Brazil's Pioneering Framework for Sustainable Sovereign Bonds

The Framework has been certified by Sustainalytics for its alignment with the principles established by the International Capital Market Association (ICMA) and will serve as a guiding reference for the issuance of such sovereign bonds, which are backed by resources directly tied to budgetary expenditures that contribute to the advancement of sustainable development in the country.

Significantly, this marks the first instance where the Federal Government has committed to offering sovereign debt bonds to the financial market with explicit sustainability criteria. To oversee the implementation of this framework, the Brazilian Federal Government has established a Sovereign Sustainable Finance Committee (“CFSS”), led by the Ministry of Finance and comprising representatives from various ministries, tasked with evaluating and selecting qualified projects aligned with the eligibility criteria set forth in the Framework.

According to Ministry of Finance, after conducting a series of investor roadshows in early September, the aim is to issue bonds in the aggregate amount of R$ 2 billion. Through this bond issuance, Brazil seeks to enhance its appeal to direct foreign investors, with the intention of fostering greater economic growth and development within the country.

The Framework

From an eligibility criteria standpoint, the Framework outlines criteria across 17 key areas, encompassing pollution control, renewable energy, biodiversity, climate adaptation, universalization of basic sanitation, socioeconomic development, and infrastructure accessibility, among others, to ensure sustainability and responsible practices.

From a supervisory perspective, the CFSS will oversee the distribution and monitoring of funds through its Integrated System of Financial Administration, utilizing the Integrated Planning and Budget System for financing purposes. Also, it will bear the responsibility of furnishing the requisite information to elaborate disclosure reports, considering the necessity to scrutinize, at a finer level of detail, the alignment between eligible expenditure categories and budgetary allocations. Moreover, the Federal Budget Office will assume the role of supplying supplementary information pertaining to the budgetary execution of eligible expenses.

In accordance with the Framework, Brazil aims to fully allocate net proceeds within 24 months from the date of issuance. Until allocation is completed, any unallocated proceeds will be managed in accordance with the relevant government debt management legislation and the National Treasury’s cash availability guidelines. In case of unallocated proceeds, they shall not be directed towards activities characterized as GHG-intensive or controversial, as per the exclusion criteria outlined in the Framework.

The Framework set forth two types of reports (allocation and impact reports) which will be published annually, either upon the maturity of the bonds or upon the full allocation of their net resources. The initial report will be issued within one year of the issuance of the respective bond, followed by subsequent reports every 12 months, which will be publicly available on the National Treasury Secretariat’s website.

The allocation reports will provide detailed information on the amount disbursed in the following categories:

• Expense category;
• Type of expense (current expenses, investments, and financial investments);
• Recent expenses (reimbursement) and current expenses;
• Expense category as a percentage of total expenses, distinguishing the proportion of co-financing; and
• Remaining balance of unallocated net proceeds.

On the other hand, the impact reports will include:

• Qualitative information on the impacts and outcomes associated with the amount disbursed for each expense category; and
• Quantitative data on the impacts and outcomes linked to the amount disbursed for each expense category.

Additionally, there will be an independent third-party assurance report accompanying the aforementioned reports, which will verify if the allocation complies with the eligibility criteria outlined in the Framework, ensuring transparency and accountability in the implementation of sustainable initiatives.

Concerns

While the Brazilian Government has outlined the initial objectives of the package, there remains a need for more detailed plans regarding their implementation, as several initiatives (e.g. carbon market) must pass through legislative bodies (such as the national congress) before they can be put into effect.

Furthermore, the implementation of eligible projects outlined within the Framework requires a lengthy administrative process, including procurement/bidding processes and obtaining environmental licenses. These procedures can potentially lead to delays in achieving the desired outcomes of the framework. Additionally, the Brazilian regulatory framework is known for its complexity, which may pose significant challenges to the execution of certain initiatives. Coupled with issues related to the inefficiency of the state, these factors can further complicate the implementation process of the Framework.

Where do we go from here?

Despite the challenges we may encounter in the regulatory and legal landscape for implementing the Framework, the national level, it has the potential to enhance sustainable finance in Brazil and set a pioneering standard for reporting practices and resource allocation within the private sector – consequently, it could enhance legal stability in the market and make it more attractive to investors. On the international stage, the Framework has the capacity to bolster Brazil's standing in the realm of sustainable finance and investment, elevating its profile among foreign investors and strengthening confidence in Brazil's alignment with global sustainable development objectives.

This perspective gains further credibility with Brazil's recent announcement about public consultation concerning the government's proposal for a Brazilian sustainable taxonomy, which aims to offer guidance on, among others, reliable information regarding sustainable finance. As per the outlined schedule, the taxonomy is set to be formally released in 2024, with mandatory adoption expected for 2026. The proposed taxonomy may indeed have an impact on financial transactions and agreement provisions – we look forward to being part of that discussion!