New report calls on Brazil to issue a deforestation-linked sovereign bond

A new report from Planet Tracker and the Grantham Research Institute assessing Brazil’s sovereign health shows that the country is on an environmentally unsustainable path to 2030 and beyond, depleting its natural capital base through deforestation, and thereby bringing systemic risks to its sovereign bonds.

The report “Brazil: roadmap to sustainable sovereign bonds", sets out four steps Brazil could take to change direction, including issuing an innovative Deforestation-Linked Sovereign Bond tying interest payments to its success in reducing deforestation.

“A Deforestation-Linked Sovereign Bond would be an effective way for Brazil to align its fiscal and sustainability ambitions with those of the capital markets,” says Peter Elwin, Director of Fixed Income & Head of Land Use Programme at Planet Tracker and one of the report’s authors. “Deforestation is depleting Brazil’s natural capital base, threatening its economic health, and issuing a DLSB would be a strong statement by Brazil that it was intent on following a different path.”

If structural changes are not made, the authors warn that Brazil risks being left behind by the market transition to net zero, and the policy responses of other governments trying to tackle climate change.

These market and policy pressures are expected to ratchet up in 2023 and 2025, as well as in the years leading up to the pivotal 2030 deadline for the Sustainable Development Goals.

Co-author Nick Robins, Professor in Practice - Sustainable Finance at the Grantham Institute, says: “This report underscores the systemic nature of the sustainability challenges facing Brazil's sovereign bonds - but it also sets out some practical ways of moving forward, which would build on growing investor demand and positive steps within Brazil (for example, from the central bank)."

Investors holding the USD113 billion of Brazilian sovereign bonds expiring after 2030 are particularly exposed to the impact of these seismic shifts in the capital markets which were not priced in when the bonds were issued.

Elwin adds: “We expect investor attention on Brazil’s macro-economic fundamentals and the extent to which its sovereign bonds fail to align with investors’ sustainability objectives to increase. Credit ratings are not providing investors with sufficient warning of the risks created by Brazil’s depletion of its natural capital.”