Sergio Leitão publishes article in the newspaper Valor Econômico stressing the need for a socio-environmental risk matrix for infrastructure investments

The post-pandemic green recovery is reshaping national and international investments, decision-makers, financial institutions, and policies related to the environment and to the socio-environmental risks of infrastructure investments.

“Unifying and improving criteria for governance, social, and environmental risks, especially in the field of infrastructure–now viewed as an opportunity for generating investments, providing momentum to the economy, and reducing the damage created by the pandemic–are urgent tasks,” writes the Executive Director of Instituto Escolhas in this article.

Read the full text below:

For an environmental risk matrix  | Opinion | Valor Econômico

Sergio Leitão

Uncertainties, difficulties, and reversals have not prevented ambitious policies aimed at tackling national challenges in Brazil–such as the Real Plan, the inflation target regime, and the Fiscal Responsibility Law launched to guide public finances.

In recent weeks, another threat has led entrepreneurs, bankers, and even international celebrities to demand an urgent response: Brazilians need creativity and commitment in order to break the strong resistances presented by backwardness, and to act with greater effectiveness against environmental degradation.

Any country or company that ignores those demands for better practices in the environmental, social, and governance areas (known as ESG) will be left behind.

Examples from other countries show that Brazil is already late: it needs more solid foundations in order to protect people and companies from the grave consequences of climate change.  Increasingly, consumers and commercial and financial partners hold negative sentiments toward those who fail to prioritize social responsibility and the prevention of the causes and effects of global warming and of the deterioration of the planet’s natural resources.

Unifying and improving the criteria adopted with respect to governance and social and climate risks, especially in the field of infrastructure–now viewed as an opportunity to generate investments, provide momentum to the economy, and reduce the damage caused by the Covid-19 pandemic–are urgent tasks.

We cannot allow the temporary supply of liquidity created by state measures taken against the new virus to cover up real risks linked to environmental, social, and governance factors that threaten the profitability and even the future viability of certain projects, with potential negative repercussions for their financiers.  Being ambitious in this area means paying greater attention to the consequences of funding projects that are potentially harmful to the environment.

The country should adopt an environmental risk matrix for mandatory use in the selection of projects and in decisions about their financing.  In this process, it will be crucial to get public sector authorities on board, such as the president of the Central Bank and financial sector leaders, among them the presidents of the country’s largest banks.

The international financial crisis of last decade prompted the creation of the Financial Stability Board (FSB), an organization made up of the world’s most influential economies, aimed at preventing and reinforcing measures by governments and institutions against threats to robustness and liquidity in financial markets.

More recently, a sign of the times was the creation by the FSB of a special task force, the TCFD, aimed at enhancing the visibility of risks that climate change brings to the financial sector.

This initiative runs counter to the mistaken idea that the consequences of the climate crisis are long-term and irrelevant to current business decisions. In Brazil, the TCDF should become the reference for measures meant to guide banks and investment funds in the effort to create a green and sustainable economy.

In fact, other countries are already ahead. In September, financial sector regulators in France inaugurated a Committee for Climate and Finance that–drawing on the TCFD’s recommendations–will monitor more closely the environmental commitments of banks and other entities in the country, as well as control their practical results. In the UK, regulators organized a public consultation aimed at reinforcing the monitoring of financial institutions’ ESG commitments and at deciding on new regulation.  The UK authorities–inspired by the TCFD–have argued that, by raising the quality of asset evaluation and of decisions about capital allocation, greater transparency can strengthen market resilience.

British regulators note that voluntary adherence to the task force’s principles for the dissemination of financial risks associated with climate change has grown. However, they believe that evidence from the market supports the idea of government intervention so as to accelerate progress in this field.

Since May, Instituto Escolhas has sought, through consultations with government and market actors, a convergence around the evaluation of ESG risks, meant to price and guide investments.  Our goal is to establish a matrix that can be applied by the banking sector or, more broadly, by financial institutions. Yet it goes even further: we need legal or regulatory mechanisms as indispensable mechanisms for the approval of financing and investments.  It is an ambitious project meant to position Brazil ahead and to generate enormous rewards in terms of investment attraction and efficiency in capital allocation.

There are clear hurdles, from technical issues related to calculating the costs associated with the matrix risks that will be applied by banks, to the need to unify the different methodologies adopted by the diverse actors in relevant markets.   Through workshops and consultations with the private sector, government agencies, and other authorities, by October we will hold a seminar to present the risk matrix to be used by banks and investors.

This effort entails suggesting norms so that regulatory agents, provided with qualified portfolios, can ensure the harmonious and fair application of the new methodology.  With the deepening of environmental problems, investments that enable the transition to a low-carbon emission economy will be favored. For example, Morgan Stanley studies have shown that 90% of high-income individuals between the ages of 24 and 39–the millennials–wish to plan their investments following ESD criteria. They are the children of a generation, the baby boomers, who will leave them a legacy of assets valued at over two dozen trillion dollars.

The choice is ours: whether to keep the options associated with the past and with setbacks, or to prepare the indispensable regulatory framework needed to harness the opportunities that this future offers us.

Sergio Leitão is a lawyer, environmental entrepreneur and Executive Director of Instituto Escolhas

Originally published at: https://valor.globo.com/opiniao/coluna/por-uma-matriz-de-riscos-ambientais.ghtml