Investors want to finance green projects in Brazil, but can’t find them

International investors are facing a shortage of green bonds and other financial instruments that could help Brazil fund its transition to a low-carbon economy.

The conclusion is from a study by Janus Henderson, a British investment manager that has about US$432 billion (R$2.19 trillion) in assets under management.

According to the report, the delay by the Brazilian government and the private sector in taking advantage of the high foreign demand for green investments helps to explain why the country is so far behind in financing its decarbonization goals.

“There are now a lot more ESG-focused funds [ambiental, social e governança, na sigla em inglês] than at any other time, even in emerging markets. There is no shortage of demand,” says Jennifer James, portfolio manager at Janus Henderson, in an interview with sheet.

The so-called green bonds are fixed income securities whose purpose is to raise funds to fund sustainable projects, usually linked to renewable energy, energy efficiency, waste management and reforestation.

According to the executive, the issuance of these bonds has grown slowly in the Brazilian corporate world, but remains null at the governmental level — unlike countries like Chile.

For her, the environmental stance of President Jair Bolsonaro (PL) and the lack of political will are issues that get in the way.

“Brazil has a leader who maybe doesn’t believe in climate change, that doesn’t help. So, first, we need someone who accepts that this is happening and then tries to solve it. [o problema]”, he says.

The Janus Henderson report reminds us that most Latin American countries have already set targets to reach zero net carbon emissions (net-zero). However, these commitments have not spurred the use of green financing instruments.

According to the CBI (Climate Bonds Initiative), the sustainable bond market has reached US$ 1 trillion, but only US$ 45 billion comes from Latin America.

Brazil is the second largest issuer, with US$ 8.7 billion in circulation, losing to Chile, which has US$ 9 billion.

The Janus Henderson study mentions the limited use of sustainable bonds in Brazil. What financial instruments are these?

This is a good question, because people use different terms to describe the same things. Generally speaking, we talk about titles [de dívida] labeled, which is the umbrella for sustainable bonds, green bonds, etc.

This is a new arena for everyone. The two countries where we see the most issuance of these bonds are China and the United States — and this only happens because they are countries with a lot of debt issuance, not because they are in the sustainable vanguard.

Chile has also been active in the area of ​​solar energy and other renewables, which is wonderful. Because they have a good investment grade rating, they have always managed to issue [títulos de dívida] at lower costs.

In addition, the current president [Gabriel Boric] really took the opportunity to think long term about sustainability in the country. They have been working a lot in this area. We are still in March and Chile has already made three operations to issue green bonds this year.

With that, I think they end up opening the door for other countries to follow suit, because these titles were very well received. Investors want sustainability-linked debt securities.

I usually talk about the need to have so much will [política] and the ability to access green resources. That means having the technological know-how, having the right people to create those ambitions and also to accompany them.

Regarding the political will you mentioned, environmental policy is not exactly a priority for the Bolsonaro government. Do you see a connection between this and the scarcity of sustainable bonds in Brazil?

I see Brazil in a different position. First of all because the election campaign will start soon. The election is still a few months away and this creates a difficult scenario for trading sustainability-linked bonds.

As I was saying, it takes political will to do that. I would love to see candidates talk about sustainability for Brazil.

The country has already thought about sustainability, it just isn’t funding it at the government level. The financing [verde] has taken place at the local level and in the private sector. There are companies doing interesting things in this area, such as JBS and Suzano. Both issued green bonds last year.

You see, you can’t change what these companies do, right? They are responsible for environmental damage, I won’t mince words on that. However, they are making the right efforts to mitigate them — which is better than nothing.

Companies tend to be more innovative than the State itself. Now Brazil has a leader who maybe doesn’t believe in climate change, that doesn’t help. So you need, first, someone who accepts that this is happening and then tries to solve it.

How do you see sustainable bond issues in the private sector? Do you think it is growing at the expected pace or is it still too slow?

We have a team within our ESG research group that engages with companies. We go to companies like JBS, for example, and say ‘what are you doing to solve this problem? It would be great if you guys issue green bonds.’

That’s how the market will evolve. I must say that it has evolved slowly, but this is not because there is no investor demand. There are more ESG-focused funds today than ever before, even in emerging markets. There is no lack of demand.

I think a lot of companies aren’t issuing bonds because they can finance these projects elsewhere — or because they don’t have the aspirations now. I am confident that they will realize that it will probably cost them less to borrow money in the world of sustainability.

You say the problem is not one of demand. Do you mean that international investors are looking for green projects to finance in Brazil and Latin America, but can’t find them?

Yes, and I think there are a few reasons for that. The first is that this [mercado de títulos sustentáveis] it’s a new market and we don’t have a common language to talk about what the aspirations are. There is no level playing field, not even now.

We need to agree on what we’re talking about and what our goals are, but we haven’t had that conversation yet.

It’s all happening very quickly, and from my perspective, by investor guidance. But I would say that for now, even on this side of the fence, we don’t have a common language to talk about what our expectations are — and that’s a big hurdle.

For example, when I ask a company what it is doing to deal with its emissions, it will likely respond that it is trying to reduce it by 30%. But from which base date? They haven’t defined it yet. Companies have not been very good at measuring and reporting [seu desempenho sustentável].

Large organizations typically have ten people in their investor relations departments and two of them are dedicated to ESG. That’s great, but not everyone can do it. So, if a company cannot report progress to its investors, it cannot issue sustainability-linked bonds.

Do you think the Brazil’s net-zero ambitions are at risk?

No, because this journey is not a straight line. Never is. It can be zero effort until the skills are ready and all of a sudden you see rapid progress.

I think that [as ambições] are not at risk. The deadline is also very far away. If you set a reminder for five years from now, we can have this conversation again, and I bet Brazil will have made some progress.

In the coming years, do you see any changes that represent an advance in Brazil’s net-zero agenda?

I would love to see an incentive system for companies that is country driven. I know that there are a lot of tax subsidies for companies to participate in projects related to sustainability, but I would like to see this broader. This is something that can be done to encourage these investments in the long term.

I think there is also a lot to be done from the point of view of dissemination [das questões sustentáveis]. Not all companies are able to effectively communicate what their goals are and how well they are being achieved.

This is something that could be standardized by country, for example, or sector by sector.

JBS, Minerva and BRF could come together to form a collective and say “here are our goals as industry leaders, and every year we will release a report to tell you about what we have already done”.

It would be great to see some standardization. This would certainly make investors more comfortable, but it would also set the tone for how seriously companies are taking these sustainable goals.

X-ray

Jennifer James

Portfolio manager at Janus Henderson Investors, he is responsible for the British manager’s emerging markets corporate strategy. Prior to joining the firm in 2014, she served as a fund manager and research analyst at Thames River Capital. She holds a degree in management with a focus on finance and English literature from Boston College. She has 24 years of experience in the financial sector.