By Antonio Carlos Teixeira
As a Global Society, one of the major challenges facing us is the transition to a low carbon economy. In an oil-based Civilization, the task will not be easy. But it’s not impossible. Among the urgent actions to be implemented, the most immediate is the reduction of the emissions of gases generated by the gears that move our production and consumption modes. The main one, without a doubt, is carbon dioxide, CO2.
Efforts to combat the damaging effects of excessive CO2 emissions are coming from many fronts. In the energy sector, for example, markets are positioned to renew and adapt their structures and regulations to move towards the transition to the low-carbon economy. In the European Union (EU), the energy sector is key to the goal of decarbonising the economy between 85% and 95% by 2050. One way to achieve this is to use massive renewable and low, such as wind power, according to Wind Europe’s recent “Making transition work” report.
In this sense, adaptations will be needed throughout the production chain, as well as agreements and commitments that encourage us to think and practice this behavior change. Such an evolution in the perception about the urgency to reduce CO2 and other greenhouse gas (GHG) emissions is fundamental for understanding the need to direct resources to finance the transition to a low carbon society.
The idea of this article is to encourage and strengthen the participation of the Brazilian Insurance Sector, through its main agents (insurers, reinsurers, brokers, educational and research institutions, among others) in actions aimed at the design and implementation of portfolios of mitigation and adaptation projects to the risks and effects of climate change. One of these actions is undoubtedly the negotiation of so-called Green Bonds, specific financial instruments capable of agglutinating and encouraging programs and projects to boost the consolidation of the global low carbon society.
COP21: the key to the Paris Agreement
During the 21st Climate Change Conference (COP21), held in December 2015 in Paris (France), the 195 member countries of the United Nations Framework Convention on Climate Change (UNFCCC) committed themselves to intensify actions and investments for development of a low carbon economy.
In addition to the general objective of stabilizing the average temperature rise of the Earth below 2°C in relation to pre-industrial levels – and, if possible, stopping this increase by around 1,5°C – the Paris Agreement indicated the importance of approving financial resources for actions to mitigate and adapt to climate change from both public and private sources.
The Paris Agreement also provides for the establishment of a US$ 100 billion per year climate finance fund to be created by developed countries by 2025. However, this figure would not even close to the volume of investments estimated by organizations such as the Agency International Energy, World Bank and World Resource Institute (WRI) needed to cross the transition to low-carbon planetary society: US$ 5 trillion per year.
The mobilization of resources through specific financial instruments for investments in environmental and / or climate programs and projects is supported by Green Bonds. The increasing evolution of these roles at the international level led the group of the world’s 20 largest economies (G20) to recommend it to their members, according to their recent report “Climate Finance Study Group”.
Definition and international markets
Green Bonds can be defined as fixed income securities to raise funds for investment in projects (new or existing) based on environmental and / or climatic issues. They are characterized by financing long-term “green projects or assets” – something that is closely related to institutional investors such as pension funds and insurance companies.
The first issue of these papers was made in 2008 by the World Bank. They are currently issued in dozens of countries by commercial banks and companies, and in more than 15 currencies. Until 2012, the only issuers of Green Bonds were the multilateral development banks. Since then, companies, municipalities, credit and export agencies and commercial banks have significantly increased their participation as issuers of these securities.
Accumulated Emissions of Green Bonds by Type of Issuer
. Multilateral banks: 29%
. Business: 28%
. Municipalities: 17%
. Commercial banks: 12%
. National development banks: 11%
. Exim credit agencies: 3%
Multilateral development banks and municipalities increasingly include adaptation components to climate change in their Green Bonds, with a view to creating Green Projects to adapt to climate change.
Since 2007, issuers from developing countries have launched US$ 10 billion in Green Bonds. Currently, the Chinese and Indian markets are among the fastest growing, mainly due to the explicit support of their national governments.
The energy sector is still the most used segment of the resources obtained with the issuance of Green Bonds. However, the transportation and civil construction sectors are beginning to stand out with significant global growth, mainly due to the issuance of Chinese bonds.
Use of Green Bonds Resources by Sector
. Energy: 44%
. Construction: 24%
. Transportation: 12%
. Water: 11%
. Waste and pollution: 5%
. Agriculture and Forestry: 2%
. Adaptation: 2%
In the calculations of the Climate Bonds Initiative, Green Bonds traded at US$ 140 billion in September 2016, as well as another US$ 576 billion of those papers that have the potential to be classified as such. In summary: Green Bonds are financial instruments tied to additionalities or environmental attributes that promote benefits to mitigate the effects caused by climate change.
The potential of the Green Bonds market in Brazil
In Brazil, fixed income papers that could have environmental/climatic additionalities included and be classified as Green Bonds are:
. Quotas of Investment Funds in Credit Rights (FIDC)
. Agribusiness Receivable Certificate (CRA)
. Certificate of Real Estate Receivables (CRI)
. Incentive Debentures for Infrastructure
. Financial Letters
. Promissory Notes
If the focus is the international market, they may be issued as bonds, notes or commercial papers, using any regulated instrument in the chosen jurisdiction.
The “Guia para Emissão de Títulos Verdes no Brasil 2016” (Guide for the Issuance of Green Bonds in Brazil 2016, document released by the Brazilian Federation of Banks – Febraban and the Brazilian Business Council for Sustainable Development – Cebds) presents an excellent diagnosis of the potential of the Green Bonds market in Brazil. The methodology identifies the sectors with the greatest capacity to develop Green Projects and that “could receive resources obtained through the issuance of Green Bonds in the primary capital market.”
According to the document, the sectors with great investment possibilities for Green Bonds issues are: agribusiness; forest; energy; and infrastructure, the latter specifically in the areas of transportation, construction and sanitation. According to the Climate Bonds Initiative, the market for Brazilian fixed-income securities with positive environmental characteristics amounted to US$ 2.9 billion in July 2016, including those labeled and not labeled Green Bonds.
“These sectors are fundamental to Brazil’s economic growth and its transition to a low-carbon economy. The Green Bonds represent a great opportunity to direct capital to the investments needed to achieve the climate change objectives established at COP21 through the Paris Agreement”, says the Febraban / Cebds Guide.
Participants, guidelines and principles
The global financial market already has specific guidelines drawn up by international institutions for the development of Green Bonds issues. As a reference, we can mention the principles created by multilateral organizations such as the World Bank, Inter-American Development Bank (IDB), International Finance Corporation (IFC), European Investment Bank (EIB) and International Capital Markets Association (ICMA).
Composed of more than 50 financial institutions, ICMA stands out for the development of globally recognized Green Bond Principles, concepts that provide guidelines for market action in these securities related to: identification of the eligibility criteria of the projects financed; selection of projects; management of resources; monitoring and reporting.
The main players involved in the Green Bonds segment are the same as the traditional Capital Markets: issuers; underwriters; investors; regulators and supervisors; rating agencies; fiduciary agents; financial auditors; systems for registration, deposit, settlement and trading of securities; legal advisors.
In addition to these usual members, the Green Bonds market also has the participation of a third party: the External Evaluation Agents, who, through an independent opinion, attest to the positive environmental attributes of the projects for which resources Shall be allocated.
The Green Bond Principles define the following External Assessment formats:
1 – Opinion
2 – Verification
3 – Certification
4 – Green Rating
The characteristics of this evaluation and its modalities are detailed as follows:
. Opinion issued by consultancies or institutions with recognized experience and technical capacity in the area of sustainability.
. It does not require the existence of pre-determined criteria.
. The so-called “Second Opinion” in the international market can fall into this category.
. Opinion issued by audit firms or consultancies / institutions with recognized experience and technical capacity in the area of sustainability.
. Verification carried out based on internal criteria or declarations (claims) of the issuer itself.
. It is also possible to refer to external guidelines and principles, such as the “Green Bond Principles”.
. Opinion issued by audit firms and other institutions accredited / approved by the certifying body.
. Evaluation based on external criteria (certification standard).
. The “Climate Bond Standards” are currently the only Green Bonds certification available.
. Performed by rating agencies or research institutions.
. Assignment of a specific green score for the title (not for the issuer in general).
. In 2016 the agency Moody’s released its rules for rating and rating for Green Bonds.
Source: Guia para Emissão de Títulos Verdes no Brasil 2016 / Green Bond Principles (2016)
“It should be noted, however, that it is the responsibility of the issuer of the Green Title to ensure that the allocation of resources obtained and the monitoring of the environmental performance of the projects occur as planned. In this sense, the External Evaluation is the best way to verify the fulfillment of these commitments and can also be used in the process of communicating the results to the investors and coordinators [of the emissions]”, suggests the Febraban-Cebds Guide.
Issue to finance projects or green investments
Companies active in the Brazilian market may finance or refinance, with the issuance of Green Bonds, a single or a set of identified and / or specific Green Projects. Corporations may also choose to issue Green Bonds to finance a green investment program, without the respective projects being specified at the time of issuance. In these cases, the issuer would only indicate which category of projects the resources would be allocated (eg energy efficiency, renewable energy generation, effluent treatment, etc.), leaving detail to be made later.
Benefits for the issuer of Green Bonds(1)
1) Diversification and / or expansion of the investor base:
. Access to new investors, such as sustainable funds (which consider environmental, social and governance issues – ASG), investors with a specific mandate to purchase Green Bonds or with long-term objectives (such as pension funds, insurance companies and signatories of the PRI – Principles For Responsible Investment), which by their characteristics can keep the paper in portfolio even in times of crisis.
2) Reputation gains:
. Greater visibility for Green Projects;
. A positive marketing tool, differentiating the Green Bonds issue from conventional issues;
. Recognition of the issuer’s commitment to the conservation of the environment and mitigation and prevention of the risks posed by climate change.
(1) According to “Guia para Emissão de Títulos Verdes no Brasil 2016”
(the Guide for the Issuance of Green Titles in Brazil 2016)
Investor Benefits for Green Bonds(2)
1) Greater transparency in the use of resources:
. The projects financed with funds obtained through the issuance of Green Bonds are generally structured and framed within a long-term strategy of the company, having to adhere to its socio-environmental responsibility policy and reveal governance for the sustainability of its business.
. The clarity and specific destination in the application of the resources and in their monitoring can cause the Green Projects to present lower risks associated to the investment.
2) Convergence with voluntary commitments:
. Investments in Green Bonds facilitate the fulfillment of commitments to the resource managers signatories of the PRI and the Institutional Investors Group on Climate Change (IIGCC). These voluntary commitments, undertaken by more than 1,500 national and international organizations, guide investments in projects that favor sustainable environmental and social development;
. For specialized investors with sustainability mandates, the availability of Green Bonds facilitates the identification of projects and target assets in the fixed income market.
3) Financial return:
. The Green Bonds, in general, present financial return and prices defined by the market, as it happens for the conventional titles.
(2) According to “Guia para Emissão de Títulos Verdes no Brasil 2016”
(the Guide for the Issuance of Green Titles in Brazil 2016)
An “Opportunities Market” for insurers in Brazil!
Financial institutions can play a prominent role in the Green Bonds market, as they can be issuers, coordinators of corporate issues or even act as investors. It is an “Opportunities Market” not yet explored by the Insurance Sector: currently only commercial and development banks stand out among the most relevant financial institutions in the international Green Bonds market.
Therefore, participation in the Green Bonds Market – whether as issuer, coordinator or investor – is a great opportunity for Brazilian insurers, especially corporations in the segment that plan to expand their social and environmental actions and strategies. Green investments to mitigate the emission of greenhouse gases (GHG) and climate risks.
As issuers, financial institutions may issue Green Bonds to finance Green Portfolios of their clients (financing or green loans). But also, like companies, they can issue bonds to finance or refinance their own Green Projects. “One example is the implementation of a broad energy efficiency program in its administrative units, data centers or branch network”, says the Febraban-Cebds Guide. The document also points out that such institutions “can also become major issuers of Green Bonds to finance companies without access to the capital market, thus helping to leverage the ‘green economy’.” That is: the Green Bonds market is a business to be pursued by Brazilian insurers!
In international experience, Green Bonds issuance programs by financial institutions focus primarily on loan portfolios for renewable energy, energy efficiency and sustainable construction projects. The following table also shows examples of other sectors and areas as an option for projects to be financed through green bonds.
Examples of Eligible Activities for Green Bond Financing Projects:
. Generation, transmission, storage or use of solar, wind, bioenergy, hydro, tidal energy, geothermal
Energy Efficiency (equipment and products)
. Sustainable buildings (retrofit and new constructions)
. Efficient storage systems
. Efficient heating systems
. Smart grids
Pollution prevention and control
. Wastewater treatment
. Emission control (GHG and other pollutants)
. Decontamination of soil
. Recycling and generation of high value-added products
. Generation of waste energy
. Analysis and environmental monitoring
Sustainable management of natural resources
. Low carbon farming
. Forestry and sustainable forest management
. Restoration of native vegetation
. Recovery of degraded areas
. Fisheries and aquaculture
. Protection of terrestrial, coastal and marine habitats
. Sustainable use of biodiversity
. Implementation of ecological corridors
. Production of electric and hybrid vehicles
. Non-motorized vehicles
. Infrastructure for clean vehicles
Sustainable management of water resources
. Treatment and remediation of water
. Infrastructure for capture and storage
. Infrastructure for distribution
. Watershed protection
. Sustainable systems of urban drainage
. Flood control systems
Adapting to climate change
. Climate monitoring or early warning
. Resilience infrastructure (dams and/or other structures)
. Development/use of varieties resistant to external climatic conditions
Products, production technologies and eco-efficient processes
. Ecological stamps / sustainability certificates
. Development of technology and/or biodegradable or renewable products
. Eco-efficient processes / products
Source: Guia para Emissão de Títulos Verdes no Brasil 2016
Responsible for moving significant volumes in the financial market, with significant investment portfolios, institutional investors are key players in the Capital Market.
In this sense, insurers, operating in the management of third party resources, operate with a long-term perspective, a fundamental vision to foster their active participation in the Green Bonds market.
This increase will not only benefit the insurance companies, but the entire Brazilian Insurance Market. In addition to encouraging innovative business in the financial sector, it will propagate cutting-edge environmental and sustainable perspectives and parameters – in line with mitigation aspects of climate impacts – capable of generating innovations in products, programs and projects in the fields of education, research and relationship with insureds, strengthening the transition of the Insurance Sector and its contribution to the achievement of a global society and economy of low carbon.
Antonio Carlos Teixeira
Communication Consultant for Sustainability, Corporate Advisor for transition to a low carbon society, editor of TerraGaia blog
. FEBRABAN; CEBDS. Guia para Emissão de Títulos Verdes no Brasil 2016. Outubro 2016. Available in: http://cebds.org/publicacoes/guia-para-emissao-de-titulos-verdes-no-brasil-2016/#.WCcLX_krKUm. Access in: Nov. 12 2016.
. FEBRABAN; CEBDS. Guia para Emissão de Títulos Verdes no Brasil 2016. Version for public consultation, Sept. 16 2016. Available in: https://cmsportal.febraban.org.br/Arquivos/documentos/PDF/Titulos%20Verdes%20-%20Guia%20Febraban%20CEBDS%20-%20vConsulta%20Publica_final.pdf. Access in: Nov. 12 2016
. G20. Climate Finance Study Group – Promoting efficient and transparent provision and mobilization of climate finance to enhance ambition of mitigation and adaptation actions. June 2016. Available in: http://g20.org/English/Documents/Current/201608/P020160815357624187353.pdf. Access in: Nov. 14 2016.
. UNDP. UNDP and Climate Change – Zero carbono, sustainable development. November 2015. Available in: http://www.undp.org/content/dam/undp/library/Climate%20and%20Disaster%20Resilience/UNDP_and_Climate_Change.pdf. Access in: Nov. 13 2016.
. WIND EUROPE. Making Transition Work. September 2016. Available in: https://windeurope.org/wp-content/uploads/files/about-wind/reports/WindEurope-Making-transition-work.pdf. Access in: Nov. 13 2016.
. WORLD BANK. Green Bonds: working towards a harmonized framework for impact reporting. December 2015. Available in: http://treasury.worldbank.org/cmd/pdf/InformationonImpactReporting.pdf. Access in: Nov. 10 2016.
Suggested sites on green bonds and related matters:
. Climate Bonds Initiative
. Environmental Finance
. European Investment Bank (EIB)
. Inter-American Development Bank, IDB
. International Energy Agency, IEA
. Institutional Investors Group on Climate Change (IIGCC)
. International Capital Markets Association (ICMA)
. International Finance Corporation (IFC)
. Principles for Responsible Investment (PRI)
. World Bank
. World Resource Institute (WRI)
Acesse a versão em língua portuguesa do artigo: