Aim is to channel more external resources to finance investments for transition to a low-carbon economy

05/27/2024

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Nelson Barbosa — Foto: Leo Pinheiro/Valor

Brazil aims to leverage its rotating presidency of the G20 to channel more external resources into financing the necessary investments for transitioning to a low-carbon economy in emerging countries, including itself.

According to Brazil’s Ministry of Finance, $10 billion out of $30 billion available over the next five years is not reaching those who need it most. Development banks, whether multilateral like the World Bank, national, or subnational like the Brazilian Development Bank (BNDES), are crucial in addressing this issue.

This topic links two of Brazil’s priorities for its G20 presidency: sustainable development and the reform of multilateral governance institutions, said Ivan Oliveira, undersecretary of sustainable finance at the Ministry of Finance.

The ministry has identified four main funds: the Green Climate Fund (GCF) from 2010, the Climate Investment Funds (CIF) from 2008, the Adaptation Fund from 2010, and the Global Environment Facility (GEF) from 1994.

According to Mr. Oliveira, these four funds alone have $30 billion available over the next five years. Typically, these funds are formed from government contributions and, to a lesser extent, from companies. The goal is to pool resources from developed countries to finance the necessary investments in emerging nations, particularly the poorest.

The most vulnerable nations cannot afford the investments needed, which range from building renewable electricity generation plants to transitioning truck and bus fleets, to constructing infrastructure that makes cities more resilient to climate events like floods.

Although the amounts involved fall short of the $100 billion per year estimated as necessary at the signing of the Paris Agreement during the 2015 UN Climate Change Conference, the Ministry of Finance highlights an additional problem: the difficulty in accessing these funds. Therefore, not only are the funds insufficient, but they also fail to reach their intended targets.

Mr. Oliveira suggests that discussions within the G20 could lead to recommendations for creating “country platforms,” leaving a detailed roadmap on the reform of multilateral development banks. According to Mr. Oliveira, “this roadmap is Brazil’s major contribution,” and the aim is to complete it by the end of the year, at least in terms of the governance reform of multilateral banks.

“One of the points that will be addressed is how multilateral banks need to connect more effectively with national and subnational development banks, particularly through what we call ‘country platforms,’ or vehicles created to enable international investors and other stakeholders, such as the multilateral banks themselves, to connect projects in countries and finance them,” Mr. Oliveira said.

In Brazil, BNDES often receives resources from multilateral banks. Under the leadership of Aloizio Mercadante, who took over last year with the return of the Workers’ Party to the federal government, this type of funding has advanced. In 2023, the development bank secured $3.2 billion from multilateral institutions abroad and expects another $4.6 billion between this year and 2025, Mr. Mercadante estimated earlier this month while presenting the bank’s first-quarter financial results.

In other areas, the BNDES operates the Amazon Fund, the world’s main REDD+ instrument focused on financing the reduction of deforestation, and has used the Climate Fund since last year as an alternative to expanding its funding. The National Treasury boosted the fund with $2 billion raised in November through the first issuance of green bonds in the external debt market.

“The Climate Fund has scaled up. It used to disburse R$300 million to R$400 million and now will disburse around R$10 billion per year. This will fund various initiatives: from urban transportation to the recovery of degraded areas, from the ecological transition of efficient machines to biogas production, and renewable energy sources to biofuels. This also creates opportunities for industrial policy but with a strong environmental focus,” said Nelson Barbosa, director of planning and project structuring at the BNDES, adding that the bank has already received over R$30 billion in project requests.

According to Mr. Barbosa, one of the obstacles to be overcome in the interaction between external funds and multilateral banks, on one side, and development institutions that can act as “country platforms,” on the other, is exchange rate variation, in addition to the availability of resources (funding) and guarantees.

“Brazil is now implementing a mechanism where the Treasury will reduce the cost of currency hedges for some selected projects. Globally, and I think the 2008 crisis proved this, there isn’t much of a liquidity or funding problem. The resources exist. The problem is the currency mismatch,” Mr. Barbosa said.

The Treasury mechanism Mr. Barbosa referred to is Eco Invest Brasil, launched by the Ministry of Finance in February. The program, in partnership with the Inter-American Development Bank (IDB) and the World Bank, aims to encourage foreign capital inflows into the country for energy transition investments, offering currency hedging mechanisms at lower costs than market rates.

“There is a discussion that the IMF and the World Bank, more than providing liquidity or funding, should create a global hedge mechanism. It’s like creating a currency hedge fund for selected projects, where the interested party can obtain funding and hedge more cheaply through the IMF than in the market,” added Mr. Barbosa.

Rémy Rioux, president of the French Development Agency (AFD), believes that Eco Invest Brazil could serve as an example for other countries. He was in Rio this week for a meeting, hosted by the BNDES, of the Finance in Common (FiCS) network, of which he is the chairman.

“We launched the FiCS Financial Innovation Lab in Rio, with the support of the IDB and the Climate Policy Initiative (CPI), which is ready to receive new ideas and help develop and disseminate them,” Mr. Rioux said in a written interview.

“Based on the Brazilian example, public development banks could be asked to develop tailor-made financial arrangements to unlock green and resilient investments, addressing the main existing financial constraints identified at the national level, such as exchange rate instability, cost of capital, lack of international financing, rating limits, etc.”

*Por Vinicius Neder, O Globo — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/