NatWest makes case for Brazil SLB

IFR 2464 - 17 Dec 2022 - 6 Jan 2022
2 min read
Americas, EMEA
Julian Lewis

Brazil, one of the most notable sovereign absentees from the ESG bond market, should harness this year’s progress in sustainability-linked bonds to attract investor support for reversing deforestation in the Amazon, according to NatWest Markets.

With regional peers Chile and Uruguay establishing a sovereign SLB sector with their landmark deals in March and October, respectively, NatWest said the Latin American heavyweight should follow their leads with a bond issue tied to the new Lula administration’s success in turning around the significant loss of Amazonian forest under its predecessor.

“[A] well-designed instrument would garner global interest from a wide cross-section of investors,” said Alvaro Vivanco, head of EM and ESG macro strategy, in a research note. It should “open the door for significant funding for Amazon protection”.

Vivanco cited the fact that deforestation can be quantified, as well as the Amazon’s global importance as a vital carbon sink. “It’s simple, objective, measurable, and arguably one of the most direct ways to make a global impact,” he said.

Favouring the structure over “suboptimal” green bonds, he said Brazil could offer an SLB tied to a single deforestation KPI but with both step-up and step-down payouts to incentivise progress.

Moreover, Vivanco – who said European countries are “starting to entertain the idea” of sovereign SLBs too – suggested updating Uruguay’s two-way pricing innovation by reducing or increasing each annual coupon to reflect undershooting or overshooting against the target. With 2034 Brazil bonds yielding about 6.35% currently, he suggested capping the step in either direction at 200bp.

Annual targets would be set in line with the Lula administration’s goal of ending deforestation by 2030.

Any underperformance towards the target in the early years would have to be made up to avoid higher future payouts. “We think this sends the right nudge of urgent, immediate action aligned to missed targets,” Vivanco said.

Like key EM peers China, Russia and South Africa, Brazil has yet to offer green or other ESG bonds. India is the only one of the so-called BRICS nations to announce plans to begin sustainable financing at the sovereign level.

India has said in 2022/23 sovereign green bonds will be issued for mobilising resources for green infrastructure and proceeds will be deployed in public-sector projects that help reduce the carbon intensity of the economy. India’s Department of Economic Affairs published its “framework for sovereign green bonds” last month, along with a second-party opinion by Cicero Shades of Green.