Why Bankers Must Be Climate Activists: Q&A With Joaquim Levy

“The dilemma between being sustainable and making a profit has ceased to exist in many cases,” says Joaquim Levy. “And those who do not exploit this will take losses.”

Levy has spent a life at the top, jumping between the key roles in the public and private sector. Having just turned 60, he is currently in the private sector, although arguably as engaged in public policymaking as he has ever been. At times during the past two decades he seemed like one of the few points of stability as Brazil’s governments, of various different parties, came and went – though ultimately in 2019 he quit after only a few months running the National Bank for Social Development (BNDES), under pressure from President Jair Bolsonaro.   

Currently leading economic strategy and investor relations for Banco Safra, an influential private bank, the former finance minister of Brazil and ex-CFO of the World bank is on a mission that is green and loud. It doesn’t matter where he sits, in the private or public sector. Climate is “everyone’s fight” and it “should be everyone’s job to improve government and public policy”. 

Last July, he was one of the signatories of “Convergence for Brazil”, an open letter published in July 2020 by former finance ministers and ex-presidents of the country’s Central Bank. In this, they called for zero deforestation in the Amazon and the Cerrado, and investments in research and technology and made the case that it is possible for Brazil simultaneously to decarbonize the economy and increase productivity and prosperity.  “Brazil has a tremendous comparative advantage because here we have an abundance of renewable resources that already provide cheaper energy than fossil energy”, he says, in defense of the decarbonization of the Brazilian economy.

Levy is still obsessed with being of service: “I have always cherished public life and truly enjoyed building things that impact everyone’s future. The private sector is also a place to serve, it deeply influences the larger ecosystem. There is no dichotomy between these two worlds. The question is: am I producing the right value?” he told Driving Change during our wide-ranging conversation.

Driving Change (DC):What are currently the world’s most effective public policies for decarbonizing the economy?

Joaquim Levy (JL): Effective public policies vary with the location and its problems and comparative advantages. But the important thing is to have some characteristics that leverage local advantages, such as wind in Europe, sun in India, bio in Brazil, smart grids in the USA. Looking at the static and dynamic impacts comprehensively is also vital – because decarbonization needs to solve a series of problems and needs to do so sequentially. An electric car has several cons in the short term, such as using electricity from fossil fuels and its production process generating a lot of greenhouse gases (battery, etc.). But dynamically, making the electric car feasible is good, because it solves part of the decarbonization puzzle. The same goes for the hydrogen car: improving the efficiency of the transformation from hydrogen to electricity can be good, even if the hydrogen is not green, because it is a first step towards creating a long clean supply chain.

California, for instance, makes an enormous effort to balance climate, water, sectoral and social interests. If you attend to each sector without looking at the aggregate effect, it can lead to a worse situation than before. China is a good example of deploying fiscal and regulatory instruments to ensure the productivity gains of new technologies pay for the costs of transitioning to green. There, renewable sources are increasingly cheaper and more scalable. Yet it is also necessary to develop fiscal instruments at the federal level to compensate regions that are more dependent on coal – essential if the country is to transition to renewable energy and ultimately to carbon neutrality in 2060.

DC: What public policies still need to be invented to accelerate change and why?

JL: Looking at the big changes that we are going to experience in the next ten years, I would say that decarbonization policies need to help markets with the pricing of climate risk. In this sense, the work initiated by Mark Carney, the former Governor of the Bank of England, to get companies to include their exposure to climate risk in their financial statements has been essential, having encouraged central banks to focus on the systemic aspect of climate and environmental risk and countless institutions to develop new models for predicting and managing those risks.

I had the privilege of being part of that work, as well as that carried out by the central banks in the Network for Greening the Financial System, while I was at the World Bank. The positive repercussions of this are getting bigger and bigger.

Another key issue is mobilizing and paying attention to cyber-security and data privacy policies, since optimizing and automating production, transmission and consumption are key to reducing energy consumption. But how should we measure and manage the risks of relying more and more on “smart” infrastructures? And if optimization involves regulating individual behavior, how can it not be oppressive?

I certainly don’t have all the answers.

DC: How will we finance this net-zero future? 

JL: I don’t care about financing. New technologies are often cheaper and more efficient than old ones. And as central banks charge the financial sector more analyses of environmental risk, prices and markets will incorporate the costs of climate change and anticipate it. Renewable energies, for example, are more adapted to the type of savings we need today. Which has less risk, investing in wind or in oil wells on the other side of the world at 5000 m depth with a risk of spillage? Europe has already responded with offshore wind, and the same goes for solar in other countries, and solutions based on nature, which are more resilient.

Large companies are realizing that times have changed and are figuring out how to make money from new technologies, which will sustain the change process. You can create a global market for clean energy that reduces both poverty in the Sahara and greenhouse gases in Europe, taking advantage of the experience of oil companies and ensuring complete energy security, not least because there will be multiple suppliers. If there is a signal that demand in Europe is guaranteed, many companies will enter and the price will fall.

And it could be an anti-poverty program will bring political stability. The biggest difficulty is often to finance transition costs: for example, sustainable electricity is cheaper than coal, but how to compensate the investor in the coal plant that is not yet amortized? Or the workers who have been in the industry for twenty years? For that, you need policies to share the gains that you have when you move to new technology, compensating the “losers” from the process. This is fundamental from a political point of view, and globalization and its consequences have some lessons in this regard.

DC: Which country is best positioned to lead the world in decarbonization?

JL: I would say that Brazil is one of the best-placed countries in this race, although it may not have noticed it yet. (But many foreign investors have noticed it!).

If we look at the main pillars of decarbonization in the carbon-neutrality strategy presented by the United Kingdom in 2019, we see that Brazil has competitive options in all of them. There is enormous potential in renewable solar and wind energy, including offshore, to deliver several times the current electricity production. And we have the extra advantage that, because of integrated power system, we can modulate the different intermittent sources to ensure stable generation.

On the transport side, we can enjoy 40 years of success because we have 20-25 years in which biofuel will play an increasing role, especially if we accelerate the introduction of hybrid cars, which consume 30% less energy. In the meantime, we will start electrifying buses and trucks. The production of palm oil in degraded areas can be an answer for world commercial aviation, creating jobs and helping the regeneration of deforested areas.

In the industrial process sector, we are perhaps the only country that can produce green steel, using charcoal to transform our iron ore — perhaps the best in the world — into pig iron, and renewable electricity to turn it in to steel.

Then there are the opportunities to create jobs in the process of capturing carbon. Today, with a carbon tax in the importing countries of $30 pr ton of CO2, we could probably scale this production dramatically by taking advantage of the planted forests we already have and planting another 15m hectares.

In terms of food, the country is consuming less meat. But mainly, we increasingly see the integration of crops, livestock and forests to make the carbon footprint of the Brazilian food dish smaller and smaller. The agriculture sector is one of the most loaded with technology in Brazil.

Fortunately, we do not have a harsh winter that requires heating with fossil fuels. We have a cement industry that innovates to reduce its carbon footprint. We are also exploring the use of wood. There are beautiful wooden houses, but now what we need are durable, safe, comfortable and inexpensive houses to close the 6 housing deficit that we still have. Wood has new uses that can be very profitable, taking the place not only of cement but also of plastics.

In other words, in these five macro areas for zero-carbon, Brazil is viable and competitive. To move forward, we do not need subsidies, only policy stability and guidelines for large and small producers to be able to adopt efficient and verifiable standards that facilitate their financing by the private sector. In addition, we can partner with more technologically advanced countries to produce at scale here, as we did in the case of wind farms, creating good jobs and even exporting.

DC: How can the new administration in the US elevate the discussion and move markets to push forward this decarbonized future? 

JL: The key is for the government to have policies that reflect the big picture and, firmly and patiently, integrate the implications of each choice and balance different interests transparently. I think the new administration will have a lot of people who work like that, and a leadership that has a systemic, disciplined vision and that traditional American optimism, which translates into a lot of persistence. They can have a very big impact, in the financial world and in other countries.

DC: What’s the importance of getting a serious commitment from Asian countries to carbon neutrality? 

JL: Asia has a major challenge, which is dependence on coal for electricity generation and heating. But the commitment in the region is more and more mature. There is a clear understanding that to lead on the climate issue and in creating the technologies to overcome it, can be a great commercial and strategic advantage. That is why China, Japan, and South Korea have announced ambitious plans, and India, Indonesia, and Vietnam have been looking for alternatives in solar energy, palm oil and urban planning that are expected to have a lot of impact.

I am particularly curious about the new capital of Indonesia, which can be a truly 21st-century sustainable city. I also believe that there are many partnership options for Brazil: in ethanol in India (which has excess sugar and many people employed in the sector); palm oil in Indonesia (which is trying to make it more sustainable); wind farms in China; and hydrogen in Japan.

In addition, there is the whole issue of forest regeneration and preservation that is essential for decarbonization. Brazil can organize itself to sell environmental services and carbon credits during the transition of several of these coal economies to new sources of energy.

DC: Where in your extensive public life do you believe you had the most impact? 

JL: I was privileged to have participated in the first half of the 2000s, both under the Fernando Henrique government and Lula’s, in a very important movement in Brazil to develop social policies. I was there when we started the Bolsa Familia (social welfare that provides financial aid to poor Brazilian families). It was so effective, and it made such a difference.

I would say the environmental part in both the private and public sectors as well. When I was in the financial sector at Bradesco (one of the largest financial institutions in Latin America), I started working with the UN Principles of Responsible Investment and the socio-environmental practices now known by the acronym ESG. I wrote the PRI policy there and developed the manual on how the environment affected our portfolios and how we should adjust our investment policies in each asset class to reflect ESG.

No one talked about this in Brazil then. Also, when I took over the Finance Department of the state of Rio de Janeiro in Brazil, a long time ago, my wife was deeply involved in all things related to sustainability. One of the conditions she imposed for me to accept the position was that I implemented the so-called green ICMS (a state value-added tax on the circulation of goods, interstate and intercity transportation and communication services). It was a way to incentivize city halls that designated Environmental Protection Areas or invested to improve the treatment of solid waste, including reducing methane emissions. Miraculously, 12 years later, it still works. The amount nowadays is something like BR$150m a year.

Yet my daughters think that I am always doing too little. They are all so committed to every environmental cause!

DC: And what about when politics get in the way of good policy making?

JL: It’s not easy – one has to cut through the noise. I am very privileged, I had the possibility to just go away when I thought my contribution was no longer needed. I had the opportunity to leave at the moment I chose.

Fernanda Bak

Fernanda is a media professional with robust editorial, research and storytelling skills, spanning multiple platforms. For the past eight years, she worked at The Economist, based in New York, as a Programme Director for the events department. Fernanda is also the author of BrazilYorkers (2014). Written in both English and Portuguese, the book captures the way a diverse array of Brazilians love, struggle, and understand the city they chose to call home. She has extensive experience working for all the major Brazilian broadcasting television networks as a news reporter and newscaster. Fernanda holds a Master's degree from NYU’s Interactive Telecommunication Program (ITP) and has written on state and national politics, foreign affairs, finance, technology, sustainability and energy for organizations like Rede Globo, Rede Record, SBT and Rede Bandeirantes.

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