In Brazil, the debate over environmental protection increasingly hinges on one factor: money. A lack of it is invoked by the Brazilian government when demanding billions from western nations to stop the destruction of the Amazon rainforest or when justifying budget cuts at its environmental protection agencies.
For a cohort of investors in Latin America’s largest nation, however, there remains an untapped option that could satisfy Brazil’s demands for capital while bolstering its green credentials. They say the Brazilian government should issue sovereign green bonds.
“If done well, they will hit a wall of money. It is probably the first thing I would do if I were responsible for funding Brazil,” said Thede Rüst, head of emerging markets debt at Nordea Asset Management, which has €250bn assets under management.
“It would be a very positive step from Brazil if they linked some — or all — of the green bonds’ use of proceeds to outcomes [reducing deforestation]. This would be a very positive step, not only for very ESG-conscious investors like us, but also from a funding perspective for Brazil.”
Deforestation in the Amazon rainforest last year surged to its highest level in more than a decade, triggering a global outcry from green-minded investors, companies and nations. The rainforest is considered a vital buffer against climate change.
Under pressure, Jair Bolsonaro’s administration has pleaded for financial support through schemes such as “Adopt a Park,” where companies and institutional investors can pay to preserve chunks of Brazil’s forests. The pleas, however, have mostly fallen on deaf ears, with investors saying such schemes are akin to philanthropy and do not meet their fiduciary obligations.
Instead, they point to green bonds, which have surged in popularity among countries and companies. In the past year, Italy and Germany have issued debut green bonds, while Chile has issued more than $12bn in ESG-linked bonds to date.
According to rating agency Moody’s, green bonds — proceeds of which are earmarked for specific purposes deemed to have a social or environmental impact — are the biggest segment of the growing ESG market, with $375bn expected to be sold this year, up from $258bn in 2019. In Brazil, green bond issuances by companies as well as the national development bank have been snapped up, with sales reaching $8bn since 2015, according to data from the Climate Bonds Initiative.
“It is one issuance after the other. It feels like a fever,” said Caroline Prolo, an environmental lawyer with Stocche Forbes Advogados in São Paulo.
Thatyanne Gasparotto, head of LatAm at the Climate Bonds Initiative, said an initiative from Brazil on sovereign green bonds “would be welcome”.
“[It would be] an important signal to the market about long-term commitments to a low-carbon and resilient economy [and] there is definitely a significant appetite for robust green sovereign bonds in the market right now.”
Jan Erik Saugestad, chief executive of asset manager Storebrand, said: “In some respects Brazil is a natural candidate to issue a sovereign green bond — they have a very green energy matrix with heavy reliance on hydro, for example.”
But he cautioned there were a number of obstacles, including that Brazil’s main “investment in renewable energy has already happened, in many cases several decades ago, and the current government budget has such a small allocation to green investment expenditures that they would not need or fit a benchmark-size global bond issue to finance them”.
Sovereign green bonds in Brazil also face regulatory barriers, notably an almost two decades-old congressional resolution that prevents the country from earmarking funds for projects when issuing sovereign debt.
“Unfortunately there is a restriction in Brazil regulations that currently says all proceeds from sovereign issuances must go into the public debt budget. They have to go to one pool of funding. That regulatory barrier would have to be overcome before Brazil can issue a labelled bond,” said Gasparotto.
She added that making such a change would not be impossible if the government deemed it a priority. However, Brazil’s Congress is notoriously slow-moving and legislative changes can often take years.
Ricardo Salles, environment minister, told the Financial Times that green bonds were “something Brazil can do. We have all the conditions.” However, nobody has emerged as a champion for the cause in Brasília, with responsibility for the subject split over several ministries and the Treasury.
A chief executive at a large Brazilian company also warned that Brazil would face credibility issues given the apparent disinterest of Bolsonaro, a rightwing former army captain, in protecting the Amazon rainforest and stopping climate change.
“If we take the necessary action to mitigate illegal deforestation, then we would raise our credibility. We would be able to issue not only green bonds but sustainability-linked bonds,” he said, referring to bonds that commit to specific targets for the likes of emissions or deforestation reduction.
“Of course, they could do it [now] just for marketing, but there would be no greenium benefit on that,” he said, referring to the lower borrowing costs as a result of the surging investor demand for sustainable assets.
Rüst from Nordea, however, was more bullish, saying it “is very likely that there will be a very high demand for such bonds — as a consequence the coupon that Brazil has to pay is probably lower than on a conventional bond”.
He cautioned, however, that such bonds should be long-dated to be insulated from the febrile political environment in Brasília.
“This is a better way for the Brazilian government to get capital for preservation — indirect by reduced coupon payments — then asking for cash upfront. All they need to do is get the framework done.”