SK Tarpon
SK Tarpon
1344 days ago

ESG: The acceleration of the “E” post-Covid. The tipping point around the corner

Zeca Magalhães, Co-founder SK Tarpon

Society has been increasingly demanding better environmental, social and governance practices from companies, investors, and institutions. There are moments in time when different elements converge towards creating new standards and transforming how businesses and society interact.

Almost two decades ago, the dominant vision of maximizing shareholders’ value gave way to a mindset where businesses that had their clients’ interests ahead of shareholders’ started to outperform in the long run. Amazon and Netflix, amid others, led the way and this has been a positive transformation coming at the “S” (social dimension in the ESG) and the impact companies bring to society, where, in this case, the trade-off between sacrificing short-term profits to better serve clients became a smart decision for everyone, including long-term shareholders. That was an important paradigm shift, even though further advances towards balancing other stakeholders’ interest (communities, employees, suppliers) still need to be better translated into positive feedback loops between companies and society.

At some point in time, businesses and society “click”, creating powerful incentives to bring new ESG practices to become the norm while punishing companies failing to follow through. The magic happens when interests align.

Regarding corporate governance, one specific element within the “G”, which is transparency, has taken over as a value and practice over how decisions are made. Interests, as well as potential conflicts, are increasingly becoming explicit and all eyes are on how they are handled – some organizations should stand out and be rewarded when taking a more balanced approach towards multiple stakeholders interest. Companies unable to disclose to the public how they handle important issues should struggle to gain society’s approval in the era of internet and social media. Conversely, being transparent should become an edge and soon be properly rewarded by shareholders, clients, employees, suppliers, regulators, and law enforcement agencies, consequently reducing risks, creating enduring relationships, fostering learning and growth, and reducing transaction and financial costs. Decision makers become more accountable, while stakeholders should join key discussions affecting their lives, providing businesses with the opportunity to self-correct and evolve, hence creating more value for every one in the long run.

This time around, though, the acceleration we are witnessing, and to which we would like to call your attention to, is on the “E”, the environment, regarding how society is beginning to reward trade-offs between the planet’s and businesses’ health, as well as consumers’. It is now almost common sense that Covid-19, and the health / economic / social / mental challenges that followed, further accelerated the “E” trend, and we can highlight some reasons why, such as (i) Covid-19 was an accelerator for most pre-existing trends; (ii) it has further amplified fears over the limitations and fragility of life (iii) 2020 widespread wildfires have reinforced concerns over climate change and how finite natural resources are (iv) technology has become more powerful and widespread during the pandemic.

Renewable (wind and solar) was already recognized as the best energy source for the environment, but it was only very recently that it became a more efficient and cheaper mainstream way to generate energy and, as a result, more profitable to shareholders. Innovation and modern regulation are playing a key role, as should hydro reservoirs and batteries should play in the future, to manage the intermittent nature of renewables, raising the potential for countries to efficiently transition the majority of their energy matrix to renewables, making power cheaper and more sustainable.

Nextera, America’s largest renewable energy company, is now worth more than Exxon (US$ 150 billion). At Omega, Brazil’s leading renewable energy company, after nine years of swimming against the tide since we founded the company in 2008 – in other words making less money and returns than what others were doing on fossil fuels – we have been generating more value over the last four years than most peers as wind and solar became more profitable (again, not just greener). Technology improvements, growing scale and demand shifting away from fossil fuels have driven this new world.

The same rationale applies in many areas within agriculture. For instance, pest control through chemicals (herbicides, insecticides, fungicides) had always been quite efficient and basically the only choice for farmers to meet the growing food demand worldwide. But recently, using nature itself (fungi, bacteria, virus) to control pests on the farm has become a wiser and economically better choice in many cases, besides being friendlier to the environment. These biological solutions are becoming mainstream in many crops against an increasing number of pests, helping to improve the soil as a result (farmers’ most valuable asset), increasing yields, and significantly reducing the number of interventions required (pests have become resistant to chemicals over time). Therefore, farmers are increasingly adopting bio pest control.

As money flows into this emerging industry, research and development investments are providing new and better natural solutions, reinforcing the positive feedback loop. Consumers and regulators should soon demand better standards further accelerating adoption and driving capital back into the hands of farmers and companies driving the change. With this trend in mind, we have just acquired a leading company in this field, Agrivalle, to help grow bio pest control in Brazil – and abroad in the future.

Last, but not least, let us look at nature’s ecosystems and conservation. It has never been a realistic, large-scale proposition for society to pay to protect the environment when dealing with real world issues emanating from the value provided by deforestation, including wood extraction, mining, farming, urbanization, could offer. And without a credible incentive for governments, communities, businesses, farmers, the constant is a steady decline in wilderness and biodiversity, besides a warmer climate.

10,000 years ago, humans started farming and civilization. The natural consequence was to consume more of the planet’s natural resources to a point (decades ago) which became unsustainable. But specially after the wake-up call triggered by Covid-19, the timing might have finally arrived for society and nature to come to terms and really find ways to sustainably co-exist and thrive. Protecting and regenerating nature should become not only the right thing to do, but the best tradeoff for long-term investors, businesses, and society.

Carbon credits have resurfaced as a powerful way for society and businesses to reward farmers and landowners to protect the environment. Companies are keener than ever to reduce emissions and neutralize their carbon footprint. Microsoft, Google, Facebook, and many other giants have already disclosed ambitious goals on that direction. Apple just spent a relevant part of its time during the event of IPhone12 release on Oct-13th walking its audience through the goal of becoming carbon neutral for its entire operations by 2030. Consumers are willing to favor products that better preserve the Amazon, Pantanal, the Great Barrier Reef, the Artic, Serenguetti ecosystems and so forth.

That is just the beginning. A more comprehensive approach to protect and regenerate our ecosystems, based on businesses’ contribution to/impact on to carbon sequestration, biodiversity, climate, water, air, soil and waste, that can be properly measured, accounted for, monitored and traded is right around the corner. Emerging technologies, such as blockchain, satellites, quantum computing, and AI, should create a reliable green ledger to trace back entire supply chains. Thus, transparency and incentives should drive the behavior of landowners, policy makers, businesses, and consumers towards rewarding conservation and regeneration over deforestation. Diverse ecosystems should finally be worth more alive than dead.

Similarly to when Amazon became a success putting clients’ interests first, when renewable energy became cheaper than fossil fuels or when farmers started to control pests with natural predators efficiently, we are on the eve of a new era for the environment and humans to thrive together. Moreover, that will not come at the expense of cheap food prices; neither will it cause damages to isolated or poor communities. To the contrary, in this new era, natural resources, food production and the environment should no longer be in conflict. Sustainability and efficiency will reinforce each other creating new and more powerful solutions and possibilities.

That is a major opportunity for Brazil as it could easily stand out in almost every dimension – renewable energy, sustainable farming, and nature conservation. We need to embrace the future and position the country accordingly. Becoming central to the many powerful trends mentioned above should help the country’s economy, balance its capital flows, and strengthen its society, serving its people and the world in an enormously powerful way. Hopefully, that may be the country’s biggest calling and opportunity to thrive and help the world.

Countries all around the world should tag along and roll out key initiatives on a global scale, including providing the resources required to revert the deteriorating trend (nature/climate/diseases) we started creating centuries ago, but now have the means and the conscience to start acting in concert and taking responsibility in order to address this issue. It is starting now. Investors, companies, consumers, regulators, and policy makers should all take action since the train has already left the station and that is a once-in-every-10,000-year kind of opportunity to do the right thing and flourish. Self-preservation should help society and leaders in driving the change sooner rather than later.