‘Sustainable finance is no longer a niche topic’

Bnamericas Published: Thursday, May 05, 2022
‘Sustainable finance is no longer a niche topic’

Itaú Unibanco raised US$62.5mn abroad at the end of April via the private placement of a green bond. This is the bank's first green paper issued its sustainability finance framework, which defines the guidelines for issuing green, social and sustainable bonds.

The funds can be allocated to renewable energy and energy efficiency projects, clean transportation, sustainable water and wastewater management, pollution prevention and control, and green buildings.

The recent private placement of debt abroad is another transaction that follows the bank's positive impact agenda, in which it is committed to allocating 400bn reais (US$80.7bn) in credit lines and other products through 2025 to promote a more sustainable economy.

"Sustainable finance is no longer a niche topic," Wilson Chen, head of energy project finance at Itaú Unibanco's wholesale branch Itaú BBA, told BNamericas, adding that "all of our clients want to talk about it, to understand it better."  

In this interview, he analyzes the impacts of high interest and exchange rates on energy projects, among other topics. 

BNamericas: Why the interest in issuing green bonds? 

Chen: Sustainable finance is no longer a niche topic. All of our clients want to talk about it, to understand it better and see how and when issuing debt they can already be more aligned with this type of practice. Today it's a subject that's crosscutting for business. Any strategic decision goes through this ESG [environmental, social and corporate governance] area. 

As a service provider, the bank has to be aligned with this demand. That's why we’ve built a team focused on sustainable finance, seeking to fulfill this role of green finance developer. 

The Brazilian market is not currently as well advanced in this aspect as abroad. Overseas, green bonds actually have price benefits [issuers essentially paying less for financing]. Here, there are benefits due to the alignment with socio-environmental practices. We believe that, with time, our market will develop to a point close to what is seen abroad, obtaining price benefits. 

BNamericas: What are the impacts of the rising interest rates, inflation and exchange rate on financing transactions for power projects?

Chen: Renewable generation projects have suffered a lot in the last year and a half, with the exchange rate significantly impacting capex. Those who had locked in hedges didn't suffer, but those who were still defining the supplier took two hits: exchange rate on cost and schedule, because all sectors were impacted by the disruption of supply chains [due to the pandemic]. This impacted wind and solar projects, the latter in an even more obvious way, as many components, such as solar modules, come from China. 

The exchange rate eased a little, but it went back up again. From the supply point of view, we haven't heard any more about problems, but this is still a point of focus, considering the global context and China, which is determined to maintain a policy of zero COVID, of quarantine. So there's a bit of fear. A project without a flexible schedule can be impacted. 

Meanwhile, the interest rate has gone up a lot in the last few months. So, for those who closed a PPA [power purchase agreement] back then, the rate foreseen in the contract has become outdated. A rate that was 150 reais/MWh in the free market, on average ... now a project doesn't cost less than 180-190 reais/MWh to reach the same levels of return that the entrepreneur was seeing before. Projects are already starting to arrive with PPAs with rates in this range.

BNamericas: The government has even set higher price caps for the next A-4 auction, at the end of May.

Chen: Even though the regulated auctions are not the growth driver nowadays as the largest contracted volume is in the free market, this is still a de facto sign of these variables. It’s a very challenging scenario. 

BNamericas: Has this scenario led companies to suspend projects?

Chen: I don't think so. The energy sector is already sufficiently mature and sophisticated to adjust to new scenarios. Of course, a project with an older PPA won't have the same rate. But a project that's in the fundraising stage won't stop fundraising and will adapt to the new price level. 

We've seen issues coming out successfully. We see investors with a great appetite for incentivized debentures. The projects are adjusting to the new scenarios, even to take advantage of the window of opportunity. 

BNamericas: This window is related, for example, to the one-year deadline, until January 2023, for the formalization of new requests for connection of distributed generation systems without charging fees for use of the distribution network, right? 

Chen: Yes. There's positive news, such as the framework for distributed generation, providing security for investors, as well as the prospect of approval of the project to liberalize the market, and the auctions of thermal plants that are already on the agenda, and entrepreneurs are moving to participate. 

The pipeline is really strong, with lots of things happening. And there are lots of M&A [mergers and acquisitions] transactions, both in transmission and renewables, which also helps to renew our pipeline. 

BNamericas: Have you noticed an increase in dollar-indexed PPAs?

Chen: There are a lot of talks about that. On the electricity buyer side, it has to have the exporter bias, with dollar revenues. So, being electro-intensive, they're interested in having the security of supply at a competitive price. 

This was already happening [before the foreign exchange framework was approved in December 2021], but there was a risk for the financier. The approval of the framework helped to corroborate the understanding that the model works and to simplify certain points. 

And there is the issue of the green footprint, with the interest in migrating to clean energy. Many of these companies are global, with decarbonization targets.

At Itaú BBA, we have three advisory mandates for PPAs in dollars. One is already practically closed, involving a company in the steel sector. Our client is an energy generator. Then there's the challenge of seeking sources of financing in the same currency, exploring, besides the more obvious alternatives such as multilateral organizations, financing options in the international capital markets. 

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