Brazilian capital markets bankers are continuing to innovate with new sustainable finance structures, even though investors aren’t rewarding environmental, social and governance (ESG)-labelled structures with better pricing.
Mariana Oiticica, partner and co-head of ESG and impact investing at BTG Pactual in São Paulo, says that many of the companies she talks to about structuring their funding transactions are being driven more by prestige than mathematics.
“Unfortunately, in Latin America and Brazil, investors do not pay more for a green bond or a social bond, and so there is no financial gain from issuing ESG-labelled debt from a company perspective,” says Oiticica. “So, in terms of innovation, it’s more about prestige, rather than a financial benefit. There are many awards, and the media recognizes companies that issue new bond structures – and that is driving companies to innovate. It’s not a mathematical decision.”
Oiticica says that the cost of structuring green and social bonds for the local market – with additional costs incurred from third-party ESG verification agencies – destroys the financial logic of funding through these structures, when compared with traditional plain debt structures.
She says that despite this, interest from clients wishing to issue ESG debt continues to grow, and she notes that Latin America has grown 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 achieved financial benefits for the issuer. For example, BTG worked on a local financing for highways company CCR in late July this year that included a R$500 million ($92.5 million) ‘green transition’ bond that included a trigger to lower the bonds’ coupon should certain sustainability requirements be met. The step-down is small – at just 0.08% to the extended national consumer price index (IPCA) plus 6.82% – which arguably neither really incentivises the issuer nor covers the bureaucratic cost of structuring the sustainability performance targets (SPTs). But Oiticica points out that it is at least developing the principle for rewarding green bonds with pricing benefits for the Brazilian debenture market.
Oiticica says that local ESG debenture market issuance volumes would benefit from the tax benefits that are enjoyed by local real estate, agriculture and infrastructure bonds. However, she and some local debt market bankers believe that the country’s fiscal challenges – Brazil’s primary fiscal deficit has blown out to 0.7% and the total financing deficit is near 9% – is complicating the central bank’s desire to cut policy rates and effectively eliminate the government’s ability to extend tax incentives to ESG-labelled bonds.
Incentives
In the meantime, Itaú BBA scored a market first on August 15 when it issued the first green bond under the new incentivized infrastructure regulations for Atlas Renewable Energy. The R$1.5 billion ($270 million) issuance includes a R$750 million tranche under the 12,431 infrastructure rule – and then updated by Decree 11.964 in March this year – while also being classified as a green debenture by Fitch.
The funds will be used for the implementation and operation of the photovoltaic element of the Luiz Carlos solar project, based in the Brazilian state of Minas Gerais.
Adding the ‘green’ classification doesn’t enhance the tax incentives garnered by issuing under the infrastructure debenture law, but Itaú BBA’s head of project finance, Marcelo Girão, hints at the prestige of the structure, saying that that the banks themselves are also motivated by the reputational benefits of innovating green financing structures.
“We are committed to being the bank of climate transitions, and this financing is an example of how we have been working on this agenda,” he says.
The evolution and consolidation of effective ESG practices doesn’t inhibit the market from innovating and searching for new solutions
Henrique Leite de Vasconcellos, Banco do Brasil’s ESG executive with responsibility for sustainable finance, says that innovating ESG structures goes beyond a desire for prestige and is driven by a growing ambition to improve corporate responsibility.
“The consolidation of good market sustainability finance practices is fundamental for the evolution of good business and investments in relation to ESG issues – especially given the difficulty in creating global standards in the short term,” he says. “The evolution and consolidation of effective ESG practices doesn’t inhibit the market from innovating and searching for new solutions that aim to achieve the desired objectives in sustainable investments.”
However, Leite de Vasconcellos believes the speed of this consolidation and evolution of ESG-labelled financings would be helped by better regulatory impetus.
“Regulation can act as a stimulus for Brazilian corporates to spur the volumes of green and social debenture by promoting clarity, transparency and security and therefore encouraging sustainable issuance,” he says.
Crossroads
Meanwhile Luis Barrios, chief executive and co-founder of Arkangeles – a crowdfunding platform for investing in startups, many of which are now big enough to consider green financing to support their growth – thinks that sustainable finance is at a crossroads in Latin America.
“While consolidation around best practices is increasingly necessary to manage risks and improve transparency, innovation remains a powerful force, particularly in regions where regulation is still developing,” he says. “In Latin America, innovation continues to outpace regulatory frameworks, though this may change as new rules are implemented. Ultimately, the balance between consolidation and innovation will depend on how quickly regulatory bodies can adapt to the rapidly evolving landscape of sustainable finance.”
Ultimately, while there is a push among Brazilian companies to issue sustainable debt to enhance their company’s ESG reputation, Barrios says that it is the underwriters who must push back when they think client’s ambitions are not credible.
“We have refused to structure a couple of debt deals as ESG transactions,” she says. “We show these clients the examples of deals that came to market and were seen as greenwashing – those that generated bad publicity.
"It’s better for companies to be on the safe side and spend the next two or three years improving their ESG story before going to the markets and avoiding the bad publicity that can happen when the deal doesn’t make sense for either the company or the industry in which it operates.”
