Amazon: Pará creates green loan, but there is a lack of proposals – 11/09/2023 – Market

At the beginning of July, the government of Pará was overconfident; it had been less than two months since Belém had been confirmed as the host of COP30, and local administrators believed that that moment was the ideal to launch a public call inviting banks to participate in an unprecedented financial operation in the Brazilian public sphere.

The state wanted R$350 million in the form of a sustainability-linked loan (SLL), a model that provides for a reduction in the interest rate depending on the achievement of sustainable goals. The format had been developed since 2021 with consultancies specializing in the environment.

But the 60-day notice period ended with no proposal from the office of the Secretariat of the Environment (Semas), and the government had to change some operation rules. In October, the Pará administration sent letters to five banks presenting the new format. Now, these institutions have until Saturday (11) to respond to the invitation.

The purpose of the loan is to support part of the state government’s program aimed at river conservation. The portion foreseen in the SLL goes towards creating a legal framework for the topic, structuring Semas and protecting the São Benedito and Azul rivers, in the southwest of Pará. The region is suffering from the expansion of agribusiness in Mato Grosso.

Behind the scenes, the explanation for the failure of the operation involves its unprecedented nature – the same thing that delighted environmentalists when the notice was released. In the view of technicians who participated in planning the operation, financial institutions wanted more time to analyze the proposal than those 60 days determined in the notice.

One of the points that worries banks is the legality of this type of loan. Experts consulted by Sheet they see the SLL as a second version of the SLB, a security linked to sustainability and traded on the capital market. But, since the late 1990s, federal legislation has prevented states and municipalities from issuing public debt securities. This similarity could, therefore, cause legal uncertainty to the format.

“Although this operation was called loan [empréstimo, em inglês]there is a legal risk of understanding that this constitutional rule is being disrespected, there is no doubt about that”, says Luciane Moessa, director of the association Soluções Inclusivas Sustentáveis ​​(SIS).

Technicians involved with the project who spoke to the report insist that the SLL works, in general, like a common loan and that such a comparison should not be made. But the banks aren’t sure about that.

“The banks will touch on this topic. Perhaps it was this, in fact, that made them be more cautious when presenting proposals. The instrument is innovative and everything that is innovative has to have a period of maturation”, says the secretary of Environment of Pará, José Mauro de Lima O’de Almeida.

Pará is one of the leaders in the country’s environmental agenda. Governor Helder Barbalho (MDB), for example, participated in Climate Week in New York in September, where he met with United States climate emissary, John Kerry. A month later, he met with Pope Francis at the Vatican and invited him to visit Belém and “dialogue with the Amazonians and our traditional peoples.”

“We are daring and we are not afraid of it. Today, there are two major environmental financing hubs, which are the Green Climate Fund and the Global Environment Fund (well-known international green financing funds), but access to them is completely bureaucratized and ineffective. We need to have mechanisms that can be more efficient in this aspect”, adds O’de Almeida.

According to him, the SLL would also be a way of ensuring that environmental goals were met, since loans of another nature could end up going to areas such as health and education. The SLL format does not limit the allocation of resources, unlike a normal green bond, but it conditions the reduction in interest rates on the achievement of targets – thus, the government can use the funds, for example, to build a school, as long as be sure to comply with the obligations set out in the financing contract.

Analysts point out, however, that originality does not necessarily go hand in hand with success – especially in the public sphere. The SLL in question, for example, would have a term of ten years, which, depending on when the operation begins, could extend over three governments; including politicians less linked to the environmental cause.

Initially, the project also determined that the loan had to come from a consortium of at least two banks. In other words, financial institutions could not provide credit alone. This mechanism aimed to reduce the risks of the operation, but ended up serving as an obstacle. A Sheet found that the new Semas proposal no longer contains this section.

The loan also provides for the possibility of guarantees from the Union, which needs to be evaluated after choosing the creditor. Either way, this is unlikely to be a deal breaker; Pará is one of the states with the least resources guaranteed by the Union (R$3.5 million) and, according to the National Treasury Secretariat, it has not defaulted on any payment of this type since 2016. The proposal also has to go through the state’s Legislative Assembly.

Despite its unprecedented nature in the public sphere, several Brazilian companies already raise funds via SLL or SLB – according to the Climate Bonds Initiative, Brazil’s private sector has already raised US$12.4 billion (R$60.8 billion) in this format since 2018; the sixth country that raised the most in the world.

Suzano, a paper and cellulose company, was the first to use the SLL model. In 2021, the company signed a US$1.6 billion contract with foreign banks to reduce greenhouse gas emissions and water capture in its production chain by 9.7% and 2.1%, respectively, by 2025.

The interest provided for in the company’s contract is linked to Libor (international CDI) plus 1.15%. But there are additional if the goals are not met.

“We saw an opportunity to reduce the company’s funding cost with this instrument, taking the risk of meeting these goals”, says Marcelo Bacci, executive director of Finance, Investor Relations and Legal at the company, adding that the format is more effective than traditional green bonds. “In the second, you control whether the company is using the money for what was stipulated, but whether it yielded results or not, no one will look. So it’s not very effective,” he says.

Pará’s Environment Secretary, José Mauro de Lima O’de Almeida, also thinks so. At the end of the interview, he asked the Sheet: “Look at it from the side of the fuller glass. It wasn’t a failure, it was more time for reflection.”

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Main characteristics of an SLL

• Lower interest rates linked to environmental goals
• Resources can go to any area, as long as the goal is met
• Explored by the private sector, but does not yet exist in the public sphere