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Banks have a fundamental role in decarbonizing the energy matrix

As is the case in the rest of the world, it is essential that the financial sector in Brazil develop mechanisms for evaluating the environmental risks associated with energy sector operations, especially those that can aggravate the climate change drama

By Sergio Leitão and Larissa Rodrigues

Last week’s Leaders’ Summit on Climate, led by US President Joe Biden, revealed the intentions of developed countries to inject significant economic and technological resources into transforming their economies. This necessarily prompts major changes in these countries’ energy matrixes still based on fossil fuels, which are largely responsible for the climate change issue.

In the case of the United States, intentions are already becoming bold proposals, which Biden has included in his American Jobs Plan. This strategy establishes the United States’ commitment to have a 100% clean energy matrix by 2035, in addition to converting to electric transport and equipping buildings with high energy efficiency standards.

Those who bet that the decarbonization of developed countries’ energy matrixes would never happen, as was the case in several economic segments in Brazil (not to mention the Brazilian government itself), will pay a high price. We should not fool ourselves: although the government sings its own praises about a predominantly clean (hydro)electric matrix, the country’s energy planning is still guided by the past, as if it via the image seen in the car’s rearview mirror and not in the windshield.

Proof of this is the Ten-Year Energy Expansion Plan (PDE) for the 2021-2030 period, which states that Brazil will not decarbonize its energy matrix in this decade; on the contrary, it will hike the share of non-renewable energy sources to 52%. Our energy matrix is predominantly dirty. Of all the investments foreseen for the energy sector, 84% are for the oil and natural gas sector, totaling 2.2 trillion Reais. Even if we focus exclusively on the electricity sector, the PDE foresees new natural gas plants expanding by 15 GW, showing that Brazil is moving in the opposite direction to the United States and consciously planning to dirty its energy matrix.

This fact alone disproves the promise made by President Jair Bolsonaro in his speech during the Climate Summit that Brazil will achieve greenhouse gas emissions neutrality by 2050. Is the president unaware of the PDE?

Worryingly, is that if this path of foolishness is maintained, Brazil will scare away foreign investments, which will be aligned with the new guidelines of prioritizing capital contributions for economies with low greenhouse gas emissions.

Therefore, it is essential for the financial sector in Brazil – as is the case in the rest of the world, and regardless of the change of direction dictated by the current administration – to develop mechanisms for evaluating the environmental risks of its operations in the energy sector, especially those that can aggravate the climate change drama.

The Instituto Escolhas has released the study “Risk Matrix: a path for banks to incorporate the environment into their financing”, proposing a decisive instrument with objective, standardized, and transparent criteria, designed to serve as a guide for banks to able to incorporate the environment into their risk analyses, and for environmental risks to be taken into due consideration in decision-making processes on accepting or rejecting new financing for the electric sector.

The study shows that hydroelectric plants have the highest number of environmental risks (46), followed by gas-fired power plants (34), and, finally, wind power plants (29). These risks cannot be left out of financing evaluations.

With the Environmental Risk Matrix, it is clear that any banks financing new natural gas-fired power plants, for example, will effectively be allocating resources to increase greenhouse gas emissions, and distancing themselves from the financial sector’s commitments to action on climate change and the international flow of capital, itself directing resources to renewable energies.

In the global finance game, it is fundamental that Brazilian banks protect themselves from the losses of fossil fuel power plants, which will soon become obsolete investments, instead directing their resources towards clean energy sources. This is what the rest of the world is doing and following suit would place Brazil in the group of countries with renewable energy matrixes drive low carbon economies.

Sergio Leitão is Executive Director of Instituto Escolhas; Larissa Rodrigues is Projects and Products Manager of Instituto Escolhas