On June 5, 2020, the Federal Government issued Decree No. 10.387, which extended certain tax benefits to sustainable debt securities, the so-called “green bonds” and “social bonds”, putting these bonds on a par with infrastructure or incentive debentures.
Green bonds are bonds generally bearing a fixed interest rate, intended for the implementation, expansion or refinancing of projects or assets that have a positive impact from an environmental point of view, while social bonds are bonds of the same kind that provide positive impacts to society.
Decree No. 10.387/20 promotes the financing of infrastructure projects with environmental and social benefits in the areas of transport, sanitation, and energy, including such projects among those that can be classified as priority for the issuance of incentive debentures and thus, be entitled to the same tax benefits, namely: (i) exemption from income tax on income paid to individual investors or non-resident investors; and (ii) tax rate for legal entities resident in the country.
This should boost primary and secondary markets for these bonds in Brazil, attracting investors, both domestic and foreign, and providing funds at a lower cost to issuers. It is also of great interest for medium-sized companies because it encompasses smaller projects, which are not necessarily developed by concessionaires, permission holders or authorized companies for public services.
According to Decree No. 10.387/20, projects that provide relevant environmental or social benefits are, for instance: (i) in the energy sector, projects based on: (a) renewable technologies for generating solar, wind and waste energy; (ii) in the urban mobility sector, several non-motorized public transport and low-carbon public transport systems; (iii) in the basic sanitation sector, the systems of: (a) water supply; (b) sewage; (c) rainwater management and urban drainage; and (d) solid urban waste management; and (iv) projects in subnormal agglomerations (communities) related to logistics and transportation, urban mobility, energy, telecommunications, broadcasting, basic sanitation and irrigation.
In 2019, green bond issuances reached a record of US$ 255 billion worldwide. The estimate for 2020 is of US$ 350 billion and for 2025, US$ 1 trillion. Although, this market is quite new to Brazil, there is reportedly a huge restrained demand for Brazilian projects in the international market, where there are already dedicated funds and specific green investment policies. These investors are looking for projects with a sustainability stamp, which opens a trillion-dollar door to Brazilian companies.
At the latest UN Climate Conference, COP-25, more than 600 institutional investors, who control a total of US$ 37 trillion in assets, signed a commitment to the goals of the Paris Agreement for transition to a low carbon economy.
The increasing figures of this market demonstrate a growing concern of investors with environment preservation and reveal the potential for the raising of private funds for social projects, in order to complement public investment. Issuers gain a reputation with the market showing that they have an environmental strategy and a social concern, while diversifying their investor base and reducing their funding costs.
Andreas Robert Beyersdorf is associate at Pacheco Neto Sanden Teisseire Advogados.
