Sustainable financing in Brazil: 200 operations and volume of BRL 70 billion

Although gradual and at a pace consistent with the peculiarities of the energy transition challenges, the allocation of capital to ESG assets is here to stay

The ESG theme is undoubtedly one of the most important issues in the field of corporate finance. In this space, we will seek to be didactic and objective in relation to the subject, bringing practical and historical aspects regarding how companies can benefit from sustainable financing and educate them to prepare for the adoption of measures and anticipate risks and changes that may bring transformational impacts to the business environment and its development strategies.

In 2020, BlackRock, one of the largest managers in the world, with more than US$10 trillion under management, set the tone for what would be the agenda of the main discussions involving the financing of companies, highlighting the need to reformulate the financing model. and that, within the scope of this reformulation, in the nearer future than most predict, there will be a significant reallocation of capital, drawing attention, for example, to the need for governments, companies and shareholders to face the challenges and consequences imposed by the climate changes. [1] Since then, it can be said that, although gradually and at a pace consistent with the idiosyncrasies of the challenges of the energy transition and a world in constant geopolitical turmoil, the allocation of capital in assets that respect ESG principles is here to stay.

In addition to being a green power with its various biomes that are essential for containing the pace of global temperature acceleration, Brazil received the news of the ESG emphasis with the certainty that there were many challenges to be faced, but that its capital market, recently democratized, with a record of individual investors, it had fertile ground for catalyzing ESG principles. After all, for example, in terms of governance, out of a total of 253 Brazilian companies belonging to listing segments, 203 are listed on B3’s Novo Mercado, created in 2000.

Novo Mercado obliges listed companies to commit to a high level of governance, which includes, among others, the following obligations:

• extend 100% of any premium paid to controllers for shares in their controlling block
• have at least 20% of the members of the board of directors independent;
• that every share has the right to vote. In addition, companies are required to have an audit committee responsible
• for the scrutiny of all its information presented to the market, (ii) for the assessment and monitoring of the company’s risks
• supervision of the implementation of its internal policies, which, in turn, must include at least:
  1. remuneration policy
  2. policy for appointing members of the board of directors
  3. risk management policy
  4. related party transaction policy
  5. securities trading policy

There are still many challenges, such as the need for a greater plurality of profiles of the members of their respective administrations and, in some cases, commitments established in a more objective way in relation to the metrics ESG.

In terms of the use of resources obtained through the capital markets, the country was already taking steps towards the Sustainable Development Goals.[2], by creating legal and regulatory frameworks that culminated, through tax incentives, in boosting real estate, agribusiness and infrastructure financing. Products such as Certificates of Real Estate Receivables, Real Estate Investment Funds, Certificates of Agribusiness Receivables, Debentures and Infrastructure Funds became popular in the Brazilian capital market and, to a certain extent, contributed to:

1. the reduction of our housing deficit
2. promoting sustainable agriculture
3. improving the country’s infrastructure

It is clear that tax incentives and investment products aimed at specific sectors are not enough to achieve more ambitious goals consistent with the timeframe in which they need to be implemented. For this, it is essential that society, especially the set of stakeholders of the Brazilian capital market, assume commitments in this regard.

And it is in this direction that we are heading: currently, local and international issuances by Brazilian companies already total more than 200 completed green bond operations, with a total volume of more than US$14 billion (about R$70 billion). Emissions are categorized according to (a) destination: modality in which resources will be allocated to finance projects that promote sustainability (ie project financing of a certain energy matrix neutral in relation to carbon emission); and (b) performance: modality in which commitments are made to achieve sustainable goals (ie reduction of carbon emissions, increase in diversity in the company’s leadership positions).

The obligations agreed in the documents of each offer address the green commitments and performance targets ESGwhich can bring advantages to the issuer, such as financial benefits (more attractive funding rates), and a greater range of investors in the offer, since managers have increasingly conditioned investments to ESG commitments.

The look ESG, as a consequence of this market demand, has also drawn the attention of regulatory bodies. For example, as of 2023, the CVM will require publicly-held companies to explain the non-adoption of practices ESGor include information in their respective reference forms regarding ESG documents or reports that they produce, including:

1. methodology or standard followed for its elaboration
2. information from any audit or review by an independent entity
3. possible consideration of materiality matrix and key ESG performance indicators
4. eventual alignment with the Sustainable Development Goals (SDGs)
5. eventual consistency with the recommendations of the Task Force on Climate Change Related Financial Disclosures (TCFD)[3] or recommendations from financial disclosures from other recognized entities
6. option of the issuer regarding the realization of greenhouse gas emission inventories

Finally, it is important to highlight that, as discussed here, the agenda ESG can bring great benefits to Brazilian companies and the capital market in general. However, to avoid the greenwash[4] (which tends to be increasingly rigorously analyzed by regulatory bodies), and, at the same time, extract all the value that the agenda ESG may represent, it is important that companies structure the steps in the process of adopting such practices and surround themselves with qualified service providers. The selection process of such service providers must include the appropriate choice of financial institutions responsible for intermediating the offer, lawyers responsible for preparing the documents and legal audit of the issuer, consulting ESG and auditors responsible for confirming the consistency of the financial information provided by the issuer.

[1] https://www.blackrock.com/americas-offshore/en/larry-fink-ceo-letter

[2] https://brasil.un.org/pt-br/sdgs

[3] https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf

[4] Expression that means “green makeup” or “green wash”. In these cases, brands create a false appearance of sustainability, without necessarily applying it in practice. In general, the strategy is to use vague and unsubstantiated terms.( https://idec.org.br/greenwashing)

Source: Exam