BDMG Sustainable Bonds

 

The ESG principles must be increasingly incorporated into finance. From this perspective, green and social investments not only contribute to the sustainability of the planet, but also leverage the economy, generate income, create jobs and reduce inequalities.

Introduction to the Policy/Approach/Tool

The BDMG aims to promote and encourage actions favorable to climate change mitigation, accordingly to sustainable development global agendas. In this context, the Bank has been raising resources from multilateral banks to stimulate and support green and social projects. As an example, in 2019 BDMG signed a €100 million contract with the European Investment Bank (EIB) to support renewable energy and energy efficiency projects.

It is noteworthy that there is a substantial and growing demand for responsible and low-carbon investments across the world.   Brazil has a great potential to meet these expectations and attract these investments, as well as to develop business associated to low-carbon economy.

Thematic bonds (green, social, and sustainable) were created to facilitate the financing of investments that provide environmental and/or social benefits, thus supporting an economic transition focused on sustainability. In recent years, thematic bonds have taken on greater significance in international markets. Brazil has been the largest green bond market of the LAC region, with over 47 bonds issued for a total volume of US$8 billion in a variety of sectors such as energy, land use (e.g., forestry, environmental conservation), and transport industries. The social and sustainable bond markets in Brazil are, however, still incipient with only two social bonds that make up a total of US$110 million, and only three sustainable bonds (US$362 million) so far, all of which were issued in 2020.

Becoming a certified sustainable bonds issuer highlights BDMG’s commitment to transparency and socio and environmental responsibility, which allows new investors and other partners to have greater reliability.

In addition, this process provided access to the international bonds market, a funding source not used by the bank previously, besides highlighting the Bank’s performance in the national market as a benchmark to Brazilian development institutions.

The BDMG Sustainable Bond was listed on the New York Stock Exchange, totaled US$ 50 million, and was subscribed by IDB Invest. The issuance of the first Sustainable Bond by a public bank in Brazil constitutes a precedent for other institutions to develop their own frameworks and act in this important market, considering Brazil commitments in the Paris Agreement to face climate change.

Development and design

To leverage sustainable bonds issuance, BDMG published a Framework with social and environmental standards in the SDGs context.

Besides of that, international consultancy Sustainalytics attested the Bank’s suitability to the issuance of national and international sustainable bonds through the Second-Party Opinion (SPO) certification.

The new Framework was built in accordance with the Green Bond Principles 2019, the Social Bond Principles 2019 and the Sustainability Bond Guidelines. Issuances that follow the International Capital Market Association (ICMA) guidelines, as BDMG’s, must (1) Use of Proceeds: apply eligibility criteria; (2) Process for Project Evaluation and Selection: establish governance to selection of projects; (3) Management of Proceeds: monitoring resources destination; and (4) Reporting: to define how the results will be communicated to investors.

Implementation

Technical cooperation with the IDB was essential to the project implementation. Priority fronts were established aiming to expanding knowledge and practices related to sustainable development financing.

Sitawi, a company contracted by the IDB, worked on the development of BDMG’s frameworks guided by the best practices, while Sustainalytics reviewed the frameworks developed by the BDMG in order to verify compliance with all Green Bonds Principles, Social Bonds Principles and Sustainability Bonds Guidelines. In addition, a GHG calculator was created to assess emissions, removals, forest carbon stocks and emission reductions of the operations financed by the Bank. The obtained indicators enabled to report on the operations’ impacts to all stakeholders.

Experience and impact

The resources will be used to finance or refinance projects or operations that have clear and significant socio and environmental impacts and that contribute to the SDGs.

With the issuance of this bond, the BDMG positions itself to operate in this market and as the first issuer within the public bank community in Brazil.

Many lessons have been learnt, including:

• The frameworks external evaluation (SPO) is important to attract investors and allow greater recognition of the issuer.
• Engagement with international practices and guidelines is essential to the bond success.
• The partnerships established were extremely important to the issuance implementation.
• Having a portfolio with positive impact to the environment and to society helps engaging employees and increasing the organization value and reputation for clients, regulatory bodies, and other stakeholders.

These lessons also made clear many challenges in improving sustainability action:

• Need for a culture change in financial institutions.
• Need for training to understand the importance and the possibilities of impact investments and the main questions around specific social and environmental themes such as, for example, climate change.
• Need to support customer relationship teams with the dialogue about sustainability with its clients. The client must be aware of the importance of measuring and of transparency about the benefits of its project.

Key recommendations to other institutions that aim to follow the same path, those would be:

• Try to get a SPO by a recognized company so the investors’ confidence can be improved. It’s on the basis of this evaluation that the whole work will be considered and recognized. Therefore, it is necessary to ensure that the partners are engaged and committed and, most of all, perceived as credible by the market.
• Establish indicators aligned with international practices. Investors demand transparency and comparability in assessing those instruments. Certifying that the language used in the company is aligned with international practices improves credibility and facilitate communication between the institution and possible partners.
• And, finally, to the institutions that are beginning its operations in this sector, look for partners for the development of the framework. This is a long and complex work, but doing it in partnership with others, may yield many lessons and accelerate the process, and improve the quality of the final product.

Materials

Developing the Thematic Bond Market in Latin America and the Caribbean: Brazil’s First Sustainable Bond by a Public Financial Institution – https://greenfinancelac.org/resources/publications/developing-the-thematic-bond-market-in-latin-america-and-the-caribbean-brazils-first-sustainable-bond-by-a-public-financial-institution/

BDMG Framework & Second-Party Opinion – https://www.bdmg.mg.gov.br/sustainable-bonds/