Brazil promotes green bonds despite lack of incentives

Brazilian capital market banks continue to develop innovative sustainable financial structures, even if investors do not reward structures with the environmental, social and governance (ESG) label with better prices.

Mariana Oiticica, partner and co-head of ESG and impact investing at BTG Pactual in São Paulo, says many of the companies she talks to about structuring their financing deals are driven by prestige rather than math.

“Unfortunately, investors in Latin America and Brazil are no longer paying for green or social bonds, so issuing ESG-labeled debt does not provide a financial benefit from a company perspective,” says Oiticica. “So in terms of innovation, it’s more about prestige than a financial benefit. There are a lot of awards and the media recognizes companies that issue new bond structures – and that drives companies to innovate. It’s not a mathematical decision.”

Oiticica says the cost of structuring green and social bonds for the local market – plus the cost of external ESG verification agencies – destroys the financial logic of financing through these structures compared to traditional simple debt structures.

She says that despite all this, interest from clients looking to issue ESG debt continues to grow, pointing out that Latin America has increased its share of sustainable finance bonds from 1% of the global total in 2020 to 4% today.

However, there are recent exceptions in the local green bond market that can claim to have generated financial benefits for the issuer. For example, in late July this year, BTG led a local financing for highway company CCR that included a R$500 million ($92.5 million) “green transition bond” that included a trigger to reduce the bond’s coupon if certain sustainability requirements were met. The reduction is small – just 0.08% to the extended national consumer price index (IPCA) plus 6.82% – which arguably neither really incentivizes the issuer nor covers the bureaucratic costs of structuring sustainability performance targets (SPTs). But Oiticica points out that it is at least developing the principle of rewarding green bonds with pricing advantages for the Brazilian bond market.

Oiticica says issuance volumes in the local ESG bond market would benefit from the tax advantages enjoyed by local real estate, agriculture and infrastructure bonds. However, she and some local bond market bankers believe the country’s fiscal challenges – Brazil’s primary budget deficit has risen to 0.7% and the overall financing deficit is nearly 9% – complicate the central bank’s desire to cut policy rates and effectively deprive the government of the ability to extend tax incentives to ESG-labeled bonds.

Meanwhile, Itaú BBA made a market first on August 15 when it issued the first green bond under the new infrastructure support rules for Atlas Renewable Energy. The R$1.5 billion (US$270 million) issue includes a R$750 million tranche under Infrastructure Rule 12,431 – updated in March this year by Decree 11,964 – and is also rated as a green bond by Fitch.

The funds will be used for the implementation and operation of the photovoltaic system of the Luiz Carlos solar project in the Brazilian state of Minas Gerais.

While the addition of the “green” classification does not increase the tax incentives generated by issuances under the Infrastructure Debt Law, Marcelo Girão, head of project finance at Itaú BBA, points to the prestige of this structure and says that the banks themselves are also motivated by the reputational benefits that come from innovating green financing structures.

“We want to be the bank of climate change and this financing is an example of how we have worked on this agenda,” he says.

Henrique Leite de Vasconcellos, ESG Head at Banco do Brasil, says the innovation of ESG structures goes beyond the desire for prestige and is driven by the growing ambition to improve corporate responsibility.

“The consolidation of good market practices in sustainable finance is fundamental to the development of good business and investments related to ESG issues – especially given the difficulties in creating global standards in the short term,” he says. “The development and consolidation of effective ESG practices does not prevent the market from innovating and looking for new solutions aimed at achieving the desired objectives in sustainable investments.”

However, Leite de Vasconcellos is convinced that stronger regulation could accelerate the consolidation and development of ESG-labelled financing.

“Regulation can provide an incentive for Brazilian companies to boost the volume of green and social bonds by promoting clarity, transparency and certainty, thereby supporting sustainable issuance,” he says.

Luis Barrios, CEO and co-founder of Arkangeles – a crowdfunding platform for investing in startups, many of which are now large enough to support their growth through green financing – believes that sustainable finance in Latin America is at a turning point.

“While consolidation based on best practices is increasingly necessary to manage risk and improve transparency, innovation remains a powerful force, particularly in regions where regulation is still evolving,” he says. “In Latin America, innovation continues to outpace the regulatory framework, although this may change as new rules are implemented. Ultimately, the balance between consolidation and innovation will depend on how quickly regulators can adapt to the rapidly evolving sustainable finance landscape.”

Although there are efforts among Brazilian companies to issue sustainable debt to improve their ESG reputation, Oiticica says it is ultimately the underwriters who must resist if they find clients’ ambitions implausible.

“We have refused to structure some debt deals as ESG transactions,” she says. “We show these clients examples of deals that came to market and were seen as greenwashing – ones that generated bad publicity.”

“It’s better for companies to play it safe and spend the next two or three years improving their ESG story before going public. This way they avoid the negative publicity that can come if the deal doesn’t make sense for the company or the industry in which it operates.”