By Jeffrey T. Lewis and Paulo Trevisani

Brazilian companies striving to attract global investors who focus on environmental, social and governance issues face challenges because of the country's recent history of corruption, inequality and deforestation, money managers say.

Getting across the message that ESG matters are taken seriously can be all the more difficult in a country where the economy is heavily focused on commodity production and extractive industries blamed for global warming.

Meanwhile, deforestation in the Amazon has accelerated under President Jair Bolsonaro, and some foreign investors have threatened to unload Brazilian assets if it isn't contained.

Some ESG-focused investors view a number of Brazil's biggest companies as tainted for operating in sectors they consider environmentally unfriendly, such as iron-ore mining company Vale SA and oil major Petróleo Brasileiro SA -- by far the two biggest companies in Brazil's Bovespa stock index -- as well as JBS SA, the world's biggest meatpacker.

The companies say their actions today follow sustainability standards, while government officials often cite the country's vast natural resources as a potential magnet for investors.

Environmental, social and governance standards are increasingly used as a risk-reduction tool by foreign investors, who according to Brazilian stock-market operator B3 account for more than 44% of all trades on the market. The amount of money in funds that consider ESG factors in their investment decisions nearly doubled to $40.5 trillion in 2020 from $22.9 trillion in 2016, according to financial consulting company Opimas.

"Foreign investors look at Brazil, see Bolsonaro and those big three companies and can think that Brazil isn't being responsible," said Fabio Alperowitch, whose São Paulo-based Fama Investimentos fund-management firm invests only in companies with good ESG policies. "They see the news about fires, the government, and big companies with their problems, they could delete Brazil from their portfolios."

Some Brazilian businesses have taken steps to improve environmental, social or governance elements of their operations. Mr. Alperowitch cited paper producer Klabin, medical testing lab Fleury, cosmetics maker Natura, retailer Lojas Renner and rental-car agency Localiza as among the best.

No Brazilian businesses were included in the top 100 in The Wall Street Journal's rankings of sustainably managed companies. The highest-ranked Brazilian company was food producer BRF SA, coming in at 310. The second-highest was Vale, which ranked 469.

The rankings measured more than 5,500 publicly traded firms that divulge performance data that rolls up into 26 sustainability categories weighted by relevance to the company's business. For example, greenhouse gas emissions will have a stronger impact for a transportation company than for a bank.

The rankings are based on 165 company-reported data points combined with analyses of media coverage by more than 8,800 media sources, meaning headline-generating corruption scandals and environmental disasters engulfing Brazil's corporate leaders dent performance.

Emerging-market ESG funds were up 97% in January from their 2014 levels, a better performance than total emerging-market funds, which rose by 65% in the same period, according to data provider Informa Financial Intelligence's EPFR Fund Flows and Allocations.

Cameron Brandt, EPFR's director of research, says funds seeking to invest only in firms fitting the ESG profile tend to be more reliable. "More social and governance is a comfort that the fund has somewhat more robust criteria for the companies that it invests in," he said.

"We wouldn't own metals and mining [and] haven't owned oil," said Matt Patsky, chief executive and portfolio manager at Trillium Asset Management. "We don't invest in extractive industries, so a lot of the sources for things that have gone terribly wrong in Brazil are things we wouldn't touch."

Vale has faced two deadly dam accidents in recent years. Petrobras was at the center of a corruption scandal that later involved JBS. And JBS has faced accusations of packaging beef raised on illegally deforested areas.

Vale has ended construction of dams like the ones that burst. Petrobras, meanwhile, launched a broad governance overhaul that has been praised by analysts. And JBS points to its efforts to ensure transparency in cattle buying.

Mr. Bolsonaro has ordered the military to fight deforestation in the Amazon. The government launched a new anticorruption plan in December, and a recent rise in new Covid-19 infections and deaths has reignited talk of extending emergency payments to Brazil's poorest residents. The president's press office didn't respond to an email seeking comments.

Vale said it plans to invest at least $2 billion to slash its own emissions through 2030, and is working to cut net emissions generated by its clients and supply chain by 15% by 2035.

Petrobras said it has a zero-tolerance policy against fraud and corruption and plans to invest $1 billion through 2025 to reduce carbon emissions in its operations, and set a goal of cutting its total emissions by 25% through 2030.

JBS said it has initiatives in place meant to minimize the impact of its supply chain on the environment.

Some investors see opportunity in the country. But to others, Brazil remains a risky market.

"Brazil isn't fashionable right now, and that impacts ESG as well," said Paula Kovarsky, head of the U.S. office of Brazilian renewable energy supplier Cosan Ltd., adding that the country should leverage ESG potential by sustainably exploring its abundant natural resources. "The flip side of the coin is, think about what's going on in the world and the natural vocation of Brazil."

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Paulo Trevisani at paulo.trevisani@wsj.com

Corrections & Amplifications

This article was corrected at 1831 GMT because the original version misspelled Matt Patsky's surname.

(END) Dow Jones Newswires

02-04-21 1014ET