Investor wants Brazil to be more ambitious in its green agenda – 11/18/2023 – Market

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.

Brazil’s debut on this stage took place on Monday (13), with the first sovereign issuance of sustainable bonds. In a sample of external appetite, 75% of the US$2 billion raised came from Europe and North America.

Total demand was US$6 billion. The rate of return was 6.5%, below the 6.8% initially forecast, in further evidence of external interest.

An international roadshow, led by the Treasury’s special advisor Rafael Dubeux, preceded the issuance.

There were 36 meetings with 60 investment funds, according to minister Fernando Haddad, who took advantage of the UN General Assembly in September, in New York, to publicize his green plan to foreign investors.

“Brazil is the most important natural economy in the world. If Brazil makes a mistake, we all make a mistake. This obviously has to do with the Amazon, but also with the country being China’s main source of soy and meat”, says Simon Zadek, executive president of NatureFinance, an organization that helps governments issue green bonds, and who participated in one of the meetings with the minister in the USA.

Zadek gives a positive assessment of the ecological transition plan presented by the Treasury, of which green bonds are one of the flagships.

“It’s a strategy that understands the context, is smart about technology, global value chains and the international competitive environment, and what Brazilian assets are,” he says.

The fact that the plan is more generic, without specifying specific projects in which the resources will be used, is in line with market evolution, says Kaan Nazli, responsible for emerging markets at manager Neuberger Berman, with more than US$440 billion in active. The group was one of the participants in an investor meeting with Haddad in the USA.

He highlights the focus on combating deforestation, which differentiates the Brazilian strategy from other plans, which tend to deal mainly with transport, and which better reflects the country’s emissions profile. “But we still need to see the proof, where the money will actually be spent”, he adds.

This is important because, given the still high level of emissions, Brazil today causes losses for a portfolio focused on sustainability.

“As an investor, you need to justify a trajectory that projects emissions to fall. It is in this context that green bonds appear, it is an instrument that clearly says this”, he states.

“Brazil’s first emissions will be seen with this benefit of the doubt. Later, when the market has a better idea of ​​what is happening on the ground, you will see a more critical attitude.”

Zadek highlights that the international market’s attention is also focused on the plan’s political survival after the next electoral cycle.

“If it’s Lula or someone else, that’s not my point. The question is the continuity of this vision. Investors are trying to understand whether Lula can get through the next two years ensuring the continuity of this trajectory in the long term”, he states.

Zadek sees a missed opportunity in political and economic terms in the government’s choice to issue green bonds — they are “vanilla bonds”, he says, market jargon for simple instruments that do not reduce the effective cost of capital in the country.

This is because the bonds issued last Monday are limited to a government commitment to spend the resources raised to finance environmental and social initiatives, such as controlling greenhouse gas emissions and combating poverty.

To ensure that the promise will be fulfilled, Brazil is committed to accounting for these expenses — the first report must be published within 12 months.

However, there are other more sophisticated instruments on the market.

Chile and Uruguay, for example, last year launched green bonds known as SLBs, which set clear targets that, if not met, provide for a type of punishment in the form of a change in the rate of return on investment. If they are exceeded, a premium may be provided to the issuer.

In an attempt to kill two birds with one stone, there are also operations known as “debt by nature”, already tested by Barbados, Belize and Ecuador. Roughly speaking, they allow the issuer to refinance expensive debts for cheaper ones. In these three countries, the counterpart was a commitment to use resources for marine protection.

“If Lula can show that his action in the Amazon is leading to a significant reduction in debt payment service, this will be seen as an exercise in fiscal discipline, not just an action to preserve the Amazon”, argues Zadek.

Such an issue was suggested to Haddad at the meeting in New York, says the president of NatureFinance.

According to him, a team of his is in Brazil working with the IDB (Inter-American Development Bank) to think about how these instruments associated with debt can be used more effectively in Latin America.

Another financing alternative for the green agenda is via multilateral institutions, such as the World Bank, the IMF (International Monetary Fund) and the IDB itself. The topic has been gaining ground in the forums, and Haddad has already said that this direction will be one of the priorities of the Brazilian presidency of the G20, which begins next 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.

“I see this desire on the US side to find ways that don’t exist in the architecture of assistance systems to offer resources that really help governments deliver,” says Heloisa Griggs, Open Society’s interim executive director for Latin America and Caribe, and who was also in the meetings with Haddad.