Green bonds can help finance public policies in Brazil, says Nordea Asset

Shortly after the result of the Brazilian elections, the Nordic manager Nordea Asset Management, one of the main references in sustainable investments in the financial market on a global scale, removed Brazilian government bonds from the list of restrictions in which they had been included since mid-2019.

According to Thede Rüst, manager responsible for the area of ​​debt securities for emerging markets at Nordea Asset Management, the track record of president-elect Luiz Inácio Lula da Silva (PT) gave the manager comfort for the decision to lift the investment restriction related to government bonds. Brazilian government.

Despite Nordea Asset’s more positive view of the new Brazilian government’s environmental policy, Rüst claims that he is still awaiting a definition regarding the conduct of fiscal policy in order to be more comfortable making investments in the region.

Fiscal expansion needs to be controlled and it is necessary to understand how it will be financed, says the manager, who lives in Copenhagen, Denmark, in a video interview with Sheet🇧🇷

A path that can help the Lula government to finance social programs, points out Rüst, can be through the issuance of green bonds.

According to the manager, from 2023, the global market will be much more receptive to buying bonds issued by the Brazilian government that come with sustainability goals, something that he understands would probably be very difficult to happen under the Bolsonaro government, given the lack of credibility of environmental management in the country.

“This is a market that is now very open for Brazil, in a context in which green bonds are a type of asset that is much sought after by global investors”, says the manager of Nordea Asset, which totals around US$ 235 billion ( BRL 1.25 trillion) in assets under management.

What were the main reasons that led Nordea Asset to take the decision to remove Brazilian government bonds from the manager’s list of investment restrictions? We made the decision not to buy Brazilian government bonds in 2019, during the G7 Summit, at the time when Bolsonaro and [Emmanuel] Macron [presidente da França] had discussions, and when there was a series of fires not only in Brazil, but in several other countries as well.

At that moment we realized that environmental risks were increasing and could become a long-term issue for the Brazilian government. We felt that Brazil was not taking smart climate initiatives regarding the preservation of the Amazon region. This was the reason why we took the decision to restrict the purchase of Brazilian government bonds.

And the reason we reversed that decision now is because Lula, during his first term, had a very positive track record in terms of the level of deforestation that can be considered reasonable, he adopted a much more sustainable environmental policy. This history of his in relation to the environmental issue gives us comfort.

In addition, we take into account Lula’s ability to deliver results, to induce investments that help in the work of preserving forests. Government agencies need to make an effort to boost investments related to care for the environment, really worrying about the established goals, without turning a blind eye to certain issues, and we believe that Lula has a good track record when we look at past administrations . And from the first speeches that we have followed, we see that these are issues that have been pointed out by him as priorities. Therefore, with the change in the country’s administration, we are more comfortable to understand that the environmental issue will follow a more sustainable path.

Does Nordea Asset intend to invest in the Brazilian market in the coming months? We have always maintained investments in debt securities of companies in the country. We have made the decision to stop investing in Brazilian government bonds in the past, and have turned our attention to companies that we believe adopt good environmental practices.

Among them are companies like Klabin, which operates in the pulp and paper sector, which we believe is an example of a company that manages to make a good balance between the use of resource sources such as the forest, but, at the same time, with concerns related to the sustainability of the operation. We also invested in Rumo, in the infrastructure sector, which issued green bonds with a commitment to reduce CO2 emissions.

We have always invested in Brazil, because we understand that it is important to allocate resources in Latin American countries, to contribute to the region’s economic growth. That is why, although we stopped investing in Brazilian government bonds, we consider it important to maintain investments in companies that we consider innovative in the region.

What is Nordea Asset’s assessment of the Brazilian market in 2023? What we are doing is observing the situation. At the moment, what we have been doing is following the signals about the fiscal policy of the Lula government. The markets in general are monitoring the declarations to try to understand what Lula’s conduct in the economy will be.

The challenges are mainly related to a sharp increase in public spending and the conduct of fiscal policy. If we look at the case even of developed countries, such as the United Kingdom, we had the proposal of tax cuts without financing measures to counteract it, which had a very negative impact, including the fall of the Prime Minister [Liz Truss]🇧🇷

Therefore, we are in a situation where fiscal expansion is a major challenge for the political class to manage in several countries, which also includes Brazil.

We also have the challenge of global inflation, and the question is whether countries’ fiscal policy is prepared to deal with it. In this sense, it is necessary to have a little more clarity about what the Lula government’s concrete plans are. And that’s why right now we are watching, we are not selling, we are not buying, we are analyzing the situation to understand what the country’s fiscal direction will be, as well as many of our peers, who are doing the same.

We are still not sure about this, but there seems to be a conception on the part of the market that Lula will adopt a significantly more expansionist policy, and the question is whether investors will support a policy that moves in that direction. This is a question that needs to be asked, especially considering the global context in which we are currently.

What is Nordea Asset’s assessment of the signals given so far by the Lula government regarding the conduct of fiscal policy? Fiscal expansion needs to be controlled, and it is necessary to understand how this fiscal expansion will be financed.

In the previous administration of Brazil [sob o governo Bolsonaro]it could be difficult for the country to complete the issuance of sustainable bonds, because the country, at least for most market participants, did not have the credibility to do so.

If the country made an issue of the type [no governo Bolsonaro], many investors would probably question the policy aimed at preserving the Amazon rainforest. And I think there has now been a change in relation to this market perception. I believe that the Lula government could work on issuing bonds that aim to adopt sustainable policies.

Uruguay recently issued sustainable bonds [em outubro de 2022], in which Nordea Asset invested. This is an investment alternative that we like, not least because it allows investors to monitor more closely how the funds raised are used.

And I think this is a market that is now very open for Brazil, in a context in which green bonds are a type of asset that is highly sought after by global investors. [Os títulos emitidos pelo Uruguai tiveram uma demanda que alcançou US$ 3,96 bilhões (R$ 21,1 bilhões) mais que o dobro do valor captado de US$ 1,5 bilhão (R$ 8 bilhões)]🇧🇷

The Lula government could follow this path of issuing sustainable bonds to obtain cheaper resources compared to the previous administration if it succeeds in advancing a sustainable environmental policy. This is a point that hasn’t been given much attention so far, but one that my peers and I would be open to. Lula recently declared that Brazil is back, and Brazil can also come back in terms of sustainable finance.

I am very excited about the prospects for the topic, especially in relation to a country like Brazil, which has such an important role to play by having the Amazon region in its territory. This is a field that the Lula government can and should explore.

What balance does Mr. what will you do in relation to the Brazilian market in the coming years, considering, on the one hand, a more responsible environmental policy by the Lula government, and, on the other, a more expansionist fiscal policy? I don’t think we have enough information yet to make such an assessment. The market at a certain point became more excited about the prospects for the Lula government, then that enthusiasm diminished a little, but we still don’t have all the information about what the fiscal policy will be. Furthermore, we are in a global macroeconomic scenario with a lot of volatility.

In any case, what I can say is that most investors would probably focus more on the tax issue. So, basically, even if the Lula government addresses climate issues, but is fiscally irresponsible, this would not be a good choice from the market’s point of view.

X-ray | Thede Rust of Nordea Asset Management

Responsible for the area of ​​debt securities for emerging markets at the Nordic manager, considered by peers to be one of the main references in the subject of sustainable investments. Between 2018 and 2019, he served as a member of the fixed income advisory committee of the PRI (Principles for Responsible Investment), a network supported by the UN (United Nations) that works on the development of initiatives that drive sustainability practices by market agents financial.