Energy transition and ESG: the importance of the social sphere and governance

By: Júlia Garcia Farias*

The energy transition is the process through which the energy matrix of a location is changed, both in the short and long term. It is also based on UN Sustainable Development Goal No. 07: “Clean and affordable energy: ensure access to cheap, reliable, sustainable and renewable energy for all”. Along these lines, although Brazil has already had an energy matrix characterized by hydroelectric plants for more than forty years, it has been open to dialogue on other renewable sources and discussed energy transition, seeking to meet ESG – Environmental, Social and Governance. However, this must be done not only in terms of the environmental sustainability involved, but also in relation to the social and governance scope, which make up ESG.

There is an undeniable environmental benefit from encouraging new energy sources. Returning to UN SDG No. 07, we see that “clean”, “sustainable and renewable” energy precisely reflects this growing energy transition towards renewable and clean sources, decarbonization and increased concern for the environment, especially in the face of abrupt climate change. After all, several regions are being hit by temperatures well below zero or well above forty degrees Celsius and there are new environmental catastrophes every day.

However, from a social point of view, ESG and the transition must also address “cheap” and accessible energy “for all”. Therefore, it is necessary to align the social scope of ESG with the accessibility given to energy, as well as its reasonable price or tariff. Some renewable sources can offer higher values ​​and this is one of the reasons why it is necessary to carefully consider the means used for an energy transition. After all, one must keep in mind the costs involved and how much this will allow everyone to have effective access to this energy. Including reflecting how this access impacts social changes.

It is nothing new that energy becomes, every day, more important for society. While, in the past, there were many professions that depended very little on energy; Currently, it is one of the main inputs in the most diverse areas of activity. At the same time, their presence also fills everyone's leisure routine and access to education, as well as individuals' chances of socializing, including in the digital sphere. For some years now, people have been talking about, for example, digital illiteracy and if there is something that depends a lot on energy, it is the digital world.

In an interview, Marcelo Neri, director of FGV Social, addressed the importance of energy in changing social indicators: “There are a lot of externalities in electrical energy (…) For all these advances, it is not just important whether you have energy in your home or not, but whether the community has more or less; this also has an impact (…) you have a multiplier effect: when you increase the distribution of electrical energy, you improve people directly, but this also generates an effect on the aggregate”. Furthermore, "nowadays you have 99.77% of people with access to electrical energy. We need to think about other alternative energies and I think the databases are starting to look at these other things too"[1]

Furthermore, when talking about “reliable” energy, we also need to remember energy security. Given the importance of energy, the ideal is for the energy transition to be carried out without compromising the existence of sufficient energy in the system to meet demand throughout the transition period. From the same perspective, it is ideal that energy is still economically accessible to everyone during this process, without those who take longer to join – for various reasons – necessarily having to suffer any burden as a result.

In turn, from a governance point of view, it is necessary to consider the way in which companies position themselves in relation to the chosen energy transition. This is because, just as they are increasingly paying attention to the topic, there are more consumers and investors reflecting on and basing their purchasing and investment decisions on sustainable actions. This in itself can lead to a company having economic advantages given this positioning. Therefore, if the company positions itself as an actor in search of cleaner energy, society needs to verify whether this is a specific or general positioning of that company and whether it is consistent with reality. In short, check whether this actually reflects the production of that company or, at least, the proposal for a product in question, which can be analyzed based on the information that the company makes available, both on an individual basis and in regular reports.

In any case, this attention to facts must also be reconcilable with market issues during the transition period. After all, while for some this placement may be beneficial; There is part of the market that fears suffering negative repercussions in the face of changes, both thinking about other participants who may feel affected, and due to the difficulty in meeting the expectations of consumers and investors. Considering that it is in society's interest for businesses to survive, the big dilemma is reconciling transparency to achieve governance delimited by ESG, economic prosperity and reduction of environmental impacts.

It is evident, therefore, that there are still major debates to be held regarding the energy transition and ESG and, although a considerable part of them involves the environmental point of view, there is also a need for reflection on the social and governance point of view. Regarding the social sphere, it is important to disseminate information on the topic, seeking to bring it closer to all layers of society, so that everyone is better able to reflect on the energy transition. As for governance, the topic actually moves and motivates decisions in the market, affecting how a company will act, what information it will reveal depending on the impacts, and its survival. To this end, from both perspectives, more reflection and more investments in research on renewable energy, its implementation and its impacts are important starting points.

[1] Available at: https://energiasemprecomvoce.com.br/marcelo-neri-energia-eletrica-tem-papel-fundamental-na-melhoria-de-indicadores-sociais/

* Júlia Garcia Farias is a lawyer working at the Tax Consultancy at Maneira Advogados and a postgraduate student at the LL.M. in Tax Law and Tax Accounting from the Brazilian Capital Market Institute of Rio de Janeiro (IBMEC/RJ), expected to finish in the 2nd semester of 2024. In 2023, she was a student in Modules I and II of the Electric Energy Law Course offered by the Brazilian Lawyers Institute (IAB).

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Source: MegaWhat