesinthesharepriceofISEstocksfollowingtheannualannouncementofindexconstituentsin2005,2007and2007

2.Theyfoundno

statisticallysignificantevidenceofpositiveabnormalreturnsfollowingtheannouncementofcompaniesbeingincludedintheISE.Ontheotherhand,therewasalsonoevidenceofnegativeabnormalreturns.ThelackofsignificantresultsfromthisresearchontheISEhavealsobeenfoundinpreviousworkoninternationalindicessuchasFTSE4Good,anddoesnotnecessarilymeananabsence

ofarelationshipbetweengoodsustainabilitypracticesandthecreationofshareholdervalue.Forcontext,itisrelevanttonoteanumberofstudiesonequivalentquestionsrelatedtothemoremainstreamandlongerestablishedsubjectofcorporategovernanceinBrazil.A2003studycommissionedbyBOVESPAfoundthatcompaniesthatmovedintohighercorporategovernancelevelsexperiencedapositiveimpactontheirstockvaluationandincreasedtradingvolumeandliquidity

3.A2005studybyBrunoErbisti(oneofBrazilsleadingESGinvestmentprofessionals)

showedthatBrazilbasedfirmswiththebestcorporategovernanceratingsgarnered2004P/Eratiosthatwere20percenthigherthanfirmswiththeworstgovernanceratings

4.Thebetterratedfirms

werealsofoundtohaveROEsthatwere45percenthigherandnetmarginsthatwere76percenthigherthanthosewithbelowaveragegovernancepractices.

SantanaetalhavealsocommentedontheimpactofgovernancerulesonstockpricesinBrazilina2008paperfortheIFCsGlobalCorporateGovernanceForum

5.TheynotedthatBovespasindexof

shareswithdifferentiatedcorporategovernance(theIGC)rose237percentbetweenJune2001andJune2006,whiletheIBovespaindexgained168percentduringthesameperiod.NovoMercadoandLevel2companiesalsoobtainedhighermultiplesintheirIPOsthanthemarketaverage.

1RossiJnior,JosLuizWhatisthevalueofcorporatesocialresponsibility?AnanswerfromtheBrazilianSustainabilityIndex

IBMECWorkingPaperWPE952008(2008)2Bogea,Felipe,Campos,AndersonLSandCaminoBlasco,DavidDidthecreationoftheISEcreatevaluetocompanies?

(September2008)3GledsondeCarvalho,AntonioEffectsofmigrationtospecialcorporategovernancelevelsofBovespa(2003)

4Erbisti,BrunoCorporategovernanceinBrazil:istherealinkbetweencorporategovernanceandfinancialperformanceinthe

BrazilianMarket?ABNAMROAssetManagement(July2005)5Santana,MariaHelena,Ararat,Melsa,Aleandru,Petra,Yurtoglu,B.BurcinNovoMercadoanditsfollowers:casestudiesin

corporategovernancereformGlobalCorporateGovernanceForum(February2008)


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Corporatebuyin

ReactiontoanduseoftheISE

TheISEappearstohavebeenacceptedandwelcomedbyBrazilspubliclyquotedcompanies.ThemajorityofcompaniesadmittedtotheISEmakeextensiveuseofthefact(andtheISElogo)intheirwebsites,annualreports,sustainabilityreports,pressreleasesandotherexternalcommunications.TheISEhasarelativelyhighprofileontheinternet.NumerousreferencestotheISEandcompaniesinclusionintheindexcanalsobefoundatBloombergandPRNewswire,aswellasintheBrazilianmedia.ManyISEcompaniesusetheISEsbrandvalueinaproactivewayintheirregulatoryreportingaswellasintheirPRandinvestorrelations.Figure7providesanexampleofoneofseveralPetrobrasfilingswiththeUSSecurities&ExchangeCommissionthatrefertotheISE;similarreferencestoBrazilssustainabilityindexcanbefoundintheSECfilingsofnumerousotherISEcompanies.

NoninclusionofPetrobrasThefactthatPetrobrashasbeendroppedfromtheISEs2008/2009portfolioisaverysignificantdevelopmentandarguablymarksanimportantmilestoneintheshortlifeoftheIndextodate.PetrobrasexclusionfromtheISEislinkedtocontroversialissuesconcerningseriousairpollutionfromBrazilsdieselfleetanddelaysintheintroductionoflowsulphurdieselfuelnecessaryforlowemissionvehicles.ThenewsattractedconsiderableattentionintheBrazilianmedia(butlittleinternationalcoverage).PetrobraswasunhappyaboutthecircumstancessurroundingitsexclusionfromtheISEandissuedanangryrebuttalallegingthattheexistenceofadefamatorycampaignagainstthecompanyledbytheEthosInstitute,amemberoftheISEBoard(PetrobrasalsoresigneditsmembershipoftheEthosInstitute).ItistooearlytotellwhatthelongertermfalloutofthismaybeintermsoffuturesupportfortheIndexbyotherBraziliancompaniesandrelevantstakeholders.

Questionnaireresponserate

TheresponseratetotheannualquestionnairesentoutbyFGVCEShasbeenfallingeveryyearsincetheISEslaunch(Table2).ThiscontrastssharplywiththesteadygrowthincorporatesustainabilityreportingbyBraziliancompanies,suggestingthetypeofquestionnairefatigueexperiencedbytheSRImarketintheUSandEuropeatasimilarstageofmaturity.ItshouldalsobenotedthattheIntegrationWorkingGroupofthePRIBrazilNetworkisexaminingtheESGindicatorsthataremostrelevantandmaterialforinvestorsinBrazil(page48).ThiswillincludeacomparisonofthemostcommonlyusedindicatorsinBrazilwiththoseprovidedintheGRIguidelines.Basedonthisselection,PRIpensionfundsinBrazilmaythendevelopajointquestionnairethattheywillsendtoBraziliancompanies.TherelationshipbetweenthisinitiativeandtheISEiscurrently

unclear.Table2:DecliningcompanyresponseratetoISEquestionnaire

2005 2006 2007 2008

No.ofcompaniesinvitedtocompletequestionnaire 121 120 137 137

Responseratetoquestionnaire 52% 50% 42% 37%

Source:CESFGV,BM&FBovespa


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Figure7:ExampleofacompanysuseoftheISEininvestorrelationsandregulatoryreporting

(source:SEC)

Petrobras participation in BOVESPAS

Corporate Sustainability Index is renewed

(Rio de Janeiro, November 27, 2007). PETRLEO BRASILEIRO S/A - PETROBRAS, [Bovespa:

PETR3/PETR4, NYSE: PBR/PBRA, Latibex: XPBR/XPBRA, BCBA: APBR/APBRA], a Brazilianinternational energy company, announces that, for the second consecutive year, it has been included in thelist of companies whose shares compose Bovespas Corporate Sustainability Index (ISE) for their highdegree of commitment to sustainability and social responsibility. Petrobras common and preferred shareswill have the weights of 11.12% and 13.88%, respectively, totaling 25%, the ISEs biggest individualweight.

The ISEs new portfolio will go into effect on December 01 2007 and remain valid through November 302008. It brings together 40 corporate stocks (common and preferred) issued by 32 companies performing in13 sectors. These companies were selected for their policies, management practices, performance, and legalobligation fulfillment with regard to economic efficiency, environmental balance, social justice, productnature, and corporate governance. Jointly, the 32 companies market value is R$927 billion, or 39.6% ofBOVESPAS total capitalization, currently worth R$2.3 trillion.

BOVESPA, ABRAPP, ANBID, APIMEC, IBGC, IFC, the ETHOS institute, and the Ministry of theEnvironment, who comprise the index Deliberation Board, created the ISE as a benchmark for sociallyresponsible investments in Brazil. The Board later added PNUMA to its composition. FGV-EAESPelaborated the methodology used to assess the companies. The 141-question questionnaire was sent to the137 outfits that issue the 150 most liquid shares traded at the BOVESPA and, ultimately, answered by 62companies.

The ISE is a pioneering initiative in Latin America, designed to create an investment environment that iscompatible with sustainable development demands imposed by the contemporaneous society and toencourage ethical corporate responsibility. After undergoing a revision process which involved the

participation of several stakeholders, the ISE is now in its third edition.

The renewal of Petrobras participation in the ISE is a major victory for the company and is the outcome ofits efforts to realize its strategic objectives of growing with profitability and social and environmental

responsibility.

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 6-KReport of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of theSecurities Exchange Act of 1934

For the month of November, 2007Commission File Number 1-15106

PETRLEO BRASILEIRO S.A. - PETROBRAS(Exact name of registrant as specified in its charter)

Brazilian Petroleum Corporation - PETROBRAS(Translation of Registrant's name into English)

Avenida Repblica do Chile, 6520031-912 - Rio de Janeiro, RJFederative Republic of Brazil(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ___X___ Form 40-F _______Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the

information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.Yes _______ No___X____


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CommercialbusinessmodelAllBM&FBovespaindices,includingtheISE,aremadeavailabletoinvestorsfreeofcharge.CompanieswishingtobeincludedintheISEpayanevaluationfeeofUS$2,000;companiesadmittedtotheISEcanalsopurchasealicensetousetheISEbrandforafeeofUS$7,000perannum.TheseincomestreamsaretheonlysourceofrevenuetocovertheISEsmaintenancecosts,whicharelargelyincurredbyCESFGV.

FuturedirectionsTheISEBoardiscurrentlyconsideringthepossibilityofchangingtheISEmethodologytointroduceatwotiersystem.TheaimbehindthisconceptistoencourageoutlyingcompaniestoimprovetheirESGperformance(inasimilarwaytotheexchangesdifferentiatedcorporategovernancelevels)andtoenhancethevalueoftheindextoinvestors.BM&FBOVESPAandCESFGVarealsointerestedintheconceptofcreatingaregionalLatinAmericanversionoftheISEthatmightincludeChile,ArgentinaandMexico(andpotentiallyalsoPeruandColombia).


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4.ASSETMANAGERS

MarketoverviewBrazilhasaround8,300investmentfundswithover11millionshareholdersandtotalnetassetsofaroundUS$700billionasofQ22008,accordingtodatafromtheBrazilianSecuritiesandExchangeCommission(CVM).Themarkethasgrownsignificantlyoverthelastdecade(Figure8).Attheendof2007,Brazilianinvestmentfundshadaround48percentoftheirtotalassetsinequities.Duetosharpfallsinthestockmarketin2008,reallocationandnetoutflows,asofOctober2008thisfigurehadfallentoaround15percent,withthebalancerepresentedbyinvestmentsinfixedincomesecurities.Table3liststhetop40BrazilianassetmanagersintermsofglobalassetsundermanagementasofOctober2008.Theirclientbaseisdiversifiedacrossawiderangeofinvestortypes(Figure9).Pensionfundassetsmakeuparound22percentofglobalassetsbutitshouldbenotedthatthisfiguremaybeheavilydistortedbycaptivemandatesi.e.thepensionschemesoftheparentfinancialinstitutions.Betweenthem,these40assetmanagershaveequityholdingsofaroundR$178billion(US$77billion);about97percentofthisequitycorpusismanagedby20firms,mostnotablyBancodoBrasil(Figure10).Figure8:BrazilianinvestmentfundsAUM(US$million)(source:CVM)

118149 148

97

176

247

326

434

633

743704

0100

200

300

400

500

600

700

800

1999 2000 2001 2002 2003 2004 2005 2006 2007 Jul

2008

Aug

2008

AUMU

S$million


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Figure9:Assetsundermanagementaccordingtotypeofinvestor,Oct2008(source:ANBID)

Figure10:Top20assetmanagersaccordingtoassetsundermanagementinvestedinequities,Oct

2008(source:ANBID)

Retail 13%Private 13%

Pension funds - private

companies 12%

Pension plans 11%

Corporate 11%

Pension funds - public

sector companies 10%

High income retail 9%

Public authorities 7%

Foreigners 5%

Insurers 3%

Middle market 2%

Others 2%

Investment funds 1%

Capitalization 1%

Other; 21%

$671

$702

$771

$775

$850

$1,299

$1,418

$1,600

$1,929

$2,367

$2,448

$2,547

$2,677

$2,925

$3,155

$5,226

$6,072

$7,188

$9,025

$21,131

$0 $5,000 $10,000 $15,000 $20,000 $25,000

LEGG MASON

BANCO SAFRA

VOTORANTIM ASSET

ALFA

CITIBANK

BANCO REAL

BEM

GERACAO FUTURO CORRETORA

BNP PARIBAS

UNIBANCO

SANTANDER BRASIL

OPPORTUNITY

HSBC

CREDIT SUISSE

CAIXA

UBS PACTUAL

BRADESCO

ITAU

BNY MELLON

BANCO DO BRASIL

US$ million


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Table3:RankingofBrazilianassetmanagersbyglobalassetsundermanagement

R$million US$million PRI CDP2008SRI

products

1 BANCODOBRASIL 237,441.90 102,566.70 2 ITAU 156,054.50 67,410.15 3 BRADESCO 146,539.50 63,300.00 4 CAIXA 69,270.20 29,922.33 5 SANTANDERBRASIL 60,658.90 26,202.55 6 UBSPACTUAL 59,436.80 25,674.64 7 UNIBANCO 58,792.00 25,396.11 8 HSBC 56,822.70 24,545.44 9 BNYMELLON 51,643.90 22,308.38 10 BEM 34,445.20 14,879.14 11 BANCOREAL 32,991.90 14,251.36 12 NOSSACAIXA 27,920.90 12,060.86 13 BANCOSAFRA 21,174.00 9,146.44 14 INTRAG 20,195.80 8,723.89 15 CITIBANK 19,708.30 8,513.30 16 LEGGMASON 18,208.10 7,865.27 17 BNPPARIBAS 18,134.20 7,833.35 18 VOTORANTIMASSET 18,011.80 7,780.48 19 CREDITSUISSEHEDGINGGRIFFO 17,337.40 7,489.16 20 SULAMERICANINVESTIMENTOS 11,408.10 4,927.90 21 OPPORTUNITY 9,108.30 3,934.47 22 CONCORDIA 4,059.50 1,753.56 23 ALFA 3,800.70 1,641.77 24 GERACAOFUTUROCORRETORA 3,705.40 1,600.60 25 CREDITAGRICOLEBRASIL 3,332.50 1,439.52 26 BANCOFATOR 3,153.20 1,362.07 27 BBM 1,868.90 807.30 28 DYNAMOADMINISTRACAODERECURSOS 1,043.60 450.80 29 BANESTES 979.20 422.98 30 FIBRA 976.70 421.90 31 BRB 816.20 352.57 32 MERCANTILDOBRASIL 441.60 190.76 33 BANCODETOKYOMITSUBISHIUFJBRASIL 361.80 156.29 34 PAMPARANABANCOASSET 246.60 106.52 35 MAGLIANO 115.40 49.85 36 PROSPER 94.90 40.99

37 COINVALORES 92.40 39.91 38 TITULO 89.60 38.70 39 BANPARA 65.40 28.25 40 PILLA 14.30 6.18 TOTAL 1,170,562.30 505,642.46

Source:ANBID(dataasofOctober2008)


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StatusofsustainableinvestmentTheNationalAssociationofInvestmentBanks(ANBID)isactivelyengagedonsustainableinvestmentissuesonbehalfofitsmembers.ItservesontheISEDeliberativeBoardandhasalsoworkedwiththeCarbonDisclosureProject(CDP)andtheUNPRI.AsshowninTable3,fourofthetop40assetmanagementfirmsaresignatoriestothePRI:BancoReal,BNPParibas,HSBCandUnibanco.Betweenthem,theymanageUS$73billionoraround14.5percentoftotalassetsundermanagementbyall40firms.Intermsofequityholdings,thefourPRIsignatoriesmanageUS$8.2billion,whichisjustunder11percentofthetotalequitycorpusofUS$77billion.WiththeexceptionofBNPParibas,eachofthesefirmscurrentlyoffersretailSRIfunds(Chapter5).However,thereislimitedinformationontheextenttowhichthesefourPRIsignatoriesareintegratingESGintotheirmainstream(nonSRIbranded)productsandstrategies.SRImutualfundproductsarealsoofferedbyBancodoBrasil,Bradesco,Caixa,Ita,LeggMasonWesternAssetManagement,SafraandVotorantim(Chapter5).NoneoftheseassetmanagershavesignedtheUNPRIatthecurrenttime.

Sevenofthetop40firmsweresignatoriestoCDPBrazil2008.TheyrepresentcombinedassetsofUS$326billionornearly65percentoftotalassetsundermanagementbyallofthefirmslistedinTable3.Intermsofequityholdings,theCDPsignatoriesmanageUS$44billionor57percentofthetotalequitycorpus.NoneoftheassetmanagementfirmsemploysfulltimeESGanalysts.BancoReal,HSBC,Ita,UnibancoandVotorantimeachhaveonefulltimeanalystworkingonESGissuesparttime.


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5.RETAILFUNDS

MarketoverviewRetailandhighincomeretailcustomersconstitutearound13percentand9percentrespectivelyofglobalassetsmanagedbythe40firmslistedinTable3.ThecombinedvalueoftheseassetsisaroundUS$109.7billion;BancodoBrasilandCaixaleadtherankingsforretailassetsundermanagementwhilstthetwoleadingmanagersofhighincomeretailassetsareItaandBancoReal(Bradescohasthethirdplaceinbothcategories)(Table4).Table4:Retailandhighincomeretailinvestors'assetsundermanagement

RETAILINVESTORS HIGHINCOMERETAILINVESTORS

Top10managers R$million US$million Top10managers R$million US$million

1 BANCODOBRASIL 45,928 19,840 1 ITAU 26,888 11,614

2 CAIXA 38,489 16,626 2 BANCOREAL 12,431 5,370

3 BRADESCO 24,661 10,653 3 BRADESCO 9,737 4,206

4 ITAU 11,335 4,896 4 SANTANDERBRASIL 8,749 3,779

5 SANTANDERBRASIL 10,522 4,545 5 BANCODOBRASIL 7,735 3,341

6 LEGGMASON 8,249 3,564 6 HSBC 7,658 3,308

7 HSBC 5,473 2,364 7 UNIBANCO 5,833 2,520

8 UNIBANCO 5,129 2,216 8 CAIXA 4,284 1,851

9 BANCOREAL 2,517 1,087 9 BANCOSAFRA 3,440 1,486

10 NOSSACAIXA 2,437 1,053 10 BEM 2,276 983

Total(40managers) 154,781.5 66,860 Total(40managers) 99,229 42,863Source:ANBID(dataasofOctober2008)

StatusofsustainableinvestmentNotcountingfeederfunds,therearecurrently10retailSRImutualfundproductsavailabletoretailinvestorsinBrazil,withtotalcombinedassetsofapproximatelyR$730million(US$315million)(Table5).RetailSRImutualfundsthereforerepresentlessthan0.3percentofthetotalretail/highincomeretailinvestmentmarketofUS$109.7billion.Forcomparison,intheUKtherearearound80SRIproductsforretailinvestors,accountingfornearly

4percent(30billion,orUS$44billion)oftheUKs770billion(US$1.12trillion)retailinvestmentfundsmarket.IntheUnitedStates,thereareapproximately180retailSRImutualfunds,whichtogetherrepresentabout1.8percentoftheUS$9.3trillionmutualfundsmarket.ThegrowthofretailSRImutualfundassetsovertimeisillustratedinFigure11.ThefirstBrazilianretailSRIfundwasBancoRealsEthicalFund,launchedin2001.Itwassomethreeyearsbeforeasecondmanager,Ita,enteredthisnichemarket.FurtherSRIproductsdidnotarriveinthemarketuntilthelaunchoftheISEinDecember2005,whichraisedtheawarenessofretailinvestorsandpromptedseveralotherassetmanagerstoenterthemarket.Atthepeakofthemarket(December2007),thecombinednetassetvalueoftheSRIproductsavailableatthattimewasaroundR$1.6billion,equivalenttoUS$691millionatthecurrentexchange

rate.Thedramaticcontractionoverthelast12monthsappearstobetheresultofthefallingstockmarketratherthanredemptions.


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DespiteseveralnewentrantstothemarketsincethelaunchoftheISE,marketshareintheSRInichecontinuestobedominatedbytheearlypioneers,BancoRealandIta,whoeachcontrolabout40percentoftotalSRInetassets(Figure12).

Table5:Brazil'sSRImutualfunds

NAV CumulativePerformanceFundname(CNJPNo.)

Launch

date R$m US$m 5yr 3yr 1yr

BANCOREAL

REALFUNDODEINVESTIMENTOEMAESETHICALII(04.736.006/000182)

Nov01 276.46 119.15 100.47% 12.66% 37.60%

ITAU

ITAEXCELNCIASOCIALAESFUNDODEINVESTIMENTO(06.069.957/000170)

Feb04 235.00 101.29 11.56% 43.76%

BANCODOBRASIL

BBTOPAESNDICEDESUSTENTABILIDADEEMPRESARIALFUNDODEINVESTIMENTOEMAES(05.775.731/000122)

Dec05 23.49 10.13 14.97% 39.61%

BRADESCO

BRADESCOFUNDODEINVESTIMENTOEMAESNDICEDESUSTENTABILIDADEEMPRESARIAL(07.192.379/000128)

Dec05 37.56 16.19 22.47% 37.22%

HSBC

HSBCFUNDODEINVESTIMENTOAESSUSTENTABILIDADEEMPRESARIALISE(07.535.827/000149)

Jan06 64.39 27.75 12.66% 44.38%

SAFRA

SAFRAISEFUNDODEINVESTIMENTOEMAES(07.470.273/000149)

Jan06 5.04 2.17 41.98%

UNIBANCO

UNIBANCOSUSTENTABILIDADEFUNDODEINVESTIMENTOEMAES(08.151.339/000109)

Mar07 3.45 1.49 35.16%

LEGGMASONWESTERNASSET

LEGGMASONAESSUSTENTABILIDADEEMPRESARIALFI

(1)(29.413.945/000117)

Jun07(1)

76.63(1)

33.03(1)

43.68%

CAIXA

FUNDODEINVESTIMENTOEMAESCAIXASUSTENTABILIDADEEMPRESARIALISE(08.070.838/000163)

Nov07 5.44 2.35 41.70%

VOTORANTIM

FUNDODEINVESTIMENTOVOTORANTIMSUSTENTABILIDADEEMAES(09.343.566/000190)

Sep08 2.29 0.99

TOTAL 729.76 314.53

Source:CVMInvestorsPortal(www.portaldoinvestidor.gov.br).AlldataasofDecember30,2008.(1)

TheLeggMasonWesternAssetManagementfundwaslaunchedin1986anddidnothaveanyexplicitsustainabilitystrategy

untilitwasrelaunchedinJune2007asasustainabilityfundtrackingtheISEindex.


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Figure11:RetailSRIfundassetsundermanagementinBrazil(source:CVM)

Figure12:MarketshareintheSRInichebyNAV(source:CVM)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Mar-02

Jun-0

2

Sep-0

2

Dec-0

2

Mar-03

Jun-0

3

Sep-0

3

Dec-0

3

Mar-04

Jun-0

4

Sep-0

4

Dec-0

4

Mar-05

Jun-0

5

Sep-0

5

Dec-0

5

Mar-06

Jun-0

6

Sep-0

6

Dec-0

6

Mar-07

Jun-0

7

Sep-0

7

Dec-0

7

Mar-08

Jun-0

8

Sep-0

8

R$million

LAUNCH OF ISE INDEX

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008

VOTORANTIM

CAIXA

LEGG MASON

UNIBANCO

SAFRA

HSBC

BRADESCO

BANCO DO BRASIL

ITA

BANCO REAL


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Figure13:CumulativePerformance3Years(source:CVM)

Figure14:CumulativePerformance1Year(source:CVM)

ThesixproductswiththreeyeartrackrecordsallshowoutperformancecomparedtotheISEoverthesameperiod(Figure13).ThebestperformingSRIfundoverthreeyearsismanagedbyBradesco,whichbeatthesecondbestperformingfundby750basispointsanddeliveredareturnalmostdoublethatofthelowestperformingfund,managedbyIta.Alltenfundshaverecordedsignificantnegativeperformanceoverthelast12months,reflectingthefallingIBovespaindexandmarketconditionsinBrazilasawholeandglobally(Figure14).UnibancosSRIfundshowstheleastworstperformanceoverthisperiod,dropping35percentinvaluecomparedtoafallof40percentintheISEandbeatingthebottomperformer,HSBC,by940basispoints.

0% 5% 10% 15% 20% 25%

ISE

ITA

BANCO REAL

HSBC

SAFRA

BANCO DO BRASIL

BRADESCO

HSBC

ITA

LEGG MASON

SAFRA

CAIXA

ISE

BANCO DO BRASIL

BANCO REAL

BRADESCO

UNIBANCO

-50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0%


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BancoRealsEthicalFundisbasedonitsownESGresearchandsustainabilitymethodology,includinganindependentethicaladvisorontheinvestmentcommittee.ThefundhasalwaysdifferedsignificantlyfromtheIBovespaandISEduetotheabsence(forsustainability/ethicalreasons)ofPetrobrasfromitsportfolio.AlloftheotherSRIfundsonthemarketusetheISEindextoguidetheirportfolioconstruction.Most

ofthesefundsarepassivelymanagedwithrespecttoESGissues:onlyHSBChasanactivestrategywithinhouseESGresearch.ShareholderengagementonESGissueshasnotbeenacommonfeatureofBrazilsSRImutualfundstodate.However,severalofthefundmanagersjoinedforcesinSeptember2008tolaunchashareholderengagementcampaignonlabourstandards(specifically,moderndayslaveryinsectorssuchascharcoalproduction)undertheauspicesoftheLatinAmericanSustainableFinanceForum(LASFF).IntermsoftheirESGstrategiesandsustainabilitysellingpoints,thetenfundsarerelativelyhomogeneous,especiallynowthattheabsenceofPetrobrasfromtheISEs2008/2009portfolioeliminatesoneofthemainhistoricaldifferentiatorsbetweenBancoRealsEthicalFundandtheothernineproducts.

ThetenfundsrepresentthefirstgenerationofSRImutualfundproductsinBrazil.Todate,therearenosecondgenerationproducts.Therehasbeenlittleornoproductinnovation(eitheraroundalphaseekingESGstrategiesorhighenvironmental/socialdevelopmentimpactstrategies)sinceBancoReal,ItaandtheISEindexprovidedtheblueprintforotherstofollow.Similarly,retailappetitefortheexistingSRIproductsappearstohavebeguntoleveloutinthemiddleof2007,althoughthisobviouslycoincideswiththedeclineinretailappetiteforvariableincomeproductsingeneralfollowingtheonsetofthecurrentglobaleconomicdownturn.Figure15providesanadditionalinsightintotheBrazilianSRImutualfundmarketandtheimportanceofthisnichetotheassetmanagerscompetingforbusinessinBrazil.Asnotedearlierinthischapter,investmentinequitiesrepresentsonly15percentorsooftotalassetsundermanagementatthecurrenttime.Figure10presentedinformationonthe20assetmanagerswhodominatethissegment

intermsofhavingthelargestequityportfolios.Foreachoftheseassetmanagers,Figure15showsassetsinvestedinequitiesthroughSRIstrategiesasaproportionofassetsinvestedinequitiesthroughallstrategies.Although10ofthetop20equitymanagersofferSRIproducts,theseproductsareaverysmall(and,arguably,commerciallyinsignificant)partoftheoverallequitymanagementbusinessatmostofthesefirms.EvenatIta,whichhasa40percentshareoftheSRImutualfundmarket,SRIaccountsforlessthan2percentoftotalassetsinequities.TheexceptionisBancoReal,whichpioneeredBrazilssustainableinvestmentmovementin2001andtodayalsohasa40percentmarketshare.TheanalysisshowninFigure15impliesthatSRIhasamuchgreatercommercialandstrategicsignificanceforBancoRealandisperhapsamoreintegralpart

BancoRealsassetmanagementbusiness.


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Figure15:SRIfundsas%ofAUMinequities(source:ANBID,CVM)

4.93%

0.31%

0.13%

9.19%

0.06%

1.04%

0.07%

0.27%

1.41%

0.05%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

LEGG MASON

BANCO SAFRA

VOTORANTIM ASSET

ALFA

CITIBANK

BANCO REAL

BEM

GERACAO FUTURO CORRETORA

BNP PARIBAS

UNIBANCO

SANTANDER BRASIL

OPPORTUNITY

HSBC

CREDIT SUISSE

CAIXA

UBS PACTUALBRADESCO

ITAU

BNY MELLON

BANCO DO BRASIL


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6.PENSIONFUNDS

MarketoverviewPensionfundassetshavegrownsignificantlyinrecentyears(Figure16)andcurrentlyrepresentabout18percentofGDP.AsofSeptember2008,totalpensionfundassetsamountedtoR$428billion(US$185billion)witharound32percent(R$137billion,US$59billion)investedinequitiesandequityinvestmentfunds.Table6liststhe25largestpensionfunds,whichtogetherrepresentover75percentofthetotalpensioncorpus.Thethreelargestfundsare:

PREVI,theUS$55billionpensionfundofBancodoBrasil; PetrobrasUS$17billionpensionfund,PETROS;and FUNCEF,theCaixaEconomicaFederalpensionfund,withassetsofUS$14billion.

ManypensionfundsincludingPREVI,PETROSandFUNCEFmanagetheirequityportfoliosinhouseratherthanthroughexternalmanagers.PREVI,thecountryslargestpensionfund,iswidelyacknowledgedintheregionasasetterofbestpracticestandardsacrossarangeoffiduciary,pensionsadministration,investmentmanagementandcorporategovernanceissues.ItexercisesconsiderableleadershipinfluenceoverotherBrazilianpensionfundsandinBrazilseconomyasawhole.

Figure16:Brazilianpensionfundassets,20012008(source:ABRAPP)

Statusofsustainableinvestment18pensionfundsincluding9ofthetop25aresignatoriestothePRI.TogethertheyrepresentcombinedassetsofUS$110billionasofSeptember2008,about60percentoftotalpensionfundassets.Asnotedabove,onaverage,Brazilspensionfundsallocateabout32percentofassetstolistedequities.ThetotalvalueofPRIpensionfundinvestmentontheBrazilianstockmarketcanthereforebeestimatedataroundUS$35billion.FurtherinformationonthePRIBrazilNetworkisprovidedonpages4748.PREVIwasafoundingsignatorytotheUNPRIandthePresidentofPREVI,MrSergioRosa,isoneof11electedrepresentativesontheinternationalPRIBoard.PREVIisatthecentreofongoingPRIimplementationeffortsinBrazilspensionfundcommunity.Figure17providesanoverviewofPREVIsimplementationoftheUNPRI.

-

100

200

300

400

500

2001 2002 2003 2004 2005 2006 2007 2008

R$million


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Table6:The25largestpensionfundsinBrazil

Rank Pensionfund R$million US$million PRI CDP2008

1 PREVI 128,388 55,459 2 PETROS 40,199 17,365 3 FUNCEF 32,574 14,071 4 FUNDACAOCESP 15,307 6,612 5 VALIA 9,975 4,309 6 ITAUBANCO 9,530 4,116 7 SISTEL 9,325 4,028 8 BANESPREV 8,817 3,809 9 CENTRUS 8,154 3,522 10 FORLUZ 7,034 3,038 11 REALGRANDEZA 6,008 2,595 12 FAPES 4,995 2,158 13 FUNDACAOCOPEL 4,473 1,932 14 POSTALIS 4,219 1,822 15 HSBCFUNDODEPENSAO 3,839 1,658 16 TELOS 3,698 1,598 17 VISAOPREV 3,676 1,588 18 FUNDACAOATLANTICO 3,374 1,458 19 ELETROCEEE 3,337 1,442 20 CXEMPRUSIMINAS 3,260 1,408 21 IBM 3,166 1,368 22 ECONOMUS 3,050 1,318 23 FACHESF 2,860 1,235 24 CBS 2,747 1,186 25 FUNBEP 2,669 1,153 Total(top25pensionfunds) 324,674 140,248 Total(278pensionfunds) 427,485 184,659 Source:ABRAPP,September2008

TheISEindexiscurrentlyusedbyPREVIasaproxyindicatorforcompaniesenvironmentalandsocialperformance,althoughitshouldbenotedthatthepermittedinvestmentuniverseextendsacrosstheentiremarket.PREVIhasindicatedthatitiskeentoseethedevelopmentofamoresophisticatedtoolthantheISE,whichcanonlybeusedforscreeningpurposesanddoesnotenablecomparisonorrankingofcompaniesandindustrysectors.PREVIhasrecentlybeeninvolvedinaPRIwideengagementcampaignfocusingonmodernday

slaveryintheBraziliancharcoalproductionsectorwhichsuppliespigirontotheironandsteelindustryinBrazilandabroad.PREVIisalsoinvolvedinengagementatotherlevels,includingdialoguewithboardsandpromotingGRItoBraziliancompaniesundertheframeworkoftheinternationalEmergingMarketsDisclosureProject(EMDP).PREVIandotherleadingpensionfundsareincreasingtheirportfolioallocationstoprivateequityandareparticipatinginseveralnewfundsintheinfrastructure,greentechandclimatechangearenas:unlikelistedequities,theseprivateequitymandatesaremanagedbyexternalfirmsandPREVIisactivelyengagingwithsuchgeneralpartnersontheincorporationofESGfactorsintotheinvestmentcycle.29pensionfundsincluding11ofthetop25weresignatoriestoCDPBrazilin2008.Their

combinedassetsareabout60percentofthetotalpensionfundcorpus.


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ItisimportanttonotethatPREVIandmostotherpensionfundsuseinhousemanagersfortheirinvestmentinlistedequities.ThereisthereforelittleornoknowhowtransferbetweenthepensionfundsandassetmanagerssuchasBancoRealthathavepioneeredSRIinBrazilanddevelopedinhouseresearchcapacity.PREVIitselfdoesnotappeartohaveanyinhouseESGanalystsanddoesnotoutsourceESGresearch.

AlthoughthecommitmentofPREVIandotherleadingPRIsignatoriesinBrazilisstrong,implementationbythosepioneersisstillatarelativelyearlystage.OtherpensionfundsthathavefollowedPREVIsexampleinamore

Documents

Sustainable Investment in Brazil 2009 (April 2009)