Cumberland Advisors Market Commentary – ESG Investing. Also Brazil.

Author: David R. Kotok, Post Date: January 10, 2020

ESG investing is getting hotter (pun intended). We are watching organizations change their institutional asset allocation to increase their exposure to environmental, social, and/or governance standards that are acceptable to the trustees or boards or donors. Those incoming flows into the ESG space mean higher stock prices for the companies and securities that meet the target objectives. That also means an allocation away from the bad actors who fail to qualify with high ESG scores.

Market Commentary - Cumberland Advisors - ESG

At Cumberland, three ETFs that we include in our US-focused ETF portfolio are focused on water, solar, and wind power. It is important to note that there are a number of choices in the ETF space and diligent research is needed to dig into the underlying securities. One example of a rejection we made is a so-called environmental fund that purports to hold a heavy weight in electric utilities. When we dug deeply, we found indirect exposure to coal-fired power plants as a generation source. Who’s kidding whom? The same care is needed in the electric vehicle space, where a company’s policy around charging stations may create a favorable location developed by a coal-fired power source. That may make the car owner “feel good” about ESG, but the seriousness of the environmental issue is violated if the electricity is furnished by a polluting generator.

The country governance test can be even more difficult. Cumberland looks at various metrics in determining where we take on exposure. Of course, a lot of this research is necessarily subjective, and that is particularly true in the emerging markets. A new ETF was recently launched that tries to quantify governance risk in the portfolio. The symbol is FRDM, and the full name is Alpha Architect Freedom 100 Emerging Market ETF. FRDM describes itself as follows:

“FRDM follows the theme of ‘life and liberty.’ The fund examines emerging markets stocks for factors by which its index measures this theme. In measuring the right to life, the listed factors include absence of terrorism, human trafficking, torture, and political detentions. For measuring liberty, the fund uses the following factors: rule of law, due process, freedom of the press, freedom of religion, and freedom of assembly. Lastly, to gauge property, the factors are marginal tax rates, access to international trade, business regulations, established monetary and fiscal institutions, and size of government. Based on the above factors, FRDM selects 100 securities for inclusion.”

We do not currently hold FRDM in managed accounts because we have certain seasoning rules and liquidity requirements and the ETF is too new for us to take on a position. However, our managed ETF international accounts own some of the same countries and I own some personally.

Now let’s get to a bad actor and the ongoing saga of poor governance.

We continue to monitor reporting on the destruction of the Brazilian rainforest and the political and scientific response to it in Brazil, the US, and elsewhere in the world.

Let’s start with a newly published study by Thomas Lovejoy of George Mason University and Carlos Nobre of the University of Sao Paulo, as reported in the Washington Post on Dec. 20, 2019. Their decades-long research now strongly indicates that the Amazon has come to a tipping point, beyond which deforestation and other rapid changes in the Amazon threaten to turn large areas of the rainforest into savanna, devastating indigenous cultures and wildlife and releasing additional billions of tons carbon into the atmosphere.

“The precious Amazon is teetering on the edge of functional destruction and, with it, so are we. Today, we stand exactly in a moment of destiny: The tipping point is here, it is now,” the scientists wrote in an editorial in the journal Science Advances. (“Top scientists warn of an Amazon ‘tipping point’,”

An article from NASA’s Earth Observatory gives us a deeper, more detailed picture of the progression of the devastation of the Amazon, drawing on Landsat satellite data. The article explains, “Landsat has taken a snapshot of every part of the Amazon rainforest every two weeks for 47 years, creating the world’s longest, most consistent record of change in the region.” In the 2000s NASA also conducted the Large-Scale Biosphere-Atmosphere Experiment in Amazonia (LBA), which studied how Amazon ecosystems are interconnected and how they react to rapid deforestation, climate change, and drought cycles. (“Making Sense of Amazon Deforestation Patterns,” – hat tip to reader David Kruschwitz)

In a Nov. 22, 2019, interview with Science magazine, Philip Fearnside, a scientist at Brazil’s National Institute of Amazonian Research, stated that while development in the Amazon, most of it illegal, destroyed more than 9700 square kilometers of rainforest in the year ending in July – an increase of 30% from the previous year and the highest level of deforestation since 2007–08 – the additional damage that has occurred since August 1 now totals at least 3929 square kilometers, putting deforestation for the 2019–2020 fiscal year on track to be even worse than last year’s. (“Brazil’s deforestation is exploding – and 2020 will be worse,” Science, Nov. 22, 2019,

Presumably, this interview put Dr. Fearnside at some professional risk, since his colleague Dr. Ricardo Galvão was ousted as director of Brazil’s National Institute for Space Research (INPE) on Aug. 2, after he went head to head with President Jair Bolsonaro over the validity of satellite data that revealed the accelerated deforestation. (“Brazilian institute head fired after clashing with nation’s president over deforestation data,” Science, Aug. 4, 2019,

Bolsonaro’s most recent pronouncement on the degradation of the Amazon is that “Deforestation and fires will never end; it’s cultural.” (“Brazil’s Bolsonaro calls Amazon deforestation ‘cultural,’ says it ‘will never end’,” Washington Post, Nov. 20, 2019,

In response to the fires and international pressure over them, Bolsonaro called out the Brazil Armed Forces, which operated until Oct. 24 and, according to the Defense Ministry, made 127 arrests, resulting in more than $33 million in fines. However, the operation also allowed the Armed Forces to further consolidate its already extensive presence in the region. (“After Brazil’s Summer of Fire, the Militarization of the Amazon Remains,” Foreign Policy, Nov. 19, 2019,

There has been political backlash against Bolsonaro and the fires, both in Brazil and around the world. Brazilian ex-president Luiz Inácio Lula da Silva has decried the Bolsonaro administration’s environmental and social policies and vowed to “battle for democracy.” Lula, who was released from prison just two weeks ago after serving a sentence on corruption charges that he and his supporters claim were trumped up, told The Guardian, “Bolsonaro has already made clear what he wants for Brazil: he wants to destroy all of the democratic and social conquests from the last decades.” (“Exclusive: Bolsonaro is turning back the clock on Brazil, says Lula,” The Guardian, Nov. 22, 2019,

As for the official US response, we can only point to the fact that when Bolsonaro addressed the UN General Assembly on September 24, 2019, in New York (claiming that the Amazon “remains pristine and virtually untouched,” that Brazil is one of the best countries in the world at protecting its own environment, and that fires are not destroying the Amazon), he said he was “especially grateful” to President Trump for his support over the fires. “[President Trump] well epitomized the spirit that must prevail among UN member states: respect for the freedom and sovereignty of each of us,” he said. (“Brazil’s president attacks Amazon rainforest ‘lies’ and thanks Trump for support,” CNBC, Sept. 25, 2019,

Now consider this irony. Trump and Navarro launch a trade war, and the most efficient world exporter of soybeans is stymied. The US held that efficient producer/exporter position before Trump’s trade war got in the way. The trade war encourages the Chinese capital flows to Brazil to finance soybeans, giving the Chinese a less confrontational source. Hence the burning of Brazilian forests is accelerated, to create more land for agriculture and the export of soybeans to China.

Meanwhile, the US expands it budget to send taxpayer money to American farmers as a subsidy because they are denied income by the trade war. Most of the farms receiving this aid are large ones rather than family farms, and American farm bankruptcies are up 24% despite the aid (“Farm Bankruptcies Rise Again,” Trump’s tariffs are having significant effects on overall US GDP, jobs, and wages, too. See “Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions,” Tax Foundations, Dec. 16, 2019,

Further complicating matters, on Dec. 2 Trump reinstated tariffs on steel and aluminum from Argentina and Brazil, criticizing the countries for devaluing their currencies to hurt US farmers. However, his action fails to account for the fact that in the first 10 months of 2019, Brazil shipped $25.5 billion in farm products including soybeans and pork to China – more than 10 times the value of steel and iron products sold to the US. (“Trump Ties Brazil, Argentina Steel Tariffs to U.S. Farm Woes,” Bloomberg, Dec. 2, 2019,

Think about the US-China-Brazil dynamic in the longer term. The forests in Brazil take generations to regenerate (if they are not lost forever). The capital investment made in Brazil by the Chinese is longer-term, so that the competitor we created is now in place with a large sunk cost. Now what happens if there is a trade settlement, and US soybean farmers try to sell to China again but run up against a strong new competitor in Brazil?

In a further irony, Bloomberg reports that Brazil is counting on demand for “green” debt by global investors to help raise funds for large infrastructure projects, including a multi-billion-dollar railway across a portion of the Amazon. In the past, Brazil has also used “green” securities to finance agricultural exports. (“Brazil Hopes Green Debt Will Help Fund $3.1 Billion Amazon-Crossing Railway,” Bloomberg, Nov. 28, 2019,

Brazil is also now seeking international aid in preserving its forest while at the same time promoting economic and social development in the Amazon. On Nov. 20, Environment Minister Ricardo Salles said Brazil would call on rich nations at the United Nations COP25 conference, held Dec. 2–13, 2019, in Madrid, to provide $100 billion a year to help Brazil and other developing nations preserve their natural resources, as promised under the 2016 Paris Agreement. (“Brazil to Ask Rich Countries to Help Pay for Amazon Protection,” The Wall Street Journal, Nov. 20, 2019, However, along with the many other failures to act at COP25, little was done to advance the fund. Instead, a work group was formed to take up the issue again next year. Vulnerable nations were said to be appalled at this lack of progress. (“COP25: Self-serving G20 spites youth, humanity, world at climate talks,” Mongabay, Dec. 17, 2019,

The issues we raise are global in scope; and they are complex, both in geophysical, geopolitical, and moral terms. We may criticize the behavior of the Brazilians or the Chinese; but, along with the Brazilians and the Chinese, we continue to increase our greenhouse gas emissions. The gap between those growing emissions and the levels that would be necessary to rein in global warming are the subject of the United Nations “Emissions Gap Report,” the 2019 edition of which was issued on Nov. 26. (“10 things to know about the Emissions Gap 2019,” UN Environment Programme (UNEP),

The US’s per capita emissions are greater than those of any other nation and twice as high as China’s. Our emissions were reduced by 20% over the past two decades but have been on the rise again since 2017.

Financial Times Image - Greenhouse Gas Emitters
Source: Financial Times,

The worsening of carbon dioxide emissions is, of course, not the only environmental problem exacerbated by the rollback of regulatory enforcement and protection during the Trump Administration. Writing on the Medium site, Andrew Winston cites data from a National Bureau of Economic Research study on particulate matter air pollution in the United States. The Oct. 2019 study determined that “eroding air quality was linked to nearly 10,000 additional deaths in the U.S. relative to the 2016 benchmark.” (“The Biggest News and Health Story in the U.S. That Nobody Paid Attention To,” Medium, Nov. 26, 2019,

Washington Post Image - Air Pollution

We may count ourselves fortunate that in this country we have government and private institutions that can bring serious scientific expertise to bear in analyzing the environmental challenges we face, and that we have free access to much of the data and conclusions they produce. In Brazil and many other places in the world, citizens may not have such resources.

But let’s not forget that scientific research and communication to the public, particularly with regard to climate change, are under attack here, too. Writing on the Politico site, Helena Bottemiller Evich states,

“Sen. Debbie Stabenow, ranking member of the Senate Agriculture Committee, … publicly released a list of more than 1,400 climate studies that Department of Agriculture researchers have published during the current administration after POLITICO reported that USDA buried its own research and failed to release its plan to study the issue….

“The trove of studies by USDA researchers carry warnings about climate change that the government is largely not communicating to farmers and ranchers or the public. The list published includes research showing that climate change is likely to drive down yields for some crops, harm milk production, and lead to a drop in nutrient density for key crops like rice and wheat.”

Clearly, we are up to our collective ears in environmental alligators, and “draining the swamp” is not proving to be a very effective strategy.

Reader Jim Sidinger wrote to bring the moral and practical dilemma we all face into even sharper relief:

“One issue that I have not been able to figure out, however, is that of the moral issue of my decision (as a member of an advanced economic society) that the farmer in the Amazon, or the people of India and China do not have the right to try to bring their situations up to our economic level, when we used these same ‘dirty’ methods on our way up to ours – albeit years ago before we realized what harm we were doing.

“I don’t believe there is enough currency/resources in the G7 to continue our society and give that Amazon farmer and the 3+ billion people in China and India our standard of living without some additional farmland and the use of ‘dirty’ energy. I know we are trying to save them, along with ourselves, by greenhouse gas mitigation. But do we have the moral right to keep them back, economically, in the name of planetary salvation? Am I really saving me at their expense?”

We thank Jim for his thoughtful comment. Brazil is not an isolated case: It is emblematic of a global issue. We could look at Borneo and palm oil as readily as we can at the Amazon and soybeans and beef (“Borneo is burning: How the world’s demand for palm oil is driving deforestation in Indonesia,” CNN, Nov. 2019, The Amazon fires and others blazing around the world, along with climate change impacts already underway, raise economic, moral, and existential questions that require intelligent, committed responses. Can there really be any economic winners on a planet that becomes far less livable and less productive because of runaway climate change?

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.