States join the ESG wave as green business spurs

To say that the ESG (environmental, social and governance) agenda has reached the public sector may sound a bit naive. Preserving the environment, solving social problems and adopting ethical conduct are fundamental attributions of countries, states and municipalities.

However, since public management started to be inspired by the business profile, politics also borrowed the market’s vocabulary — and the acronym of the time was not left out.

Brazilian states are willing to join the ESG wave, but with a different approach. While companies intend to be green, governments position themselves as supporters of these businesses.

In São Paulo, InvestSP, an investment stimulus agency linked to the Finance and Planning secretariat, began to study ways to bring environmental, social and governance principles into the state government.

“We need to ensure that all public policies, all tax incentives and research and development resources are directed to projects that have this ESG agenda”, says Gustavo Junqueira, president of InvestSP.

According to him, the agency is developing a rating system with the help of the private sector. The idea is that tax benefits and special tax regimes are prioritized for companies and projects with better ESG scores.

“We hired consultants to help us make this assessment, [sobre] what is an ESG project, how to compare one to another. We are in conversation with B3 —which already has the sustainability index— so that we can do something along the same lines, and in conversations with Febraban so that the matrix [de classificação] be the same,” he says.

Junqueira argues that granting benefits based on sustainable criteria encourages “green competition” among companies, creating a virtuous process.

He cites the example of the automotive industry, which today receives incentives for generating many jobs and for gaining competitiveness in relation to imported products. In the ESG model it would be different.

“The auto company would have access to tax benefits depending on the ESG rating. If it is a triple C [classificação ruim], will have some benefit. If it is triple A [classificação ótima], you have access to 100% of the benefits. So you reorganize the entire system,” he explains.

For the time being, the project is still in the study phase and would need to be discussed with the Finance department to review the tax impact. According to Junqueira, it is possible to do this without generating an increase or decrease in existing benefits. “You are going to relocate from one place to another.”

States with best ESG performance

In the ranking of ESG in the states, released in September this year by the CLP (Public Leadership Center), São Paulo appears as the first place.

The survey is based on the same 86 indicators that the institution uses to draw up the competitiveness ranking of the states —also led by the São Paulo population. The difference is that the indicators are redistributed according to environmental, social and governance criteria.

Gender balance in public pay, for example, enters the social pillar. The indicators referring to the performance of the judiciary, on the other hand, are in the governance axis, while issues such as basic sanitation were included in the environmental and social axes.

São Paulo leads both in the overall ESG classification and in the three individual axes. According to Lucas Cepeda, CLP’s competitiveness coordinator, being in first place does not mean that the state is doing everything right or has the best performance possible.

“The former is more advanced if we take the average, and the latter less. But that doesn’t mean that the former does everything better than the latter,” he says.

Even because the state of São Paulo has had slips. In July this year, the government joined the UN’s Race to Zero campaign, which brings together actors committed to neutralizing carbon emissions. However, the state has failed to meet its most recent climate target of cutting 20% ​​of its greenhouse gases by 2020.

Last year alone, 141.7 million tons of CO2 equivalent were emitted, a value that should have been around 114 million for the original target to be met.

Furthermore, according to the latest Atlas of the Atlantic Forest, São Paulo had one of the worst variations in the annual deforestation rate. The state was approaching zero deforestation —when it doesn’t exceed 100 hectares— but, between 2019 and 2020, it saw the rate jump 402%: going from 43 to 218 hectares deforested.

Still, São Paulo has the best performance in comparison with other federative entities.

In Cepeda’s view, ESG is not something that will make sense for all Brazilian states at first, as this level of sophistication of public policies cannot be achieved by the majority.

“But for those states that already have greater technical capacity, a better reality, the issue becomes fundamental for the issue of attracting investments and financing public policies.”

ESG to attract local investments

The coordinator says that the idea of ​​the ranking is to provide a new tool for the states to be able to expand their capacities to attract investments and finance public policies, which can be especially relevant in a scenario of fiscal tightening.

“States and countries that in the coming years do not adhere to the logic of the ESG will be excluded from global economic flows”, he adds.

This is what Gabriela Ferolla, executive director of Seall, an impact management startup that participated in the elaboration of the ranking, also says.

For her, it makes perfect sense to look at ESG within the scope of public management, and some states have already understood this.

“When we observe this entire global movement, in which resources are being increasingly directed based on sustainability parameters, it is very important for the public sector to bring this language to its policies”, he says.

According to Ferolla, more and more national, regional and global development banks are bringing an ESG vision to the qualification of their financing.

One example comes from BDMG (Minas Gerais Development Bank). In 2020, the institution had a growth in its sustainable portfolio, with 58% of the total disbursed going to these assets. It was also the first Brazilian public bank to issue sustainable bonds, in an operation carried out by the New York Stock Exchange.

Minas Gerais is fifth in the ESG ranking made by the CLP, and has been mobilizing on this agenda.

According to Fernando Marcato, Secretary of Infrastructure and Mobility of the state, Minas has a concession plan with around 12 projects that have environmental, social and governance clauses.

“The dilemma is always: what level of effectiveness can I have? Is it just inducing and principled or can I impose fines? We opted for this second path, and today all our contracts have a clause called ESG” , he claims.

Marcato cites the example of Pampulha Airport, whose company that won the auction will need to create a racial and gender diversity program. In the Belo Horizonte bus station concession, the winning company will have to install solar panels in the terminals.

However, the main test of ESG in the contracts will be with the ring road, the biggest concession project in the state, in the amount of R$ 5 billion. On the environmental side, the company will be required to survey carbon emissions and neutralize them.

According to Marcato, non-compliance will result in a penalty. “It’s a contractual obligation like any other,” he says.

In the social part, the secretary highlights the human rights actions, which were based on a resolution of the UN Human Rights Committee. “The dealership [do rodoanel] will be required to carry out a prior mapping of the impacts that the work will generate in [relação a] possible human rights violations.”

He cites the case of Belo Monte as an example to be avoided in large projects. The construction of the hydroelectric plant generated a prostitution boom in Altamira (PA), including cases of sexual exploitation of children and adolescents.

“This due diligence [diligência prévia] it will have to be done in the project, as well as an impact mitigation plan”, he says.

The issue of human rights, in fact, is linked to the ring road even before the public notice is launched.

In February of this year, the government of Minas Gerais and Vale signed an agreement worth R$37 billion to repair the damage caused by the tragedy in Brumadinho. The text established that part of the amount would be allocated to projects such as the ring road, which drew criticism.

In addition to the argument that the road stretch will favor mining companies like Vale, victims of the disruption said that the resources should be fully applied in the affected communities.

According to Marcato, the agreement with Vale was to indemnify the damages in the state of Minas Gerais, and does not interfere with individual actions relating to the affected municipality.

In addition, the construction of the ring road will have obligations with the population of Brumadinho, such as the requirement that the concessionaire prioritize hiring the victims’ families and the population of the city.

In relation to ESG Minas initiatives, the secretary says that the state has stood out on the subject and that, recently, it also joined Race to Zero.

“It is a government that believes in private investment and we know that private investment today does not exist without ESG. There is convergence on this topic.”