With India having achieved a record greenium on its recent debut issue, Brazil is preparing to become the second major emerging market sovereign to offer ESG bonds this year.
After working with the World Bank and the Inter-American Development Bank, the National Treasury is to soon launch a financing framework that stalled under the administration of former president Jair Bolsonaro – with a debut issue to follow.
The move comes after the sovereign was absent from international markets in 2022, thanks to its presidential elections, as well as volatility in spreads and yields.
“Investors give a lot of importance, and Brazil gives a lot of importance, for the environmental components. So we are looking forward to being back in the market in a form related to that,” said Luis Felipe Vital, head of public debt operations at the National Treasury.
Last year, regional peers Chile and Uruguay moved ESG bonds forward with the first sovereign sustainability-linked offerings. And Brazil may use those countries' efforts – plus Mexico’s UN Sustainable Development Goals-aligned bond issues – for inspiration.
Speaking at a recent Official Monetary and Financial Institutions Forum event, Vital cited “very interesting ESG-related transactions in the external markets” by peers.
“Brazil is looking forward to being in the same place in the near future,” he said.
In addition, Treasury secretary Rogerio Ceron said in a recent press conference on Brazil’s public debt that the sovereign will look to issue “ecological” bonds this year.
Green likely
While Brazil has not confirmed this, market participants expect it to issue in green bond format. Some sources had previously suggested it might offer sustainable bonds with green and social use of proceeds.
A new OMFIF survey of sovereign debt managers shows that twice as many EM sovereigns are planning to offer sustainable use-of-proceeds bonds this year as intend to bring green or social issues.
NatWest Markets has also made a case for the sovereign to follow Chile and Uruguay’s lead into SLBs. An issue of up to US$10bn could support the new Lula administration’s efforts to reverse deforestation in the Amazon, said Alvaro Vivanco, NatWest's head of EM and ESG macro strategy.
It is still unclear if Brazil is open to the product and whether it will be included in its framework.
World leader
In any case, Brazil’s huge environmental significance – a reflection of the Amazon rainforest’s critical role in producing the earth’s oxygen and in global weather systems, its exceptional biodiversity and its large number of indigenous groups – makes major investors positive about the prospect of the country issuing ESG bonds.
“We would expect Brazil to demonstrate its aspiration to be a world leader within the sovereign labelled debt space,” said Tongai Kunorubwe, head of ESG for fixed income at investment manager T Rowe Price.
“Our hope and expectation is the inaugural issuance would be a green bond targeting the Amazon biome, and we have shared this directly with the Brazilian Treasury,” said Kunorubwe, noting that the country’s high weighting in the JP Morgan Emerging Market Bond Index would merit an inaugural deal “well above benchmark size” and possibly with several tranches.
Viktor Szabo, an investment director for EM debt at fund manager abrdn, said there had been a warm investor reaction to initial signals of a Brazilian framework in 2021. “We were super excited,” he said.
He called the sovereign’s prospective market entry “long-awaited” and “a logical step” in view of the new administration’s policy priorities – in particular, halting Amazonian deforestation and reducing poverty.
“Brazil is very well positioned to issue such an instrument,” said Larissa de Barros Fritz, ESG fixed income strategist at ABN AMRO. “It's a country that is very important when it comes to reducing emissions on a global level. It’s a bit surprising that they haven’t done that [ESG issuance] already, although understandable given the political agenda in the past.”
Kunorubwe expects Brazil to look to build a liquid ESG bond curve rather than limiting its ambition to “a one and done-type transaction”.
While the inaugural deal will probably be launched in US dollars, Szabo said Brazil should also offer ESG bonds in its large domestic market. “Their pension funds at some point will also be looking to invest sustainably,” he said.
Turkey next?
Other major EM names could also be on the way. “There's still a lot to watch in that space,” said Pierre Blandin, global head of SSA DCM at Credit Agricole.
Notably, recent reports suggest Turkey is working on a potential green bond.
The sovereign published a sustainable financing framework in November 2021 with a second-party opinion from Sustainalytics. The framework allows it to sell bonds, loans and sukuk issues in green, social and sustainable format.
Turkey has indicated that it will seek to launch a debut ESG bond of unspecified format this year, having already marketed its framework and ESG strategy to investors.
In addition, banks including JP Morgan are advising Saudi Arabia on a long-anticipated green bond framework.
Other key EM sovereigns appear further off, however. While sanctions would inhibit any offering by Russia, neither China nor South Africa appear close to entering the ESG market.