When Caramuru, a large Brazilian commodities trader that specialises in soy and other agricultural commodities, began to assess its options for debt-raising tools last year, it decided to consider green bonds.
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To qualify for such a deal, the company ran through more than 5,000 suppliers to document that none of its supply chain was part of deforestation or included modern slavery labour anywhere within its businesses. And this was for a structure that offered opaque cost benefits at best.
“Frankly, the ‘greenium’ [lower financing cost attributed to sustainable bonds] on local debt products that are structured for domestic transactions is not statistically relevant – which is a nice way of saying we don’t see a greenium in Brazil at this stage,” says Frederic de Mariz, head of fintech and ESG (environmental, social and governance) at UBS BB, which worked on the subsequent R$355 million ($72 million) green debenture for Caramuru.
The Brazilian investment bank has enjoyed around a 60% share of the domestic green bond issuance market so far in 2022, following a strong 2021.
“The company still believed it was the right structure for them, and we helped them with the underlying governance,” explains de Mariz, who 18 months ago established an ESG practice at the bank.
The Central Bank of Brazil is clearly, for me, one of the leaders globally and is driving the process of incorporating ESG considerations for banks
“It's probably as much the investors as other types of stakeholders who are pushing for ESG transactions – including the company’s owners, executives and clients,” he adds. “Within those stakeholders, I would say the regulator – the Central Bank of Brazil – is clearly, for me, one of the leaders globally and is driving the process of incorporating ESG considerations for banks.”
This is backed up by Caramuru itself, with senior executives having gone on record in local media to say that not only did the deal establish the company’s sustainability credentials, but that this was a deliberate strategy in the run-up to an expected IPO.
The company deliberately targeted retail investors: about 98% of the bond was distributed to individuals, with more than 2,800 such participants.
“The interest in ESG in Brazilian companies transitioning is similar to that seen in international companies – but it’s being adapted to the local environment – and by the leading exporters,” de Mariz adds.
Other bankers in Brazil question whether or not there is a complete absence of greenium in the market. For example, in June 2021 pulp and paper manufacturer Suzano issued a green bond that – with a yield of 3.125% for a 10-year – was the lowest in corporate finance history in Brazil.
Netting opportunities
The global appetite for ESG-compliant paper, combined with the growing demand for specific commodities as a result of the movement towards net zero is creating a very interesting opportunity in Latin America – and Brazil in particular.
In recent years, Latin American indices have trailed emerging-market benchmarks. However, the convergence in demand for certain commodities, together with better governance, means that there is a growing belief among bankers in the region – validated by growing inward financial flows – that the 2020s could be a period of opportunity for the region.
Not only does it export many commodity staples whose prices are being boosted by supply shocks created by the war in Ukraine, but more importantly it is home to many of the metals that will be crucial to ESG-driven, net-zero commitments.
Net zero means electrification in practice, and, more than anything else, this will create a lot of demand for copper
Robert Friedland, founder and co-chair of African mining company Ivanhoe Mines, says that electrification is incredibly bullish for the metal.
"Copper is an EV [electric vehicle] story," he told an S&P mining conference in May 2022. "In 2030, 20 million EV charging points are expected globally, consuming over 250% more copper." He went on to forecast that by 2040, passenger EVs would require more than 3.7 million tonnes of copper a year.
Latin America benefited from a commodities boom in the 2010s, only for this to fall away as the commodities supercycle faded. But there are reasons to think that this time it might be different.
First, as Stephan Wilken, country head of Brazil at Deutsche Bank, points out, the commodities cycle is likely to be super-charged by geopolitics.
“ESG policy will be closely linked to security policy, and that will reignite some of the regional trading and value-chain integration that will reverse from the globalization theme of recent decades,” he says.
However, while Wilken is sure of these trends, it is not clear how they will be manifested in Latin America.
“China has been interested in the region for the past decade or so,” he says. "I think the country will only increase its interest in assets like energy, infrastructure and commodities in the region."
Chile recently opened the door for all sovereigns – but particularly those in commodity-rich countries in Latin America – to issue sustainability-linked bonds and secure lower-cost financing for those governments that are prepared to link their environmental policies to debt servicing costs.
However, one banker who worked on the Chile deal tells Euromoney that there are still questions about how transferable the structure is to other countries in the region – such as Peru and Brazil – that have regulatory and political risk in the short term.
Political will
Politics will definitely play its part. The interference in Petrobras’ pricing policy is just the latest example of international investors being uncertain about the free-market commitments of past, present and future administrations.
Not only did Brazil’s previous president Dilma Rousseff intervene to prevent the state-controlled oil company from setting commercial gasoline prices, but current president, Jair Bolsonaro, has called recent Petrobras profits "absurd". In March this year, he abruptly fired the chief executive of the company in response to popular protests against rising oil prices.
With a presidential election at the end of this year, some investors fear further intervention in Petrobras' price-setting mechanism by the Bolsonaro administration. Meanwhile the frontrunner for those elections, former president Luiz Inácio Lula da Silva, has committed to ending the indexation of gasoline prices to the dollar as a means to achieve lower prices for Brazilian consumers – at the expense of Petrobras' profits – and is steadfastly against the privatization of the company.
Wilken notes a dichotomy in Brazil between the larger companies and investors who are waiting for electoral clarity before executing decisions and what he calls "the grass roots" of corporates that remain active in their transition strategies.
We see huge interest among corporates for advice about how to approach sustainability and how to align corporate policies and strategies to be able to anticipate capital’s insistence on ESG-qualified deal terms
“We see huge interest among corporates for advice about how to approach sustainability and how to align corporate policies and strategies to be able to anticipate capital’s insistence on ESG-qualified deal terms,” he says.
UBS BB’s de Mariz says that while “pure plays” – those companies that have entered the ESG space as 100% sustainable operations – are easier to finance in Brazil, there is a growing acceptance that investors must engage with companies that are undergoing transition from old-economy business practices if there is to be widespread transformation in corporate behaviour.
“It is a huge focus of ours to target the transition,” he says. “Obviously, we're very happy to bank, you know, the best in class. But they represent a small percentage of companies, and we're very aware of that. So it's a huge focus of UBS to look at the middle of the spectrum – between the poor performers and the leading examples. And I have to tell you, the feedback I'm getting from most companies is that they really want to engage in those conversations. They're really eager to transition to do the right things for a lot of different reasons.”
De Mariz points to an unnamed energy company in Latin America that is striving to develop its decarbonized portfolio.
“When you have those challenges, maybe the very ‘dark green’ investors are not going to be willing to invest in those stories that they have a very clear mandate to not engage with,” he says. “But I think that, from an emerging-market standpoint, those hardcore ESG investors are probably a very small minority and there is willingness from the traditional ESG investor to engage with transition. They will want a very clear path in the transition.
"What I'm getting in the feedback is that investors are raising the bar in terms of disclosure requirements.”
Hitting your targets
While European banks in Latin America are confident that the expertise imported from their home countries will give them an edge in sustainable financing in the region, the locals aren’t simply conceding ground.
According to Anna Aranha, director at environmental, social and governance (ESG) accelerator Quintessa, many companies agree to ESG-driven key performance indicators without any idea of whether or not they can meet them.
Aranha says she has worked with around 30 of Itaú BBA’s clients and sometimes the executives – whose variable compensation is often linked to these ESG-driven KPI goals – are delighted to find out that companies such as hers are available to help the company transition to its new net-zero path (or other similar target).
Aranha cites one Brazilian company that has now issued two ESG-linked bonds – as an example.
“The company had already issued the bonds before we started to talk to them," she says. "It became clear that it wouldn’t be able to meet its KPI goals based purely on the company’s internal innovation.
“So we connected the company with existing external solutions that could help them fulfil their targets – and the executives were delighted.”
Another example was Quintessa’s introduction of brewing company Ambev to startup TRC Sustantavel – a company that was able to reduce Ambev’s water consumption by 40% and its energy bills by 30%.
Quintessa also worked intensively with Braskem to help the firm understand how it could reduce the environmental impact of its packaging by increasing recycling: not only did its introduction of a company that creates organic packaging – Já fui Mandioca – help the Braskem attain its KPIs but it also led to the creation of a new unit at the company (Circular Economy Braskem).
However, for Aranha, while these improvements to companies’ ESG practices is a valid goal, the ultimate implementation of ESG bonds is to develop new business areas.
“We were in talks with one company for multiple years about a project that developed a new low-income market product for them,” she says. “When the finance executives realized that they could finance the initiative through bespoke bonds, they began to get very interested. It created the momentum to get the project launched.”
Aranha says the new ESG-bond financed business is the ultimate in what this area of finance will bring about. She adds that companies that have long discussed new business areas that would transition their overall corporate footprint into one that is more sustainable are now becoming serious.
“I spoke to a head of sustainability at a very well-known energy company the other day and she was telling me that she had always struggled to get a meeting with the CFO,” Aranha recounts. “All of a sudden, the CFO reads some articles about local bonds with ESG KPIs and he wants to call me in to discuss what we can do.”
