Brazil should consider sovereign bonds linked to deforestation targets – study

RIO DE JANEIRO, BRAZIL – While the Financial Times published a harsh editorial stating that investors should sanction Brazil for failing to curb deforestation, a paper also produced in London proposes a slightly more constructive approach: the country should give a positive signal to the market by issuing bonds with targets to curb deforestation.

The proposal provides an unprecedented approach to sovereign issuance.

Several countries have already issued green bonds, in which the use of the resources is allocated to finance green projects.

But none has yet issued the so-called “sustainability-linked bonds,” in which the money is used more freely and interest is linked to the fulfillment of sustainable goals, which are becoming increasingly popular among companies.

The idea was proposed by Planet Tracker, a sustainable investment think tank, in partnership with the Grantham Research Institute, which studies climate change and the environment at the London School of Economics (LSE).

More than merely an attempt to encourage the market to conserve standing forests, the issue would be a means of aligning interests in order to reduce the country’s sovereign risk.

Planet Tracker’s proposal is based on a diagnosis made last year about the risks to the debt profile of countries arising from the way they handle their natural capital – an aspect that is far from rating agencies’ radar, but which has the potential to change structurally the credit quality of countries in the long term, the NGO says.

An assessment of G20 countries shows that Brazil is the second-most exposed in terms of sovereign risk to changes in natural capital, behind only Argentina.

The mathematics is complex, but the logic is simple: as much of Brazil’s economy and trade balance is tied to the production of agricultural commodities, the changes brought about by deforestation – such as droughts and loss of biodiversity – can significantly impact the country’s payment capacity.

The loss of forest cover is the largest source of greenhouse gas emissions in the country.

There is also growing regulatory pressure, with developed countries pushing for the implementation of carbon taxes on imported products which can potentially take into account deforestation associated with the goods produced in a given country, Planet Tracker points out.

The European Union this week released its plans for a so-called ‘border tax,’ and Democrats in the United States have said they are considering taking the same path.

The goal

Thinking about such an issue when the federal government is racking up deforestation records, dismantling environmental protection agencies, and more recently undermining the monitoring of patch burning and forest fire data, seems like a long shot.

But it is worth noting that the 2022 elections are just around the corner.

To be able to issue these bonds Brazil would need to have a credible deforestation containment policy, and the creation of governance bodies would be advisable so that the goal would become a state issue, surviving a change of government every four years, Planet Tracker notes.

The concept is that bonds would have a step-up, with an increase in the coupon paid should Brazil fail to meet its deforestation containment target.

A commitment of zero illegal deforestation in the Amazon by 2030, which has already been included in the Brazilian NDC, but explicitly vanished in the last update of the country’s commitments in the Paris Agreement, would be a good parameter, the researchers note.

They further add that a robust monitoring of data would be required, including external auditing to ensure integrity and transparency.

Earlier this year, the Brazilian Treasury had stated that it would be studying “sovereign ESG issuances,” specifically aimed at attracting more foreigners to the composition of the country’s debt profile, albeit with little detail about the scope of the bonds.

At the time, one of the challenges pointed out for issuing green bonds was that the Constitution would not allow government bond issuances with “earmarked” destinations – in addition to the practical fact that restricting the use of resources would not be a good idea in a country in which a good part of the budget is already limited.

Issuance linked to sustainability goals would help solve this problem, broadening the potential use of the funds raised.

This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error