Strategists at a UK bank have proposed the idea of a super-sized $10 billion Brazilian government bond that would be specifically designed to help halt the destruction of the Amazon rainforest.
Stopping deforestation of the Amazon, which absorbs vast amounts of planet-warming greenhouse gas, is part of Brazilian President-elect Luiz Inacio Lula da Silva's sweeping plan to reclaim leadership on climate change measures.
He has recently asked the United States, Britain, France, Switzerland and Canada to join an international Amazon protection fund set up during his first 2003-10 administration and has made a firm commitment to zero deforestation by 2030.
To help stick to that pledge, strategists at NatWest have proposed what would be the world's biggest ever 'sustainability-linked bond' - a special type of government debt that would have an explicit promise to protect the rainforest.
"It would be a big way for Lula to signal his intent," NatWest's head of emerging markets and ESG macro strategy, Alvaro Vivanco told Reuters. "The scale and importance of the Amazon, everyone can relate to it".
A $10 billion bond would be a record for the nascent sustainability-linked debt markets, one of the biggest emerging market sovereign bonds ever sold and four times bigger than any of Brazil's current bonds.
Money raised via sustainability-linked debt can be used for almost any purpose. So Lula would have a huge injection of resources, for his conservation plans and the other key parts of his political agenda.
BOND STRUCTURE
Importantly, Vivanco sees the bond having a structure used by Uruguay this year where the regular annual interest payments investors receive, known as coupons, would go down if the government beats its targets, but also up as a penalty for missing them.
It could be set as 100 basis points for every 1,000 km2 up or down from the target, up to a maximum of 200 bps in either directions.
For example, if the baseline was to reduce deforestation to 12,250 km2 but the actual loss was 13,250 km2, the government would be have to increase the bond's 2024 coupon payment by 100 bps.
As an incentive to do as much as possible though, the coupon payment would go down by 100 bps if the loss was 11,250 km2.
"As a reference, a 2034 Brazilian bond is currently yielding around 6.35%, making the step up/down feature potentially financially material for Brazil," Vivanco's initial outline of the plan last week said.
The bond could run to 2035 and the deforestation numbers could be verified using satellite images by a third party such as the United Nations.
The huge $10 billion scale shouldn't be a huge hurdle either, with all types of investors, from major pension and wealth funds to even global central banks likely to be keen to show they are trying to tackle climate change.
"If Lula goes around the world selling this bond, you would have to have a reason not to be part of it," Vivanco said. (Reuters)