INTERVIEW OF THE MONTH – ROBERTO DUMAS: “If we don’t look at the environment, we will lose money”

Interviewee of the month economist Roberto Dumas provides an overview of the socioenvironmental criteria of the Brazilian financial market and notes the need for a change in the government’s role if we do not want to lose market share

Instituto Escolhas’ March interview addresses practices for assessing social and environmental governance in the financial system.  Professor of Economics Roberto Dumas, who holds a Masters degree and who has been working with the domestic and international financial markets for more than thirty years, especially in areas of structured operations and credit risk, comments on the subject.

“We need to de-romanticize the term sustainability and to differentiate it from altruism,” says Dumas, explaining that, although the term ESG (Environmental, Social and Governance practices) is relatively new, financial institutions and banks, especially Brazilian ones, have been concerned with socioenvironmental issues for some time, as a way of avoiding profitability losses.

Dumas stresses the importance of government action through taxation and incentive policies on positive and negative externalities in the business and confirms that the adoption of a new mandatory matrix, as proposed by Instituto Escolhas, can bring benefits. However, he stresses the importance of having a top-down system–one capable of persuading presidents and boards of directors of financial institutions–in order to succeed.  Read the full interview below:


1 – ESCOLHAS – Much has been said about environmental practices in the Brazilian financial market, and the term ESG seems to be in fashion. Last year, the Central Bank launched a sustainability agenda and Itaú, Santander and Bradesco banks announced a commitment to the Amazon. How do these documents translate into practice?

ROBERTO DUMAS – Although we think it is a fad, ESG is nothing more than an amplified credit analysis. Banks, especially Brazilian ones, have been adapting for some time and for various reasons, such as legal risk [Law 6938/81 makes banks co-responsible for funded projects], credit risk [when payment to the bank comes the project’s revenue stream] or reputational risk.

However, we need to de-romanticize the term sustainability and not confuse sustainability with altruism. Sustainability means being sustainable in all aspects, including profit. If there is no return, it is altruism, and you will not put together an investment portfolio of only altruistic companies. If you only look at the stakeholder and, if over the next 10, 20, 30, 40, 50 years there are no dividends or profits, how will you follow up on this action? How will you attract new investors? Investment is a serious activity.

The last time I read something about climate change, in order to keep [the Earth] as it was 10 years ago, the world would need at least 4 trillion dollars each year. This value won’t be achieved through altruism. The government could help–not with command and control, as it has already done, but rather by trying to internalize the positive and negative externalities in the business. For example: are you building a coal-fired power plant? Then you will have to pay the cost of the CO 2 emission, a CO 2 emission tax, and the energy generated by thermoelectric plants will become more expensive. If you choose photovoltaics instead, you will receive a tax benefit. In other words, what we have long taken for granted (“you do not pay for polluting and you do not earn monetary congratulations for preserving”) is not working to change the world. 


2 – ESCOLHAS – Although there are some voluntary practices in the financial sector to assess socio-environmental factors in financing major projects, we still live with the impacts of projects such as the Belo Monte Hydroelectric Plant and the disasters of Mariana and Brumadinho. So wouldn’t more rigid and mandatory mechanisms be needed to assess the environmental dimension and avoid these impacts?

ROBERTO DUMAS – Here are two concepts: reasonableness and proportionality. What is reasonable? How far can we go? In terms of financing, I really need to look closely, because I know where the company is going to put its money and, according to the Environment Law, 6938/81, the bank is co-responsible for the financing. Now, let’s talk about working capital. If I am going to give money to Vale, for example, through working capital, through hot money, which is valid for one day, or even through a derivative, what kind of license or due diligence will I have?

It’s difficult to be 100% all the time, and it’s not even an issue that you don’t wish. Sometimes, a license has expired and then we also have the problem of bureaucracy in Brazil, with institutions that can go on strike, lengthy processes. Sometimes you reach the end of the process, with all the licenses, and the Public Prosecutor says, “No, I do not agree with this assessment by the agencies” [such as Ibama or ICMBio]. It would be great for us to visit a website and say, “Everything is ok with your company, it has all the licenses. Prosecutor, do you agree? I agree,” and then be able to disburse the money. Now, when the government officials themselves start to duplicate work, you are lost. Banks and financial institutions manage risk (risk is having an idea of ​​what can go wrong), but not uncertainty.

If we tightly squeeze banks’ command and control, they will find a way to deal with it. If you say that, when you give a company working capital, a swap or a forward market and an accident happens, someone will go to jail, the decision will be: “Then I won’t give more money to that company.” If the entire financial system decides not to give money, he will  go bankrupt. But that would be a disservice to the total productivity of factors in Brazil, which is so in need of infrastructure.


3 – ESCOLHAS – As other countries and blocs, such as the European Union, grow more concerned about socio-environmental issues, many experts have spoken about a possible decrease in investments in Brazil. What do Brazil and our financial system need to do in order not to lose investments and to show the world that they take environmental issues seriously when assessing their investments?

ROBERTO DUMAS – I understand that speaking about socio-environmental risk as the European Union (EU) has been means talking about the Amazon, and the bank won’t be able to help there; it’s the government that has to do something [to show credibility to the world].  In his only debate with Trump, Joe Biden, who has just been elected President of the United States, deliberately looked at the camera and said, “Brazil, either you develop an environmental agenda–which means the Amazon–or you will suffer sanctions.” That was music for the ears of the 27 EU countries, which had just signed a free trade agreement with Mercosur. Who is against the agreement? France and Ireland, which are Brazil’s biggest competitors in agribusiness. In those cases, there’s nothing the bank can do. It has no policing power. What can Bradesco, Itaú, Santander, Caixa or Banco do Brasil do against illegal loggers? Arrest them? No. They can donate something, but the Amazon, which is exactly where the problem is happening, is a government problem.  

In other words, there is no doubt that we are going to suffer sanctions, especially the more the government has a knee-jerk reaction. I’m not saying that whoever has a visceral response is wrong. Maybe he is 100% correct–but he shouldn’t respond like that, in desperation. My fear is that we have already begun butting heads with our main trading partner, China (we have stepped back now, because we need the vaccine). Our second trading partner is the European Union, with whom there is already tension. We have already clashed with France, we have clashed with the Netherlands, we have clashed with Germany and we didn’t congratulate the United States. In other words, we have already clashed with Brazil’s three largest buyers. Argentina, the fourth largest buyer, is not coming out of the recession. You have to be careful what you say. If saying what you think doesn’t work even at home, imagine between countries.


4 – ESCOLHAS – What are the main challenges or difficulties in incorporating a socio-environmental matrix for banks and financial institutions?

ROBERTO DUMAS – For a matrix to work, it is necessary to have a double entry table: financial products and values versus ​​what the risk is. For example: foreign exchange financial swap: which matrix will I use? Will I excuse myself? No. But, for all other products, I will. I need to verify whether this company is on the banned list (some banks don’t finance ammunition, for example; others don’t finance arms for countries) or on the restricted list, in which I provide the credit, but I want to see what it’s doing. For example, there are companies in which outsourced workers engage in labor similar to slavery. It is up to us, analysts, managers, directors, to point this out. If the company falls into this problem twice, it enters the blacklist.

Something else I always talk about is environmental and social governance. There’s a need for governance. The analyst or the director has no power to veto [the credit or financing]. This has to be done by the president and/or board of directors. So this matrix has to be top-down. If the president or the board of directors don’t understand the importance or concept of sustainability or reputational risk, you’re wasting time. Before developing the matrix, it’s important to have an awareness chat, which is something that large banks already do, making it very clear to everyone the risks we’re taking (credit, reputation and legal risk), to show where we are stepping, giving examples. When this has been agreed upon, when the vice president of the board of directors releases [the matrix], then you get to work, but reasonably, because otherwise we will become Brazil again: the law requires, but nobody complies. 


5 – ESCOLHAS – What changes will it be possible to see when an environmental risks matrix is adopted for mandatory use in the selection of projects and in the decisions regarding financing in Brazil?

ROBERTO DUMAS – The matrix is ​​good, it’s great, but it has a principle of command and control, when it should have a principle of “do this, and I’ll give you a benefit.” Ah, but you can say that the existence of the matrix will reduce the collection of interest, but there is always a decrease in interest when the risk is lower, it is the RAROC (Risk-Adjusted Return On Capital). If the matrix does in fact weigh on the client’s risk rating, it will be important. On the other hand, the bank may say, “I have the matrix” but give it such an insignificant weight that it has no impact on the client’s risk rating. And that ‘s no use. For example, you can place in the matrix a weight of only 0.05%, which has zero impact on the risk rating, even when there is compliance with the legislation. So, be careful with the proportionality and the weight it has. The matrix has to be relevant to the client’s risk rating, because otherwise, even if I say that everything is destroyed [in relation to the environment], the impact on the risk rating will be zero. In other words, it didn’t do any good.


6 – ESCOLHAS – Do you believe that banks are willing to give up profit in favor of the environment?

ROBERTO DUMAS – In fact, it’s the opposite; it’s this view that is wrong. Sustainability is not about giving up profit. But rather: when I don’t look at the environment, my profit drops. For example, I don’t look at the socio-environmental aspect [of a company], and they find out that I am giving money to someone who uses slave labor. It’s a tweetfest and that’s it, my profit is gone. If I ignore the environment and the social dimension, my share price goes down. Therefore I don’t follow-on, and my profitability also falls. If I do this as a socio-environmental profit director, they’ll throw me out the window. Everyone has eagle eyes for these issues. Looking at the environment will not improve my profit, but it will help to keep my track record. If I don’t look, I lose money.


7 – ESCOLHAS – With this new wave of small investors, do you believe that Brazilians who are now entering the stock market are open to socioenvironmentally responsible investment, or is this still more of a trend for large investors? And are our personal investment brokers already working with this type of product?

ROBERTO DUMAS – I’ve seen many banks offering them, but first, it’s good to de-romanticize: a green seal does not mean protecting turtles; it means having an inspection by an independent consultant to check the conditions of my workers. In the case of mining, the independent consultant will check worker conditions, see if the company is throwing mercury into the river and give an ok–or not. The independent consultant analyzes together with the bank and, if everything is alright, it wins a green bond.

Many investors, usually large ones, are more willing to buy them [green bonds] and more concerned. Several times when I was working at a certain bank in the financing area investors called from the United States or Europe to find out how we lent money for that project, for that hydroelectric plant, which was our due diligence. If we answered any old way, he would sell our stock, which would have an impact on reputation and also on profit. This group that is entering now, Brazilians who are starting to invest, these investors are not looking. Even if they do, they will not carry out due diligence like a major institute. They will talk about what they saw in the evening news, see the seal of sustainability, but they don’t go deep. 


8 – ESCOLHAS – How are the issue of banks and the financial sector in this scenario? Can the divestment cause (withdrawing your money from banks or companies that finance activities linked to the burning of fossil fuels) also become a cause in Brazil? What would be an alternative for the market to adapt to the low carbon economy and cause the least possible impact on people who depend on these activities?

ROBERTO DUMAS – This is now becoming a cause in Europe and the United States, because of Trump. Whether or not it will become–it’s inevitable, it’s already a given. Tesla’s operations are worth more than those of Ford, GM and everyone else. Will it be now? In how long? It ‘s hard to say. If we go into economics, we’ll arrive at the famous economist Schumpeter, the creator of the phrase “creative destruction,” who said that development assumes that some things are destroyed and are innovated upon. For example, we talked about digitalization, which will take away jobs, and about how we would start working from home. We used to say that and the pandemic simply hastened the inevitable. A year later and now, here we are.  I’ll end up working from home once a week.

Another way of looking at it is by inverting the issue: will we continue to use oil more and more? No. This is a trend. In Chile, negative externalities already factor in, where it’s not forbidden to do certain activities, but if you do, you’ll be fined. This is a trend, inevitable. The only thing we can say is: there is no point in trying to preserve jobs that are going to die. Another example, which has nothing to do with the area of ​​fossil fuels. I am a teacher, but the world is changing to distance education (EAD). So I know that I’m going to die professionally. It’s important that those in these dying professions are aware and develop. In the past, we had to change every five or ten years. Today, we have to reinvent ourselves every single week.