Sustainable finance is gaining in Brazil as more companies improve their environmental, social and corporate governance (ESG) performance, and banks are playing a key role in this transition, says the head of BNP Paribas in that country.
Banks are playing – and will play – a vital role in the global transition to net-zero carbon emissions and in achieving the United Nations’ other Sustainable Development Goals, from gender equality to sustainable and resilient cities. How? By financing the efforts.
But how exactly are banks doing this?
LatinFinance interviewed Ricardo Guimarães to find out how his bank, Paris-headquartered BNP Paribas, is helping clients in the transition in Brazil, including by setting an example itself. Guimarães, who has been chief executive of the Brazilian division since March 2020, says the bank has set targets in line with the Paris Agreement to achieve net-zero carbon emissions by 2050 and has worked on sustainable finance deals with companies including Suzano, a pulp and paper producer.
The interview was edited for length and clarity.
LatinFinance: How are ESG goals being set at your bank?
Ricardo Guimarães: There are several policies and intermediate goals that the bank has been setting to achieve the transition. This is part of the relationship with clients. Each client has its own history and its own starting point in this regard. Some are starting to look at ESG now, some are on the winning side and have already completed a large part of the transition.
LF: Can you give an example?
Image: Ricardo Guimarães
RG: In terms of sustainable finance, for instance, Suzano is a frequent issuer of ESG-aligned bonds. Its first issuance was entirely focused on the environment. Its latest issuance had a key performance indicator (KPI) related to the environment in terms of water consumption, but it also included elements of social and governance to improve the share of women at the executive level. So, we can see that Suzano already has this strong environmental maturity, and that it has already started to look at the “S” component of ESG. Other companies start with the “S” dimension because they think it is more important than the environment. It depends on the situation. Chile, for instance, is a frequent issuer of ESG bonds. The first one was related to the environment, and at start of 2021 it issued another bond related to the combat against coronavirus with a social component. It was one of the first bonds in Latin America to include this social dimension.
In terms of transformation and policies, which is a third dimension, we have launched an environmental policy this year in Brazil. I am telling clients that we are not going to support any client that is not able to prove that there is no element of deforestation in its supply chain, whether it would be soybeans or meat, by 2025. This is a policy that we set up with a group from Paris, but we are also speaking with clients here to understand at which point of the transition they are to adapt deadlines accordingly.
The policy must be ambitious enough to meet the carbon zero, methane zero, and neutral greenhouse gas targets by 2050, but it also must be realistic. There is no point telling clients, “I am not going to finance your project” if they are not in a position, if they are not ready to reach for those goals. We must give them some time to adjust to this transition. The feedback we have had from clients is positive. They are moving in this direction, each of them at their own speed, but fortunately, big Brazilian protein companies have started to speak publicly about their carbon-zero targets in their supply chains and within timeframes that are very similar to ours.
LF: Are transition bonds working? Are they useful?
RG: We have projects and bonds that mention transition bonds, when you are moving from a bad starting point to a better one. When a company issues a bond, it is using a liability. The moment it includes transition targets toward sustainability with transition targets toward a sustainable economy, it is, in a way, the finance department that is leading the company to become greener. So, the CEO or the CFO are using more sustainable finance tools or transition bonds to force the corporate strategy to move in that direction.
LF: What are the main challenges and the risks that may get in the way of ESG?
RG: Let us take the air as an example, to put it simply. At the moment, the economy is dirty and when an investor puts his money to work, that money needs to help transform the environment into cleaner and more sustainable air. The current challenge is that companies understand that you must have a strong sustainability agenda for a marketing point of view, as a start, to take a stand. The difficulty from the point of view of who is doing sustainable finance is to understand the process of that company, setting KPIs for that issuance and making sure that the company can meet these KPIs to avoid transforming the operation into greenwashing, which is a transaction where the market understands that targets are very or little ambitious.
LF: In your experience, has there been a lot of greenwashing?
RG: Banks have been very careful because there is a brand image at stake, there is a tag name attached to the transaction. When you stick an ESG label to a deal, every bank, every investor is putting its credibility at stake with that transaction as well. So, this may happen, but most cases are related to transactions that have indeed a strong sustainability bias.
“I am more confident about credit origination when I know that a company has already been working on energy transition issues than toward a company that is not.”
LF: How are consumers, investors and regulators putting pressure on banks for them to become greener?
RG: This is an interesting point because central banks – and the central bank of Brazil, in particular – are going in the same direction and, I would say, at the same pace as the European Central Bank – in demanding that banks include climate change scenarios in their credit analyses. So, when I prepare a credit analysis before a new issuance, I must check what happens if there is flooding, if the sea level changes, if it rains too much, what impact the environment may have on my clients’ operations. This will lead banks to adopt ESG criteria in credit origination because regardless of the debate regarding climate change, what is clear is that climate change will create uncertainty to credit. And then when central banks demand that banks perform such analysis, you already have banks working to reduce climate change uncertainty in their credit origination, so it is the right thing to do. Investors and shareholders have increasingly asked for this. It is also a credit solvency issue. If you consider a loan for a medium-term project of 10 to 15 years, you check if there is an agenda for energy transition, and if that project is not going according to plan, it is going to be lagging behind, and there will be a need for additional investment. The company would probably have to use part of the original loan proceeds to invest in a change in its energy mix, for instance. So, I am more confident about credit origination when I know that a company has already been working on energy transition issues than toward a company that is not involved in climate change issues. All this counts as a kind of pressure so that banks can make a contribution in this energy transition towards zero carbon emissions. LF