Sustainable Investment in the Brazilian Public Administration

The effect of the Corona virus pandemic (COVID-19) in our lives can be an important turning point in the Environmental, Social and Corporate Governance (ESG) strategies in the Brazilian Public Administration.

In recent years, Brazil has sought to implement its infrastructure through different models of partnerships between governments and the private sector. The need for delegating the execution of public services to third parties by the Government, in most cases, has been either because of the lack of public resources to meet the demand of the population, or because of government interference on the project’s execution. In the latter case, there may even be enough public capital to invest; however, it is recognized that the operation of the service by private entities are more efficient. Also, there is the hybrid possibility, which arises when a private agent can operate, but does not have the initial investment to carry out the project. This is the case of Public-Private Partnerships (P3).

Some programs have had great success in Brazil, such as highway concessions in the State of Sao Paulo, which - to date - has one of the best roads in the country, thanks to its option for concessions in the 90s. In this environment, several companies and professionals emerged believing that private participation in the construction and operation of the country's infrastructure is the best (if not the only) way to finance Brazil’s infrastructure growth.

In my practice, I see - more often today - companies and professionals connecting with the goal of forming a core capable of not only preparing highly competitive proposals for future concessions, but also introducing a different concept from the traditional one. This new concept towards the management of these concessions is focusing not only on investment related needs and return of economic and financial aspects of the operations, but also valuing the socio-environmental benefits generated by the implementation and operation of the business.

Investing in a sustainable way means integrating beyond financial issues into investment decision-making, that is, considering ESG factors. In other words, environmental, social and governance criteria are a set of standards for a company's operations that socially conscious investors use now to track potential venture opportunities.

This tripod of sustainability, or the so-called Triple Bottom Line, encompasses the idea that these three dimensions need to interact holistically; that is, sustainable growth is the development capable of meeting the needs of the current generation, without compromising the ability to meet the needs of future generations.

This view is based on the current reality that large investment funds, pension funds, institutional investors, reinsurance funds, etc., increasingly understand that the projects to be financed cannot only ignore the growing scarcity of natural resources, increased air pollution and rivers and oceans’ degradation, as well as ignoring its responsibility in reducing inequality in human activities, thus understanding its importance as an active agent of change in our society.

And if this is the case for private corporations, which offer products and services to its customers, much more responsibility will have a business that provides a public utility service, in which the ultimate purpose is, by nature, the social benefit for its users.

In public service concession projects, by its kind, the prevalence of public or collective interest over private is implied. This means that the benefits provided to the community resulting from the service provided are greater than the costs generated by it. Here it is of fundamental importance to pay attention to the fact that when the benefits and costs are mentioned, we never restrict them only to the financial scope.

In Brazil, for instance, the concept of sustainable development is in the Federal Constitution of 1988 and originates from the systematic interpretation of articles 225, caput, and 170, VI, pointing out that the State is responsible for environmental preservation, and that the protection of the environment is also one of the principles guiding the economic order. In the Brazilian legal system, sustainability is not restricted to one of the pillars alone, but in their combination: environmental, social, and economic.

Art. 3 of the Brazilian Bidding Law, teaches us that sustainable bidding procedures are the one that is intended to guarantee the compliance of the constitutional principle of isonomy, the choosing of the most advantageous proposal for the administration, and the advancement of sustainable national development.

In this regard, it can be said that sustainable public procurement is: the formal administrative procedure that contributes to the promotion of sustainable national development, through the addition of social, environmental and economic criteria, in the purchase of goods, services and implementation of construction. In general, it is all about using the purchasing power of the public sector to generate economic and socio-environmental benefits.

Thus, it is natural that these institutions must show a socio-environmental balance that is infinitely more positive for society than a purely for-profit corporation. And this positive social balance tends, more and more, to be a fundamental element in the way business will finance itself, in its market value and in its future valuations.

On that, I consider that the evaluation of a given public service must involve the measurement not only of the economic-financial equation used recurrently by the private marketplace. It is also necessary to measure the “social profit”, which is the net benefit for society.

Another particularly important factor in running a business is the code of conduct for the company and its employees. The beliefs and values, not only in a theoretical way, but demonstrated in the daily life of the company through the actions of the managers and other collaborators and employees of the organization, are vital for the formation of a strong and sustainable company in the long run.

In this respect, the Brazilian Anti-Corruption Law, represents an important advancement in providing for the objective liability of companies that commit harmful acts against the public administration. In addition to meeting international commitments adopted by Brazil, this Law closes a gap in the country's legal system by dealing directly with dishonest behaviors.

COVID-19 has raised the importance of how companies operate and speed up the importance of ESG. Brazilian Governments (Federal, State and Municipal) are at a crucial moment and with a fresh focus: it must commit themselves to conduct business in a legal, ethical, and transparent manner, ensuring that they are capable of meeting the needs of this current generation, without compromising the ability to meet the expectations, needs and hopes of future generations.

This article is written by Luciano de Almeida Freitas and views are his own.