Finance and IDB work on a fund to protect foreign investors in socio-environmental projects – 12/14/2023 – Market

The Inter-American Development Bank (IDB) and the Ministry of Finance are working on the creation of a fund whose objective is to protect foreign investors who contribute resources to socio-environmental projects from exchange rate fluctuations.

The tool, the first of its kind in the world, is under development, and the forecast is that, initially, it will be able to cover at least US$3.4 billion in contributions, according to the IDB.

“One of the things we hear from investors is that yes, they are the ones who invest more, but if there is a devaluation and depreciation, that is a problem, it is an uncertainty”, says the bank’s president, Ilan Goldfajn, in conversation with journalists this Thursday (14), in which he detailed the announcement made at COP28.

“We are engaged with the Ministry of Finance to find a solution, a fund, in which this can be protected [hedge, no jargão do mercado]. This is a very important product because, if it works, it is something for the whole world”, he added.

“Many foreign investors do not enter projects because they face uncertainties related to exchange rate fluctuations,” says Ilan.

During the COP, the Minister of Finance, Fernando Haddad, said that the platform should be launched next year.

As shown by Sheet, the international financial market welcomes the Ministry of Finance’s green agenda, but believes that Brazil can be more ambitious. There is also a concern that goes beyond the doubt about the achievement of the proposed objectives: the 2026 election.

As they are long-term investments and focus on environmental and social impact, the fear is that, depending on who occupies the Planalto from 2027 onwards, there will be a reversal of the current guidelines — a fear based on the Jair Bolsonaro (PL) administration.

The IDB has participated in several initiatives to create new financial tools with a focus on sustainability. The bank was involved, for example, in the development of the green bonds launched by Brazil last month, which allowed the country to raise US$2 billion in resources.

These tools seek to overcome problems common to the region —fiscal restrictions and economic instability, mainly— that deter foreign investors, at a time when Latin America and the Caribbean offer several opportunities for projects aimed at sustainability, such as clean energy.

In addition to Brazil, the IDB was also involved in Ecuador’s debt-for-nature operation, which allowed the country to exchange more expensive debt for a cheaper one, committing to use part of the resources obtained to preserve the Galápagos Islands.

Considering all the operations of the IDB group, which includes the public BID (aimed at States), IDB Invest (for the private sector) and IDB Labs (for innovation), the projection is that by 2023 it will add a total of US$ 23.6 billion in financing support in Latin America and the Caribbean.

The majority (US$13.5 billion) was directed to States, and US$10.1 billion to the private sector.

One of the programs highlighted by the IDB is Amazônia para Semper, which encompasses eight countries in the region. Launched in June, the initiative seeks to combat deforestation and promote the bioeconomy, among other objectives. For 2024, the projection is for more than US$ 1 billion in projects in the Brazilian Amazon alone.

During COP28, the IDB announced the goal of tripling its climate financing over the next ten years, reaching US$150 billion.

Financing for the green agenda via multilateral institutions, such as the IDB, World Bank and the IMF (International Monetary Fund), has been gaining ground in international forums. The Minister of Finance, Fernando Haddad, has already said that this direction will be one of the priorities of the Brazilian presidency of the G20, which began this month.

The idea is that the organizations are capitalized and provide specific lines for developing countries to finance their energy transition projects and combat the climate crisis, reducing the asymmetry with developed countries, which have fiscal space to finance their initiatives.

According to Ilan, the IDB will work together with the Brazilian presidency of the G20 both on the group’s agenda and to function as a bridge between multilateral and regional banks