JBS: Outsized Deforestation In Supply Chain, COVID-19 Pose Fundamental Business Risks

Summary

• Since 2008, JBS SA's total deforestation footprint might have been as high as 1.7 million hectares.
• Both deforestation and COVID-19 may impact the company’s revenues, cost structure, and asset value.
• Nordea Asset Management has sold its shares of JBS SA over deforestation. Others may also divest.

Chain Reaction Research has assessed the deforestation exposure and the physical and transition risks from JBS’ operations in Brazil. CRR has located and monitored 983 direct suppliers and 1,874 indirect suppliers to JBS in six Amazon states. In addition, CRR calculates the revenue and EBITDA impact of deforestation, Chinese demand, and COVID-19 in three forward-looking scenarios. See the full report here along with the methodology. 

JBS’ beef operations in Brazil have an outsized deforestation risk exposure. JBS operates 20 slaughterhouses within the Legal Amazon. The company’s monitoring of supplier compliance is limited to its direct supply. Its indirect supply chain risks remain unmitigated.

Since 2008, 20,296 ha have been deforested in the sample of JBS’ direct supply chain, and 56,421 ha in its indirect supply chain. CRR conservatively estimates that JBS’ total deforestation footprint may be as high as 200,000 ha in its direct supply chain and 1.5 million ha in its indirect supply chain. 

Both deforestation and COVID-19 may impact the company’s revenues, cost structure, and asset value. Business risks include COVID-19 plant closures; shareholder action; restrictions on export markets and supply chain exclusions; growing Chinese consumer weariness for imported meat; and availability of plant-based substitutions.

In a "high-impact" scenario, JBS’ EBITDA could be negatively impacted by 26 percent or USD 1.3 billion, leading to increasing financing costs. JBS’ cost of capital might rise as almost a third of its financing is through European investors and banks that are adopting stricter ESG policies.

JBS SA's deforestation exposure could negatively impact JBS'intentions to list its international assets in the United States.The U.S. listing would consist of a spin-off of JBS’ international operations into a separate company with the same shareholders. Simultaneous to the U.S. listing plans, JBS’ second-largest shareholder BNDESPar announced its intention to sell half its shares.