With wide energy diversity and great capacity for renewable energy, Brazil has great potential for energy projects that meet ESG criteria. The acronym – which stands for environmental, social and governance – guides projects to establish environmental, social and governance commitments and has become a growing concern of governments, regulators and investors around the world. But how are ESG practices affecting the energy market?
So, in the energy sector, ESG is aligned with several challenges that the sector already foresees in its transformation for the future. One of them, known as dual challenge, deals with the need to increase energy generation versus decarbonizing the matrix to reduce emissions.
From the same point of view, the decarbonization theme is also present in the tripod known as 3Ds. This global transformation comprises decarbonization with the increased use of renewable sources and hydrogen; decentralization, with the increasing implementation of distributed generation (RED) and energy storage solutions; and, finally, digitization, represented by the smart grid, smart meters and new platforms that connect generators and consumers.
According to Rafael Patrocínio, an associate at Mercurio Partners, “advances in the way of generating, distributing and consuming energy show that it is impossible not to rethink concepts and innovate in the way of developing new projects in the segment”. Thus, we were able to understand even more about how ESG practices are affecting the energy market.
Overall, the energy sector seeks to contribute to the mitigation of global warming by reducing carbon emissions. It also improves air quality (reduces sulfur and particulate emissions) and promotes universal access to electricity. An example of that commitment was given by newly elected US President Joe Biden, who plans to rid all US electricity production of CO² by 2035 and drive the country to zero net gas emissions by mid-century.
ESG in numbers
In the latest Global Sustainable Investment Alliance survey, conducted in 2019, US$31 trillion in global resources were allocated based on some ESG criteria. Additionally, by the 3rd quarter of 2020, US$ 948 billion in Green Bonds had been issued globally according to the Climate Bonds Initiative. Likewise, Rating Agencies are incorporating ESG factors into credit analysis, directly impacting companies’ cost of debt. In this sense, ESG is becoming a key fundraising factor, both from an equity and debt perspective.
Finally, the pressure to decarbonize companies’ portfolios is also increasing, 61 carbon pricing initiatives have already been implemented or are in the process of being implemented globally, according to the World Bank. In this scenario, renewable energy sources, energy efficiency, new energy storage technologies, carbon capture and hydrogen as an energy source will gain prominence in the companies’ portfolio.
Faced with the transformations in the energy sector, companies that are well positioned in ESG guidelines can capture opportunities, mitigate threats and generate additional value for all stakeholders, including their shareholders.