A socio-environmental risk matrix for investments in the electric power sector was the subject of “Escolhas” workshop

An instrument for the assessment and management of these risks contributes to sustainable investments in infrastructure and to ensure Brazil in the dispute for the international financial resources.

At a time when the environmental issue affects investments to the point where the international funds and the Brazilian business sector demand the Federal Government a new position of interaction between development and the environment – so that problems with Brazil’s environmental policy do not harm the attraction of financial resources from abroad, a new study by “Instituto Escolhas” is proposing regulatory instruments and proposals: a “Socio-environmental risk matrix for energy projects“. The work was elaborated based on the need to create criteria, obtain data and methodologies for the allocation of socio-environmental risks and their management, jointly with the financial sector, to evaluate projects and investments, especially in electric power. The subject was discussed on Monday (07/13) in a workshop held by “Escolhas”.

To illustrate the importance of the matrix, researcher Luiz Arruda, managing member of Prospectiva, mentioned a study by the Inter-American Development Bank (IDB), analyzing four decades of studies in Latin America and the Caribbean. Data from the research show that 46% of the conflicts in infrastructure projects have an impact on the cash generation and credit quality of companies, and conflicts are understood as delay in implementation of the project, delay in works and suspended operations. These conflicts occur during the projects planning and structuring phase.

In order to collect contributions to the formulation and implementation of a matrix that enables the measurement of such risks, “Escolhas” gathered in the online workshop the main actors: financial institutions, banks, financing agents, institutions, associations, governmental agencies, specialists in the electric power sector, universities and civil society organizations.

Representatives of the Ministries of Economy, Energy Research Company (EPE), National Bank for Economic and Social Development (BNDES), Febraban, Itaú Unibanco, Natixis, Forum of Associations of the Electric Power Sector (FASE), Brazilian Association of Wind Energy (Abeeolica), PSR Energy, Eletrobras, Neonergia, University of São Paulo (USP), Federal University of Rio de Janeiro (UFRJ), Institute of Environment and Water Resources (IEMA), WWF, Veirano Advogados, former Ministers of Economy and the Environment, among others,  participated in the event.

The participants highlighted that many Brazilian companies are aligning financial and sustainability strategies, with reduction of carbon emissions, and preparing for this new scenario of sustainable infrastructure, unlike banks and financial institutions or investment funds.  “What does it take for banks to incorporate ESG (Environmental, Social and Governance) instruments or for regulation by government institutions?” were some of the questions asked, as well as the difficulties to create a regulation or even the measurement and control of risks.

Despite being in the initial phase, the study has already presented partial results and listed the main points to be adopted for the construction and implementation of a risk matrix, which may go beyond social and environmental responsibility and can effectively dimension the risks and feasibility of the business and their funding. The paper recommends the financial sector to adopt: the funding of projects structured based on the Equator Principles and to implement mandatory assessment and monitoring tools of the Task Force on Climate-Related Financial Disclouseurs (TCFD); and the management and monitoring of the socio-environmental performance of the ventures, with the possibility of changing ratings and risks of their portfolios throughout the life cycle of the ventures – dialoguing with TCFD.

For entrepreneurs, the initial proposals suggest the application, in the planning and structuring phase – especially of energy projects – of the same elements and criteria of socio-environmental analyzes used by financial agents in the funding process. They are: instruments and tools for measuring and evaluating social and environmental impacts, according to the TCFD, and the compulsory application of the elements contained in the Equator Principles.

Roberto Kishinami, coordinator of the Electric Power Portfolio of “Instituto Clima e Sociedade” (iCS) praised the presence of a qualified audience in the different environmental, financial, governmental and Electric Power Sector fields. He further stressed the importance of building the risk matrix that he considers “a very important tool to carry out a greater integration between the different agents of the financial sector and the electric power sector and that this is a good time to build such matrix”.

For Sergio Leitão, director of “Escolhas”, the gap in how these investments may be evaluated has now found in this difficult scenario that Brazil and the world are undergoing a kind of confluence and mentioned the recent interview of the former Economy Minister, Joaquim Levy, to “Boletim Escolhas” that approached  the “need for a repricing of the environmental assets as this is in line with a movement of relocation of capital”. “The matrix is a “fundamental instrument so that the resumption of the Brazilian economy in the post-pandemic is sustainable and on the path of decarbonization”, he concluded.