Source: Google

A Long History of Controversies

It indeed is true that JBS is the world’s largest meat processing company but it also has a sort of dubious distinction attached to it. That it is controversy’s favourite child is public knowledge by now. Here’s a rundown of the various high profile controversies that the company and its owners have been embroiled in over the years:

The 2017 scandal involving President Temer

In 2017, Brazilian authorities started looking into corruption charges against Joesley Batista and Wesley Batista, the then respective chairman and CEO of JBS SA. The main allegations were that, over the years the Batista brothers had bribed Brazil’s politicians for business advantage. The brothers entered into a plea bargain deal with the authorities that gave them immunity from prosecution in exchange for information about how they bribed the politicians. Both admitted having bribed more than 1900 politicians.

Joesley Batista had secretly recorded President Temer admitting paying hush money to House speaker Eduardo Cunha, a corrupt politician who had been jailed. The day following the revelations of President Temer’s recordings, shares plunged more than 10%. Such was the impact that trading was briefly suspended. While the President denied all the charges, he had to face impeachment proceedings. This is a small indicator of the wide spread corruption existing in Brazil and involving businessmen and politicians.

2017 Insider Trading Charges

Following the plea bargain deal and the revelations of the secret recordings of President Temer, the Brazilian markets collapsed. It later came to light that the billionaire Batista brothers, in the weeks before the revelations, had sold a large number of the company’s shares. They were completely aware that once the recordings were made public, the markets would tumble. In normal circumstances, such kind of financial gains would amount to criminal charges. But because of the plea deal that the brothers had bargained for themselves, the authorities couldn’t arrest them.

However prosecutors managed to get an arrest warrant against the brothers by arguing that the Batista brother’s immunity deal made no mention of insider trading and that the Brazilian Securities and Exchange Commission, the regulator of the capital markets, was conducting an investigation against the brothers on charges of insider trading. The brothers had finally been outsmarted and were arrested.

Brazilian Development Bank (BNDES) charges

In 2009, the Brazilian Development Bank (BNDES) injected $2.8 billion into JBS which helped the company acquire the American chicken corporation, Pilgrim. In March of 2019, during their corruption investigations, Brazilian prosecutors filed charges against 12 people, including Joesley Batista. The authorities contended that JBS had bribed its way to cheap financing and investments from BNDES. BNDES had given large sums of money to companies like JBS that were looking to expand internationally. Charges against Batista didn’t bear any fruit because of his plea bargain deal.

The controversy related with Amazon rainforest

JBS has been dubbed as “The Amazon Destroyer” by environmentalists because of its continued usage of cattle, raised on deforested land. Following Bolsonaro’s ascend to office, deforestation in the Amazon has touched significant highs. Deforestation of the Amazon is rampant near slaughterhouses. In 2009, JBS signed the Cattle Moratorium with Greenpeace and pledged not to buy cattle raised on deforested land. Ever since, the company has mostly obtained its beef from ranchers involved in illegal deforestation and cattle laundering.

When the rules change, the cheaters change too. Laundering involves raising cattle on illegally deforested lands and then moving them out just in time to integrate with the supply chain, thus evading crime. Between 2013 and 2016, JBS sourced over 49,000 illegal cattle; half of them directly from embargoed pastures and the rest by three-way “laundering” transactions to disguise the source, according to the website onegreenplanet.org.

Meat Inspection Scandal of 2017

In March 2017, the federal police accused JBS and other big meat producers of bribing health inspectors to certify meat that was either rotten or tainted with salmonella. Following the raids conducted by the federal police on the meat producers, several countries including US, China and European Union banned meat imported from Brazil. This temporary ban caused significant loss to the company as was addressed in their March earnings call.

The $5.5 million settlement over firing of Muslim workers

As recently as May of 2021, JBS USA LLC reached a settlement to pay $5.5 million to settle a lawsuit filed by US Equal Employment Opportunity Commission (EEOC). The lawsuit accused the company of discrimination against Somali Muslim workers who were fired by the company because they sought longer prayer break during the month of Ramadan. Apart from the pay-out, the company also agreed to change its anti-discriminatory policies by adopting a ‘clear and simple definition of religious accommodation.

The above highlighted issues are just some instances of JBS finding itself on the wrong side of the law. There are many other instances where the company has run into trouble. While listing all of its irregularities would be akin to writing a book, the above-mentioned issues are enough to make an educated deduction. Fair to say, it’s high time for JBS to address and resolve its recurring issues.

Reaction to JBS’s Glaring Sustainability Issues

There’s no second thought on the fact that JBS has some glaring issues when it comes to ESG. ESG metrics are increasingly being used today by investors to carry out investment decisions. As such, companies and corporations around the world are adhering to ESG norms more swiftly than ever.

Given that JBS is the largest meat processing company in the world and the second largest producer of beef in the United States, any slip up will undoubtedly attract more media attention than desired. In that aspect, JBS has completely failed in presenting itself as a sustainable-friendly company. The above mentioned controversies clearly highlight this fact. But it still continues to be the world’s largest meat packing company and it still continues to rake in profits. The question here is: How long will the company sustain if it keeps continuing with its dirty practices?

It is an encouraging sign that funds and institutions around the globe are becoming cognizant of the issues lurking in JBS. In July 2020, Nordea Asset Management, the investment arm of Northern Europe’s largest financial services group, excluded JBS shares from its funds. The reason cited was the environmental track record of JBS and the company’s response to the covid-19 pandemic.

In the same month, Amnesty International while investigating illegalities in the Amazon found that illegally raised cattle in protected areas had entered the JBS supply chain. It added that the entire process of meat production in Brazil, from raising cattle to packaging beef, was responsible for the destruction of the Amazon forests and violation of human rights.

The Role of EMAlpha in helping Investors

For the stock price movement in JBS, we think ESG issues will remain relevant in the short to medium term. The investors need to be careful and watch out for major developments in the areas especially related with corporate governance. JBS, as a company, has too many skeletons in the closet for an investor’s liking. Its total discard of ESG norms could be the final nail in the coffin.

Although the issues that have been highlighted here shows the problems at JBS, it is not limited to one company alone. And these issues are not limited to companies as well. They run deep through the political system of Brazil, at times involving the President himself. One can argue that in spite of performing badly on ESG metrics, JBS still is the largest producer of meat in the world.

While that is true and valid, the bigger question is: How long can JBS be the numero uno if it continues with its practice of disregarding ESG norms? It is here that EMAlpha’s role as a pioneer in AI-ML, NLP technology comes into play for investors. The ESG issues have been a big driver of stock prices and especially in EMs, they matter even more, and the following is how EMAlpha can help investors:

• The news spread has become much faster with social media and internet. Some of the reports may be difficult to verify and their authenticity may be under a question mark, but they still influence the stock price movement. EMAlpha tracks this news flow and helps deciphering their impact on stock price movement.
• The local news flow collection picks up several important issues and the local language along with English news analysis can be tracked for important developments. The potential fallout of such events is usually better predicted using local news analysis. For example, the leaks in cybersecurity are the issues typically which appear in local news first.
• In many emerging markets, the trading patterns and ownership are highly opaque, and this is a big issue, and this often makes the stock prices volatile. EMAlpha product combines technology with domain expertise in picking up signals on the institutional investors in a stock. This is often very useful in predicting stock price movement.