Why ESG-linked bonds are gaining ground in Brazil

The appeal of bonds linked to ESG practices is gaining strength among investors in Brazil, becoming an additional and increasingly important funding option for local companies.

In the past most of the ESG bonds issued by Brazilian companies were made via overseas issues, but now they are increasingly turning to the local debt market.

"The concept of ESG debt in Brazil is consolidated. Large companies already know, and more and more medium-sized companies are becoming aware of the possibilities,” Gustavo Pimentel, founding partner and CEO of NINT, the largest ESG consulting and evaluation firm in Latin America, told BNamericas.

Almost all banks have issued such bonds and some have staff focused on originating and structuring ESG debt, and others have made the issues via their treasury areas backed by ESG credit portfolios, said Pimentel.

"Other financial advisors and debt structuring companies, such as securitization firms, have also embraced the concept and carried out good operations in the middle market. Volumes tend to grow," he added.

From 2015 through mid-2023, the volume of ESG-linked bonds from Brazilian issuers totaled 215bn reais (US$45.5bn) through 301 operations, according to figures compiled by NINT. 

Until 2021 most were overseas bonds but domestic issues are now dominating. 

In 2022, issuance totaled 58.5bn reais with 32.9bn being local issues. And this year has so far seen operations worth 11.5bn with 7.8bn coming from the domestic market.

"Despite Brazil's inherent volatility the local market is more stable in terms of cost and is accessible to a greater number of companies. For ESG debt, we have developed a local ecosystem with banks and advisors that are experienced in structuring, local second opinion providers, like NINT, and an increasing number of investors with dedicated pockets or a preference to buy labeled ESG debt," said Pimentel.

NINT is a unit of ERM, the world's biggest sustainability consultancy.

The development of Brazil’s ESG bond market also involves efforts by multilateral institutions and the federal government.

Earlier this month, the IFC, which is part of the World Bank Group, provided a so-called blue loan worth 260mn reais to Sanasa, a water and sanitation company that operates in Campinas city.

The loan will help the company achieve its goal of 100% service coverage by 2026, as well as improving its operating resiliency, efficiency and service quality.

The loan was provided by IFC's Utilities for Climate initiative, which combines its advisory and investment services to provide climate-friendly solutions to water utilities. 

IFC will support Brazilian companies to bolster their ESG practices.

"In Brazil, only 13% of debenture [bond] issues in the local market are via thematic bonds. We want to be a catalyst for the expansion of these operations," the head of IFC in Brazil, Carlos Leiria Pinto, told BNamericas in a recent interview, underlining that ESG bonds represent a good way for Brazilian firms to reach a large base of international investors. 

GOVERNMENT EFFORTS 

In May, the government authorized the creation of a committee that will be responsible for preparing the country's first international issue of a sovereign bond linked to ESG practices.

The committee will include officials from various ministries and the national treasury who will create the bond’s framework.

The government plans to issue the ESG bond this year and the amount to be raised will depend on market conditions, a treasury spokesperson told BNamericas.