“Brazil is back,” then president-elect Luiz Inácio Lula da Silva told a crowd at the COP27 climate summit this time last year, signalling a break with the environmental backsliding under his predecessor Jair Bolsonaro.
Since then he and his officials have been repeating that message to anyone who will listen — including sustainable bond investors who, as I write below, gave it a pretty enthusiastic reception.
Also today, in the run-up to intense debates on this subject at COP28, we look at how far the private capital sector is — or is not — rising to the green finance challenge.
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sustainable bonds
Is investor enthusiasm for Brazil’s sustainable bond justified?
A decade or two ago, the average fixed-income investor would have been mystified by the marketing materials for Brazil’s first sovereign sustainability bond, issued this week to fund President Luiz Inácio Lula da Silva’s green agenda.
Pledges around forest conservation, renewable energy and gender equality, until recently, had no place in the marketing of sovereign bonds. But today’s investors have clearly warmed to the idea: Brazil’s $2bn issuance received $6bn worth of orders.
This enthusiasm enabled the government to sell the seven-year bonds with an interest rate of 6.5 per cent, well below the 6.8 per cent it had earlier targeted in marketing the securities.
This is especially encouraging given that it’s been a tough couple of years for developing nation sovereign debt issuers as interest rates rose around the world.
This sustainable bond issuance has narrowed the spread — the additional borrowing cost — between Brazil and peers such as Mexico, which enjoy an investment-grade credit rating. That’s a top priority for Brazil, which lost its own such rating in 2016 amid a massive political and economic crisis.
The investor appetite reflects optimism over Lula’s green pledges, which followed four years of rampant deforestation in the Amazon region under former president Jair Bolsonaro. As the treasury’s investor slideshow noted, the deforestation rate fell dramatically in the first half of this year (albeit to a level that is still hugely worrying).
But this is not just about Brazil. A recent report by S&P Global on the green, social, sustainable and sustainability-linked bond (GSSSB) space made clear that sovereign issuers are an increasingly important part of this awkwardly named market segment.
Sovereigns accounted for 18 per cent of GSSSB issuance in the first half of this year — up from 11 per cent last year and 7 per cent in 2019. Latin America has been a relatively strong mover in this space, with seven countries in the region issuing GSSSBs before Brazil joined the party. Chile has been particularly active, with $30bn of issuance so far.
Other issuers have included state-owned entities in top oil-producing nations such as Saudi Arabia and the United Arab Emirates, sparking debate about how far this sort of debt is really driving progress on sustainability.
The issuance by Brazil, which is also a major oil producer, is interesting in this regard. The government’s investor presentation gives it huge leeway on how the funds will be deployed. Eligible categories of “social projects” — which will receive up to half the proceeds of this week’s issuance — include “employment generation”, which covers just about anything.
But the government has also committed to publishing, through a newly formed body, an annual report spelling out how the proceeds of GSSSB issuances are being deployed. The first of these, to be published within the next 12 months, will give this week’s bond buyers an idea of whether their enthusiasm was justified.
Private capital
Climate funds have their work cut out
One of the fiercest debates at the COP28 climate summit — which starts in just 15 days — will be over how to mobilise the vast flows of green investment needed in the developing countries where most humans live.
A report published today points to some interesting developments on that front — but also grounds for concern.
While private capital funds focused on climate strategies in developing countries enjoyed a bumper fundraising year in 2021 — pulling in $6.2bn — that figure fell back to $2.7bn last year, according to the new Global Private Capital Association research. This year, the funds have regained some momentum, raising $2.4bn by the end of June.
Given the huge role that private capital will need to play in addressing climate and energy transition challenges in these countries, the investment flows here are meagre.
A major study published last November, from an expert group chaired by economists Vera Songwe and Nicholas Stern, found that climate-related investment in developing countries needed to reach $2.4tn a year by 2030. Today’s GPCA report found that, since 2015, climate funds targeting developing countries have raised a cumulative total of less than $30bn.
Within that, the biggest haul in the first half of 2023 was secured by Beijing’s IDG Capital, which raised $709mn to invest in clean tech. Cape Town-based Inspired Evolution hoovered up $199mn and Rio de Janeiro-headquartered Vinci Partners pulled in $185mn for low-carbon infrastructure in Africa and Brazil, respectively.
This reflects a long-term trend among asset owners, GPCA chief executive Cate Ambrose told me, to invest in emerging markets by allocating capital to fund management firms that are based in those regions.
There is also a clear movement by fund managers towards greater geographic specialisation. In 2020, 85 per cent of climate funds targeting developing countries had a “multi-region” investment mandate. In the first half of 2023, 89 per cent had an explicit focus on a single region.
Tellingly, most of the world’s biggest climate-focused funds — such as Brookfield’s Global Transition Fund and TPG’s Rise Climate fund — were excluded from the GPCA study because, according to the analysis, they look set to deploy most of their capital in developed economies.
One notable exception there was Actis’s Energy 5 fund, which has raised $4.7bn to invest in developing-nation clean energy infrastructure. Many more funds like it will be needed if private capital managers and their investors are to pull their weight in tackling the world’s most pressing challenges.
Smart reads
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Hedge funds have been cashing in on the slump in clean energy stocks, through short bets against wind power companies.
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Carbon dioxide emissions are on course to be 9 per cent higher in 2030 than in 2010, according to the Intergovernmental Panel on Climate Change — compared with the 45 per cent drop that would be needed to limit global warming to 1.5C.
Read the full article here