Brazil & Petrobras

Ten years after Lava Jato, a strategic shift towards sustainable governance

 

From collapse to reconstruction

In March 2014, Brazil was thrust into a political and moral crisis of historic proportions. The Lava Jato ("Car Wash") operation, initially a routine investigation into money laundering, exposed an extensive corruption network involving state-controlled oil giant Petrobras, construction conglomerate Odebrecht, Electrobras (Latin America’s largest electricity company), and a wide swath of the national political elite. The figures are staggering: nearly 43 billion reais (8 billion dollars) were allegedly embezzled through an organized overbilling system in public markets.

On a national scale, the scandal led to the downfall of ministers, governors, and implicated three former presidents (Fernando Henrique Cardoso, Luiz Inácio Lula da Silva and Dilma Rousseff). It also triggered an economic shockwave: stock market collapse, withdrawal of foreign investments, halting of hundreds of infrastructure projects, and the loss of thousands of jobs, particularly in the construction sector. Yet this crisis also marked a turning point. It catalyzed far-reaching reforms that have since reshaped Brazil’s governance landscape.

 

Governance: a strengthened regulatory framework

In response to the scale of the scandal, Brazil began a series of major reforms aimed at restoring trust and enhancing the oversight of public companies. In 2016, a landmark legislation imposed new obligations on state-owned companies: enhanced transparency, independent internal audits, publication of integrity reports, and increased oversight of boards of directors. Companies were mandated to implement comprehensive compliance programs, ranging from corruption risk assessments and conflict-of-interest safeguards to rigorous procurement protocols such as rotating procurement officers to mitigate collusion risks.

Meanwhile, the Novo Mercado, the top governance tier of the Brazilian stock exchange B3, has emerged as a national benchmark. Since its reform in 2017, companies listed in this segment must comply with strict criteria: exclusive issuance of common shares, a minimum of 20% independent directors, mandatory establishment of ethics, audit, and remuneration committees, and publication of executive remuneration policies.

This strengthening of the legislative and institutional framework has fostered a culture of compliance that now goes beyond legal requirements, increasingly aligning with international governance best practices.

Petrobras: from shadow to transparency

Once a symbol of systemic corruption, Petrobras has undergone a fundamental transformation. Long subject to political interference, given that the Brazilian state retains 50.26% of voting rights, Petrobras was widely viewed as vulnerable to government overreach. These concerns resurfaced with the return of President Lula, raising fears of a revival of the 2012–2014 era, when political decisions led to a sharp deterioration in the company’s financial health. At its worst, Petrobras’ net debt exceeded five times its EBITDA, driven in part by unsustainable fuel pricing policies and unprofitable import strategies that undermined the downstream segment. While political risk remains, Petrobras has significantly improved its governance practices.

The SOE Law and subsequent amendments to the company’s bylaws have introduced robust safeguards. Large-scale investment decisions must now be reviewed by independent committees, and responsibilities are clearly delineated throughout the organizational structure. Real-time tracking systems provide full traceability of strategic decisions and contractual engagements, while executives found guilty of wrongdoing face administrative, civil, or criminal penalties. These measures are designed to curb individual misconduct and instill a corporate culture grounded in accountability and ethics.

External oversight has also intensified. Petrobras is now subject to routine audits by the Federal Court of Accounts (TCU), the environmental regulator Ibama, and the Securities and Exchange Commission (CVM). Notably, the company faced significant scrutiny in the wake of the Brumadinho disaster, which, though unrelated to Petrobras, amplified public and regulatory demand for greater transparency and environmental diligence. Thanks to these reforms, Petrobras has maintained a disciplined capital allocation strategy focused on exploration and production (E&P), gained greater autonomy in fuel pricing (as demonstrated by the diesel price hike in January 2025), and adopted a more predictable dividend policy.

However, despite these advances, we have chosen not to invest in Petrobras due to our policy of excluding exposure to non-conventional hydrocarbons. Petrobras is a global leader in deep-water oil extraction, with over 70% of its output derived from this high-risk method. While the company has not experienced any major incidents to date, the nature of deep-sea drilling significantly complicates containment and remediation in the event of a spill - posing serious environmental risks we are not willing to accept.

Environment: between ambition and contradiction

On the environmental front, Brazil has shown increasing ambition, although the path remains challenging. In 2021, the country adopted the National Policy on Payments for Environmental Services (PNPSE), which aims to financially reward ecosystem conservation activities, including watershed protection and natural resource preservation, leveraging local communities and traditional knowledge. Brazil has also implemented a national carbon market, structured around two segments: a regulated market (with sectoral quotas) and a voluntary market (where companies can offset their emissions by purchasing certified credits). The system includes REDD+ projects, which focus on reducing deforestation and conserving biomass in Indigenous territories.

The official target is ambitious: carbon neutrality by 2050. However, some government decisions have sparked criticism, such as the 2012 softening of the Forest Code or political pressure on Ibama to authorize oil projects in sensitive areas like the Amazon River estuary.

Petrobras is at the center of this tension, with plans for new offshore drilling operations in the region. While these projects are deemed strategic for national energy security, they run counter to Brazil’s climate commitments. This contradiction highlights the country’s core dilemma: how to reconcile economic development with environmental sustainabilit

Social: recognition of indigenous rights and inclusion

Brazil has also made strides on the social pillar of ESG, particularly regarding Indigenous rights. In 2023, the National Congress attempted to restrict Indigenous land claims to territories occupied as of 1988. The Supreme Court rejected this limitation, affirming the right of Indigenous peoples to reclaim ancestral lands, including those from which they were displaced during the military dictatorship. This ruling marked a significant symbolic and legal victory, reinforcing Indigenous protections enshrined in the Constitution.

Indigenous territories cover nearly 13% of Brazil’s landmass and act as a vital barrier against illegal deforestation and unregulated mining. Yet nearly one-third of these lands remain officially unrecognized, largely due to political inertia and growing pressure from agribusiness and mining interests.

For investors, respect for Indigenous rights has become a key ESG indicator, especially in sectors with high environmental or social risks. International capital increasingly demands robust social safeguards and stakeholder engagement in ecologically and culturally sensitive regions.

A decade after the Lava Jato scandal erupted, Brazil has made meaningful progress toward establishing a comprehensive ESG governance framework. Advances include stronger oversight of state-owned enterprises, improved leadership accountability, more ambitious climate policies, and enhanced recognition of Indigenous rights. Petrobras, once synonymous with corruption, now embodies the country’s complex transformation, emerging as both a driver of economic growth and a closely scrutinized player in Brazil’s energy transition. Yet, challenges remain. The balance between economic exploitation, environmental preservation, and social inclusion is fragile. Staying the course on ESG will require not just regulatory measures, but also political continuity, a mobilized civil society, and active private sector engagement. Long seen as vulnerable to corruption and deforestation, Brazil could, if momentum is sustained, become a global benchmark for responsible governance in the Global South.

 

As of today, GemEquity has invested 4.7% of its assets in Brazil, exclusively in Sabesp, the country’s leading water sanitation company. A key player in the “Marco Legal do Saneamento” reform, Sabesp actively contributes to expanding access to drinking water and sanitation services nationwide. The company was privatized in July 2024, with the State of São Paulo’s stake reduced from 50% to 18%. Governance has significantly improved since, especially as Sabesp is now subject to the New York Stock Exchange's governance standards: a majority of independent directors, an independent fiscal committee, shareholder approval of share-based compensation plans, an internal audit department, and a formal code of conduct. Additionally, Sabesp has launched numerous initiatives to enhance its ESG performance. Its primary mission is to universalize access to water and sanitation. In this context, Sabesp plans to invest BRL 47.4 billion (USD 8.34 billion) by 2028, while maximizing the positive environmental and social impacts of its services, particularly through biodiversity preservation.