Brazil: Leading Sustainable Finance in Latin America
Brazil has been making significant strides in sustainable finance, positioning itself as a leader in the field, particularly in the Latin American and Caribbean (LAC) region. In 2023, Brazil took over the G20 presidency, prioritizing sustainable development, energy transition, and fighting against hunger and inequality. The country’s Finance Minister, Fernando Haddad, emphasized the need to review the functioning of existing climate funds and facilitate financial flows to countries in need of resources for environmental protection.
Brazil has also made significant progress in the green bond market. In November 2023, the country raised USD 2 billion with its first-ever ‘green’ bond issuance, which was seen as a significant step in the global green finance market. By the end of 2022 the country had added USD 7.2 billion in sustainable debt transactions, bringing the total size of the Brazilian market to USD 31.9 billion.
Furthermore, Brazil is in the process of establishing a regulated carbon market and a Taxonomy that will set the regulatory framework for sustainable financing. This Taxonomy is expected to be formally published in 2024 and will be mandatorily adopted in 2026.
In terms of renewable energy, Brazil has committed to reducing its greenhouse gas emissions by 37% by 2025 and 50% by 2030, based on 2005 levels. The country has one of the least carbon-intensive power sectors in the world, with renewable sources accounting for 83% of Brazil’s electricity matrix. Brazil has also signed an agreement to triple renewable energy globally by 2030.
In conclusion, Brazil’s efforts in sustainable finance are multifaceted, encompassing green bonds, renewable energy, and policy initiatives. The country’s leadership in this area is evident in its ambitious goals, policy initiatives, and successful green bond issuances.
This week I talked to Steven Hyland (SH), who recently retired as Professor of History from Wingate University, where he taught Latin American history and sustainable finance courses, and researches capital markets and sustainability.
In the following conversation, you will hear about the impact of Brazil's first green bond issuance on sustainable finance, the influence of greenhouse gas reduction commitments on renewable energy investments, and more.
1. Green Bonds
How has the issuance of Brazil's first-ever green bond in November 2023 impacted the country's sustainable finance landscape?
SH: Brazil’s first sovereign green bond issuance in November fits into the country’s already robust sustainable finance ecosystem. Since 2015, Brazil’s private sector has issued over USD 18 billion in green, social, sustainability, and other labeled (GSS+) bonds in 175 discrete tenders. Brazil’s stock exchange B3 is a member of the Sustainable Stock Exchange Initiative, has had sustainability guidance for firms on the books since 2011, and offers listings for ESG thematic bonds. In 2017, the country’s development bank BNDES issued a USD 500 million green bond for energy efficiency projects.
SH: That said, this sovereign issuance is noteworthy for at least two reasons. Firstly, it should add momentum to sustainable finance endeavors because the federal government has agenda-setting and financial power as much as regulatory ones. Secondly, the bond is not a green bond, per se, but rather a sustainability bond. The distinction might seem unremarkable, but this classification is important. The funds raised are dedicated to climate change adaptation, which goes beyond projects that provide environmental solutions. It allows for greater flexibility in project development and capital allocation. This classification follows a trend seen in private sector issuances. For instance, 100% of corporate debentures issued between 2015 and 2019 were either a Climate Bonds Initiative (CBI)-aligned green bond or a CBI-certified green bond. That percentage fell to 64% in 2020 and to 52% in 2023. In its place, corporations have increasingly issued sustainability, social, and sustainability-linked bonds.
2. Renewable Energy
How are Brazil's commitments to reducing greenhouse gas emissions influencing investments in renewable energy?
SH: Certainly, Brazil’s commitments to reduce emissions by 37% by 2025 and 50% by 2030 from its 2005 levels influence investments in renewable energy. These commitments are matched with certain programs (REIDI) that wave specific tax obligations on related goods and services, discounts on transmission system use, and state-level tax exemption programs. There is a broader strategic plan led by the Ministry of Mines and Energy and the Energy Research Office.
SH: Not surprisingly, renewable energy, alternative energy, and energy efficiency projects have been Brazil's primary beneficiaries of green bond issuances. More than half of all issuances (101 of 178) have energy efficiency and renewable energy as its use of proceeds (UoP), with 93% issued since 2020. Moreover, Brazil has over 4,000 renewable energy projects planned that have yet to start, nearly half of which are solar.
3. Policy Initiatives:
How will Brazil's upcoming taxonomy for sustainable financing shape the future of investments in the country?
SH: Brazil’s Sustainable Taxonomy will set the agenda and provide guidance and clarity for all stakeholders committed to solving vexing problems and achieving sustainable development goals. The Taxonomy’s action plan should align with Brazil’s Framework for Sustainable Sovereign Bonds and the forthcoming compliant carbon market (Emissions Trading System). Put another away, we see a set of policy documents and market infrastructure cohering with long-standing efforts in the private sector to allocate capital to projects with various environmentally and socially positive impacts. It is set to be an exciting time for sustainable finance, and hopefully, it will lead to specific innovations in sustainable finance instruments beyond debt instruments.
4. Impact on Economy:
What economic benefits has Brazil observed or anticipates from its focus on sustainable finance?
SH: Since the first corporate green debenture in 2015 and BNDES’ 2017 bond offering, Brazilian firms and the national government have steadily increased GSSS+ bond issuances — USD 7.3 billion in 2021, USD 5.1 billion in 2022, and USD 6.5 billion in 2023. Clearly, there is interest in these offerings as retail and institutional investors in Brazil and worldwide demand impact from their investments. Implementing such frameworks and infrastructure to an existing dynamic green finance ecosystem should give added confidence to the marketplace as it works to root out any greenwashing. More importantly, it should help drive capital to the projects that produce the adjusted rate of return and positive outcomes increasingly demanded by all stakeholders.
Steven Hyland, Ph.D., ENV SP is also a co-founder of Commonweal Advisors, LLC and can be reached at shyland@commonwealadvisors.com and on LinkedIn.
Brazilian National Environmental Policy
This policy, which went into force in 1981, is a comprehensive framework designed to ensure environmental protection and sustainable development in the country. It sets out the principles, strategies, and standards for environmental management and integrates environmental considerations into various sectors of the economy.
National Policy of Climate Change
This policy, established in 2009, aims to address climate change in Brazil. It seeks to integrate climate protection with socio-economic development, focusing on reducing anthropogenic greenhouse gas (GHG) emissions.
Brazil Green Finance Initiative
Launched in September 2023, it brings together high-level representatives from Brazil's pension funds, public and private banks, insurance companies, local market institutions, and key industrial sectors to develop and promote policy and market mechanisms to catalyze a robust pipeline of green finance.