Brazil launches 3 types of sustainable bonds to finance environmental or social actions – 05/09/2023 – Market

Brazil is going to offer three types of sustainable sovereign bonds to international investors, who will be able to acquire them under the commitment of allocating the resources to environmental, social or combined actions between the areas.

The definition is contained in the so-called “Brazilian Framework for Sustainable Sovereign Bonds”, a document released this Tuesday (5) by the National Treasury and which means another step towards the first sustainable issuance to be carried out by the country in the foreign market.

The government of Luiz Inácio Lula da Silva (PT) expects to make the first funding later this year, although it is not possible to specify the date in advance, due to market rules.

To inaugurate the Brazilian presence in this market, the secretary of the National Treasury, Rogério Ceron, says that the government will make an initial issue of sustainable bonds (sustainability bonds, in English), the most comprehensive denomination among the three types.

In addition to the symbolism and greater flexibility in the application of resources, the use of this instrument facilitates the creation of an interest rate reference for sustainable issues by Brazilian companies abroad.

In the future, however, the government may make use of the other two categories, with green bonds (green bonds) or social bonds (social bonds), used exclusively to finance actions with a positive impact in the respective areas.

The Brazilian government usually makes at least one international issue per year. The most recent was held on April 5 of this year, when the Lula government raised US$ 2.25 billion, in an auction with high demand and higher interest rates, following the rest of the world.

In a bond auction bearing the sustainability mark, the fees charged by investors are usually lower, a kind of premium given to the country in view of its commitment to sustainable guidelines.

The Brazilian sustainable emissions framework was prepared by the Sustainable Sovereign Finance Committee and represents a kind of letter of introduction to investors.

Over 40 pages, it makes a presentation of Brazilian public policies that fit the sustainable scope, details the types of bonds to be offered by Brazil and brings the obligations assumed by Brazil in the management of resources and accountability —which should rely on quantitative and qualitative indicators.

The document also lists the expenses that must be financed with the funds raised from the issuance, as well as which of the 17 SDGs (Sustainable Development Goals) are related.

The SDGs are part of the 2030 Agenda, a global action plan supported by the UN (United Nations) and of which Brazil is a signatory.

The environmental actions listed by the government as a showcase to attract investor resources are divided into nine categories and include expenses with prevention and control of pollution and greenhouse gas emissions, promotion of initiatives related to clean transport, renewable energy, energy efficiency and preservation and restoration of forests, among others.

The framework provides for an express ban on the use of funds raised by this type of issuance to finance activities related to the exploration of non-renewable energy sources, such as oil, gas, coal and its derivatives.

In the social area, the government listed five categories. Actions include Bolsa Família, BPC (Continued Provision Benefit), distribution of food to needy families and in schools, training programs for employment, access to housing, in addition to policies that seek to protect and combat discrimination against women, black people , traditional communities and minorities.

The government selected the policies in order to contemplate the five cross-cutting agendas listed in the PPA (Pluriannual Plan) 2024-2027: children and adolescents, women, racial equality, indigenous peoples and the environment.

As the Ministry of Planning and Budget will create a kind of seal within the Budget for expenditures that fit these agendas, this should facilitate the Treasury’s work of rendering accounts to investors.

When carrying out the issuances, the government undertakes to provide transparency on the use of resources (through the allocation report) and the results obtained with the implementation of policies (through the impact report).

“We need to prove the budget allocation,” Ceron said. He recalled that funding through sustainable bonds is not a direct financial link between the investor and the financed policy, but the government needs to certify an expenditure in an amount equivalent to what was obtained through the issuance.

The government has up to 24 months from the launch of the titles to prove the application of the resources. The first impact report, in turn, must be released within 12 months, with periodic (possibly annual) updates.

The measurement of the impact of the resources will be based on quantitative and qualitative indicators. Some of them are already listed in the emission framework itself, such as reduction in greenhouse gas emissions, increased recycling, number of environmental inspection actions, reforested area, number of families served by social programs, cadastral update rate, among others. .

The list includes more than 110 indicators, but the Treasury may add others that it deems relevant to improve the monitoring of policies.

From the launch of the framework, the Brazilian government will hold a round of presentations (road show) next week for investors in three cities: New York, Boston and London.

Afterwards, Treasury technicians will monitor the market to detect the best window of opportunity for issuing Brazilian bonds in the international market.

“We cannot give many details, but there are great expectations for the Brazilian placement. It must be the most anticipated issue in the world, and it has countless symbolisms”, said Ceron. The secretary avoids anticipating values, due to market rules, but says that a “big demand” for Brazilian bonds is expected.