The role of green bonds in the transition to a sustainable economy. Sustainable Investments, Green Bonds, Green Finance, Environmental Conservation, Deforestation Reduction.

Luciana Lanna, partner in the Environmental area at Vieira Rezende Advogados, explains in this article

about the available options for raising funds via sustainable bonds and how this

market can be encouraged.

https://valor.globo.com/brasil/esg/artigo/o-papel-dos-titulos-verdes-na-transicao-para-uma-economia-sustentavel.ghtml

Green bonds are debt securities that companies, governments or banks can issue to raise money from the market. The debt market is crucial to the global economy, as its robustness reduces dependence on bank credit and can act as a stabilizing element in times of crisis, when credit tends to be scarce. Furthermore, like other debt instruments, green bonds allow risk sharing among investors, making credit provision more sustainable.

In 2007, a subdivision of this market emerged, the so-called labeled bonds. In addition to the debt issue (all debt securities have a fixed term and interest rate, etc.), they offer certain additional features. The green bond, which was first issued in 2007 by the World Bank, has environmental and/or climate benefits.

This is a title that was created to raise debt, so that the resources obtained through this raising can be applied to projects that generate positive impacts. In the same category are social bonds, sustainable bonds, transition bonds and sustainability linked bonds.

Thus, within the scope of sustainable finance, there is currently a menu of asset classes that can be used to finance investment projects linked to sustainability issues.

Specifically regarding green bonds, although it still represents a small share of the global debt market, it is an asset class that has been growing significantly.

The resources obtained through the issuance of a green bond are “stamped”, that is, they are used in projects that have a positive environmental and/or climate impact and that are presented in the bond issuance prospectus.

Another important aspect is transparency in the allocation of these resources, since issuers must generate and maintain updated information about the use of resources, which must be renewed annually until their total allocation.

According to Annelise Vendramini, coordinator of the Sustainable Finance Research Program at the Center for Sustainability Studies associated with the School of Business Administration at Fundação Getúlio Vargas, studies show that green bonds contribute to the diversification of a traditional portfolio that has a stock index and a commodity index. By adding a green bond index to a portfolio with these other indexes, the investor obtains the benefit of a low correlation or negative correlation. This means that by including negatively correlated assets in a portfolio, it is possible to create a balance that can help reduce overall risk.

Furthermore, like other debt instruments, green bonds allow risk sharing among investors.

Under the bias of national legislation, the National Policy for Payment for Environmental Services was established in 2021, which recognizes and values human activities that encourage the conservation and recovery of natural resources and that generate an environmental service, being a way to boost the scale of forest restoration in the country. Green bonds are provided for as one of the modalities of remuneration for environmental services, as provided for in art. 3, IV of Law 14.119/2021.

Likewise, in 2021, Decree No. 10,828 came into effect, creating the CPR Verde (Rural Producer's Bond – Verde). This credit instrument represents the delivery of products and allows rural producers and other agents operating in the agribusiness chain to raise funds that will be directed to financing the conservation of native forests and their biomes. In other words, through the CPR-Verde, rural producers receive incentives to preserve the environment in exchange for financial resources.

Product delivery refers to the possibility for rural producers to sell items associated with conservation or recovery activities of native forests and their biomes, such as preservation of springs, biodiversity, reduction of greenhouse gases, reduction of deforestation, etc.

According to the Climate Bonds Initiative, a think tank that follows and monitors the greenbond market, by the end of 2022, with US$15.2 billion in private sustainable debt distributed across 86 operations, Brazil ranked first regionally (Latin America and the Caribbean).

In September 2023, the Brazilian government launched the Framework for Sustainable Sovereign Bonds. Soon after, in the same year, Brazil launched a sustainable sovereign bond worth US$2 billion. The resources were allocated to controlling deforestation, conserving biodiversity, the National Climate Change Fund (with a focus on renewable energy, clean transportation, among others), and programs to combat poverty (Bolsa Família) and combat hunger (Food Acquisition Program).

Financial market participation is essential to drive the transition towards a sustainable economic system, ensuring that the necessary resources and investments are allocated in a way that promotes sustainable development and social justice.

Sustainable Investments, Green Bonds, Green Finance, Environmental Conservation, Deforestation Reduction.

Luciana Lanna is a member of the Brazil Climate, Forests and Agriculture Coalition; associated with the Network of Brazilian Women Leaders for Sustainability; member of the Environmental Law Commission of the OAB/Campinas; and associated with the Brazilian Institute of Corporate Governance - IBGC.