New green bonds to finance circular economy and sanitation May 27, 2024

Wall Street Board of Directors Reuters Mike Segar

Agência Brasil Reporter - Brasilia

New green bonds to finance circular economy and sanitation

Government plans to raise R$10 billion on the foreign market

Scheduled to take place in the coming months, Brazil's second issue of sustainable sovereign bonds on the international market will finance circular economy and sanitation projects not covered in the first launch. The National Treasury included the segments in the Pre-issuance Report, released last Friday (24).

The document repeated last year's total limits, according to which environmental projects will receive between 50% and 60% of the funds raised abroad. Social projects will get the remaining 40% to 50%. However, the internal distribution of the activities to be financed has changed compared to the first green bond issue, which took place in November last year on the New York Stock Exchange.

The Treasury has released the distribution of the money to be raised on the foreign market. The report does not estimate how much it intends to increase by issuing papers on the foreign market. Still, the ministry intends to repeat the US$ 2 billion, around R$ 10 billion at the current exchange rate, raised in the first operation last year.

According to the Treasury report, the funds obtained from Brazil's sustainable sovereign bonds will be earmarked for projects in nine segments, seven linked to the environmental area and two linked to the social area. The agency has drawn up a distribution estimate for each of these segments, with minimum and maximum sub-limits for the division of resources.

For environmental projects, the distribution will be as follows:

- Renewable energy: 30% to 34%;

- Clean transportation: 13% to 17%;

- Control of greenhouse gas emissions: 4% to 5%;

- Adaptation to climate change: 1% to 4%;

- Terrestrial and aquatic biodiversity: 1% to 2%;

- Energy efficiency: 0.5% to 1%;

- Circular economy: 0.5% to 1%;

- Total: 50% to 60%.

For social projects, the sub-limits will be as follows:

- Fight against poverty: 36% to 46%;

- Access to basic infrastructure: 4% to 8%;

- Total: 40% to 50%.

Differences

In the first issue on the New York Stock Exchange in November, priority was given to clean transportation projects (20% to 25%) and renewable energy projects (15% to 20%) in the environmental sector. The new issue will include the circular economy segment, which was not included in the first international launch of green bonds.

Regarding social projects, the maximum percentage of anti-poverty projects has fallen. In the first issue, the segment represented between 30% and 40% of the issue. On the other hand, the Treasury inserted the segment of access to basic infrastructure, which will mainly cover sanitation, replacing food security projects, which benefited from last year's operation.

Rio Grande do Sul

The Treasury said that, at the moment, the funds obtained from the green bond issue will help finance the reconstruction actions in Rio Grande do Sul already announced by the government. The agency, however, pointed out that if the relationship between the projects and the legislation regulating the issue of sustainable bonds is demonstrated, the framework could be reviewed, with the inclusion of projects.

“There is not yet enough information to classify the budget expenses resulting from these measures [aid to Rio Grande do Sul] in the classification of the Brazilian Framework for Sustainable Sovereign Bonds and, therefore, they were not included in the indicative selection of eligible expenditure categories in this report. Subsequently, if they prove to be in line with the Framework, they may be reported in the allocation of funds raised by sustainable bonds issued by the National Treasury,” says the report.

Sustainable projects

Federal bonds issued abroad, and green bonds are linked to commitments to the environment. Instead of receiving mere financial interest, foreign investors would receive a return on a sustainable project, which would be between 6.15% and 8% per year for the buyers of the bonds.

This will be the same rate of return as the National Climate Change Fund, which was relaunched two months ago and will receive part of the funds from bond issues.

Last Thursday (23), the Secretary of the National Treasury, Rogério Ceron, said that he was preparing a second issue of green bonds by the end of the year. “We are preparing a new issue of paper later this year which, again, will provide resources for the Climate Fund,” said Ceron at an event promoted by the Brazilian Association of Infrastructure and Basic Industries (Abdib). The date, he said, will depend on the best moment in the international market.

The first green bond issue has been postponed. Initially scheduled to take place in September last year, the issue only happened in November. On that occasion, the National Treasury managed to raise US$ 2 billion at an interest rate of 6.5% per year, to be paid when the bonds mature.

Editing: Aline Leal

Trad. Ana Lucia Cunha-Busch with DeepL