Brazilian issuers have been a driving force behind the unstoppable rise of sustainable bonds in Latin America. But one vital player in the market was long missing from action: the sovereign itself.
That finally changed in November 2023, when Brazil issued its first sustainable bond, a $2 billion, 7- year issue yielding 6.25%. The sovereign followed up swiftly with a second sustainable issuance in June, also for $2 billion with a 7-year term and a 6.15% coupon, again to an enthusiastic reception by investors.
Latin America’s largest economy, which relies on mostly clean energy generation, was only the 50th sovereign in the world to price a green, social, sustainability, sustainability-linked or transition bond, a group led by Poland with the first sovereign green issuance in 2017. Even in Latin America, seven nations tapped the sustainable market before Brazil, according to The Climate Policy Initiative, a think-tank.
Brazil’s inaugural issuance came shortly after the federal government approved its Sovereign Sustainable Bond Framework, published in September 2023 and drafted with the support of the World Bank and the IDB. The bond was almost three times oversubscribed and its spread was comparable to the levels of investment grade sovereigns like Mexico, according to law firm Sullivan & Cromwell.
Daniel Leal, the undersecretary of Public Debt at the Brazilian Treasury, says that market conditions played in favor of issuance at that time, and the fact that it was Brazil´s first sustainable bond probably helped spreads, too.
He notes that, although the framework had been ready for a while, the sovereign first had to roadshow to explain sustainable targets to investors dedicated to this kind of security.
“Brazil left it clear that the goal is to give continuity to the programme. Continuity is a big worry among investors,” Leal points out.
The framework informs the disbursement of the funds, and the government pledged to spend between 50% and 60% of the total in environmental projects, and between 40% and 50% in social initiatives. Among other expenditures, the money will help to finance Brazil’s ambitious Ecological Transformation Plan.
“The current administration wanted to sign that it was turning a page in the environment issue,” Leal says.
The June bond was more than twice oversubscribed. According to the Brazilian treasury, the majority of buyers were foreign investors constituted, with 77% of the total based in Europe and North America, while Latin American markets, including Brazil, answered for 14%.
Sustainalytics, an ESG securities rating firm, qualified Brazil’s sustainable bond framework as “credible” and “impactful”. Investors praised the sovereign for the levels of detail offered by the document and the pledges of transparency on how the resources will be invested.
In November, the government published its first report on the allocation of funds raised via the sustainable framework. By that time, 60% of the of the first issuance and 40% of the second had already been spent. Most of the money was allocated to current and future expenses, with initiatives to fight poverty and to promote food security receiving the largest share.