Development banks adopt ESG criteria to release credit

The transition to a green economy has gained support from the corporate world, but the issue of financing still remains a challenge. For some sectors, decarbonizing operations can mean the complete restructuring of value chains – which demands far from trivial investments.

The need to mobilize resources for complex projects sheds light on the role of large long-term financiers in Brazil: development banks.

For some time now, these institutions have reinforced their sustainable agendas, expanding incentives for social and environmental impact initiatives and linking credit to ESG (environmental, social and governance) criteria.

One of the banks seeking to take a leading role in this scenario is BDMG (Development Bank of Minas Gerais).

More than 60% of the funding made by the institution in 2021 was linked to one of the 17 UN Sustainable Development Goals. The resources allocated to renewable energy projects, for example, reached R$ 169 million.

The theme of energy transition is among the focuses. In 2019, the bank raised 100 million euros (R$ 627 million) for investments in the area, through a partnership with the European Investment Bank.

So far, 29 initiatives have been financed, which include 25 solar energy projects, three hydroelectric plants and an efficient public lighting project in Minas Gerais.

Recently, BDMG took another step in the transition to a greener investment portfolio. During COP26, the UN Conference on Climate Change, the bank made a commitment not to finance projects involving the extraction, commercialization and transport of fossil fuels from 2023.

“It is necessary to have a new type of production, of economy, and we understand that it is our mandate, as development financial institutions, to promote this”, affirms Sergio Gusmão Suchodolski. Until mid-January 2022, he served as president of BDMG and ABDE (Brazilian Development Association), an entity formed by development banks, development agencies and cooperatives from across the country.

According to Suchodolski , the organization has stimulated the transition in the investment portfolios of associates who, together, hold almost 73% of long-term credit for companies in Brazil and 45% of total credit.

“In several regions of the country, there are partnerships between subnational and multilateral banks for the themes of sustainability and climate finance”, he says.

The former president of ABDE understands that the contribution of development banks to the ESG agenda is multiple. In addition to encouraging positive impact initiatives —through credit lines with lower interest rates and longer terms—, they also act as project structurers and as institutions of knowledge and technical training.

The multifaceted role of these institutions in relation to the issue is also pointed out by Bruno Aranha, director of productive credit and socio-environmental at BNDES (National Bank for Economic and Social Development).

In his view, channeling foreign resources is one of the main contributions that banks can make in the transition to a low-carbon economy — which can be done through “green bonds”.

“In 2017, we made a first issue of US$ 1 billion (R$ 5.5 billion). These funds, which were purchased by international investors, could be used to finance new solar and wind farms in Brazil”, he explains.

Another attribution that Aranha sees for development banks is to induce good practices in the market. He cites the example of the ASG Credit, a BNDES program that conditions the cost of the loan to the sustainable performance of a company.

“If the company gives me a non-financial counterpart, I accept to reduce the interest on this financing”, he says.

According to the director, the BNDES already has initiatives to encourage sustainability in the wood, metallurgy and steel sectors. In December, it was the turn of the meat chain to enter the list, with the publication of a circular changing the rules for releasing resources to slaughterhouses.

Now companies need to prove, through an independent audit, that none of their suppliers have convictions related to deforestation, nor are they included in IBAMA’s list of embargoed areas.

The annual audit will be required until the contracts are amortized and applies not only to direct suppliers, but to the entire production chain.

“I see the role of development banks in this way: channeling international resources, prospecting projects in Brazil and, through innovative products, inducing investment with the generation of environmental and social impact”, says Aranha.​

Development banks need to have a sense of urgency, says expert

The engagement of development institutions with the ESG agenda is positive, but the question to be asked is: to what extent are they treating the priority agendas for sustainable development in Brazil with a sense of urgency?

The questioning is made by Vanessa Pinsky, a researcher at USP and an ESG specialist. In her view, banks are better able to prioritize the topic, even working on agendas that are not very attractive to the private sector.

An example would be climate adaptation projects, which require heavy investments — as in the case of ports.

In November 2021, a study carried out by Antaq (National Waterway Transport Agency) showed that Brazilian ports are already feeling the effects of the climate crisis. The perspective is that threats such as gales, storms and rising sea levels will worsen in the coming years, with potential risks to the country’s economy.

“The financing of projects to prepare the infrastructure of these ports is an agenda for yesterday”, he says.

According to Pinsky, the default rate is usually lower in development banks, which makes room for more risk.

“It is necessary to consider the extent to which banks are taking on more risk to finance innovative operations and projects that propose solutions to social and environmental problems”, he says.