The Promise of Sustainable Finance: Lessons From Brazil

The Promise of Sustainable Finance:Lessons From Brazil Frederic de Mariz (bio) Once marginal and self-regulated, sustainable finance has evolved into a quickly growing segment that encompasses several asset classes and incorporates environmental, social, and governance (ESG) considerations. Various asset classes, including mutual funds, private equity, public equity, real estate, and bonds, could adopt an ESG framework.1 In the bond category, markets have developed four ESG typologies: green, social, sustainable, and sustainability-linked. Green, social, and sustainable bonds raise funds to be used in projects with environmental or social objectives. Sustainability-linked bonds are raised by companies that set ESG objectives but do not immediately direct proceeds to pre-defined projects. Issuance of these four types of securities reached a record of $883 billion in 2021 globally, 112 percent higher than in 2020 when total issuance amounted to $416 billion.2 Sustainable bond issuance now represents almost 10 percent of total public bond issuance3 and is expected to grow. Sixty-four percent of asset inflows into asset managers located in the European Union (EU) in the fourth quarter of 2021 were aligned with ESG principles.4 While Europe represents the largest market for these bonds, with 52 percent of global sustainable bond issuances in 2021, other regional markets are catching up. Emerging markets (EM) represented 21 percent of total bond issuance in 2021, compared to 17 percent in 2020.5 While some hurdles remain for sustainable finance in EM, lessons from its development, particularly those gleaned from Brazil, can be used to help guide policymakers in the developing world. Sustainable finance growing within emerging market In 2021, sustainable bond issuance represented 14 percent of total bond issuance in Brazil, constituting a large portion of total sustainable finance activity among EMs.6 Latin America—dominated by Brazil—represented one third of all sustainable debt issuance from emerging markets in 2021, being the second largest country after China, a more seasoned market that represented fifty percent of sustainable debt issuance in emerging markets in 2021.7 The ecosystem of sustainable finance includes issuers, investors, investment banks, ESG rating agencies, and second-party opinion (SPO) providers,8 among others. Brazilian market participants routinely implement global principles, such as the Green Bond Principles (GBPs) or the Sustainability-Linked Bond Principles (SLBPs).9 Principles established by the International Capital Markets Association (ICMA) have become a common blueprint for issuers and investors alike across emerging markets. Meanwhile, issuers are raising the bar for disclosure, with a broader implementation of the Global Reporting Initiative (GRI) format for sustainability reports. The GRI allows investors to better capture how issuers address double materiality—capturing both socio-environmental and underlying financial aspects—, and to compare companies more easily. Brazilian issuers fare better than the global [End Page 185] average for sustainability reporting.10 EU regulations have also been particularly impactful, as issuers, especially global exporters, banks, and asset managers, closely follow EU regulatory developments.11 Such regulations include the EU taxonomy, EU regulations on supply chain due diligence, EU Sustainable Finance Disclosure Regulation (SFDR), and the Carbon Border Adjustment Mechanism (CBAM). The Brazilian market for sustainable finance has experienced strong growth. In the first semester of 2022, there was a total of twenty-nine issuances, coming from twenty-five companies.12 Twenty-two of the twenty-nine issuances were issued in local currency to local investors. The other seven were issued in USD mostly to international investors. Investors, both local and international, correspond to institutional buyers, including asset managers, pension funds, and insurance companies. Issuances ranged from 15 million BRL for the smallest transaction to 500 million USD for the largest deals. When analyzing the companies and their sustainable finance frameworks, twenty-two explicitly reference the Sustainable Development Goals (SDGs) or 88 percent, three the EU taxonomy, and eighteen the GBPs or SLBPs (72 percent). Twenty-three of the twenty-five transactions (92 percent) had a second-party opinion. Twenty-two out of the twenty-five issuers (88 percent) already have or commit to achieving a sustainable report, and twenty-one (84 percent) follow GRI principles, demonstrating the widespread adoption of global disclosure standards.13 Self-regulation and regulation from governments and industry associations have accelerated these...