Eco Invest Brasil program and Sustainable Investments

Overview

On October 10, 2024, Brazil enacted Law n. 14.995, which, among other things, establishes the Private Foreign Capital Mobilization and Currency Protection Program - Eco Invest Brasil Program (the “Program”), a groundbreaking initiative that seeks to attract private foreign investments and allocate resources for long-term and sustainable projects in Brazil dedicated to the country’s ecological transformation.

The Program aims to promote a green economy, with a total investment of BRL27 billion (approximately US$5.2 billion) to support sustainable projects.^[i] The initiative was initially announced in February, 2024 by the Brazilian government, the Inter-American Development Bank (IDB) and the World Bank.^[ii] Certain key aspects of the Program are outlined below.

International Cooperation

The Brazilian federal government has partnered with the World Bank and IDB as part of the country's commitment to the global climate agenda. The Program intends to strengthen climate finance and create a favorable environment for sustainable investments in Brazil. The World Bank will focus on climate finance, allocating up to US$1 billion to the Climate Fund (Fundo Nacional sobre Mudança do Clima),^[iii] initially targeting forests, green and resilient cities and solid waste management. IDB aims to provide unique financial solutions aimed at reducing foreign exchange risk for investments aligned with socio-environmental principles and climate change adaptation and mitigation.

Exchange Rate Protection

Historically, exchange risk associated with international investments and financial flows has been one of the obstacles for foreign direct investment in Brazil and other emerging and developing economies. Therefore, a key aspect of the Program is providing exchange rate protection solutions to reduce these risks and mitigate the disruption of foreign investments in ecological transition projects arising from exchange rate volatility.

The Brazilian Central Bank (BCB) will intermediate foreign exchange protection through an agreement with IDB involving the purchase of derivatives on the foreign market and passing them on to local financial institutions.

Opportunities for Brazil

Brazil has a competitive advantage in the transition to a low-carbon economy, with 80% of its energy matrix already coming from renewable sources. The Program is seen as a strategic move to position Brazil as a leader in sustainable development and further attract foreign investment to support the country's ecological transformation. The initiative is expected to create new investment opportunities in the green economy sector, particularly in renewable energy, sustainable agriculture, and carbon offset projects.

Public-Private Cooperation

The Brazilian government acknowledges that public investment alone will not be sufficient for true ecological transformation. As such, the Program aims to integrate public and private sector efforts, attracting private capital in addition to public investment in order to drive the sustainable development agenda forward more effectively.

Credit Sublines

The Program will capture four different types of credit sublines, as further detailed:

1. Blended Finance subline (financiamento parcial)

The blended finance subline will apply in the context of catalytic capital use to attract private capital investment. Competitive-cost credit lines will be provided to complement the funding of projects for investors who carry out debt raising via foreign capital market or loans with foreign financial institutions, necessarily aimed at financing projects in key sectors of the ecological transformation. Such foreign debt-raising operations must be associated with foreign exchange hedge mechanisms to avoid excessive exposure to foreign exchange risk by investors.

From a practical standpoint, Brazilian financial institutions can benefit from the Program’s blended finance and pass it on to the investors alongside the financial institutions’ foreign capital market operations. The ratio for such benefit will be defined per bid to be held by the Brazilian federal government for each subline, which is intended select such financial institutions that require the lowest catalytic capital to be deployed alongside its foreign debt raising operations (and associated foreign exchange hedge). The blended finance will need to be applied towards greenfield projects within the Program’s eligible sectors (technological development, bioeconomy, energy transition, circular economy, green infrastructure, and climate change).

The first bidding process has been launched as of July 11, 2024,^[iv] and bidders’ proposals submitted by October 11, 2024.^[v] Among other criteria, this bidding process requires: (i) minimum bid proposals of BRL100 million (around US$17.9 million) per bidder per leverage ratio level; (ii) minimum financial leverage ratio of 6:1, calculated on the ratio between the nominal amount of foreign capital and the nominal amount requested from the blended finance subline; and (iii) implementation of foreign currency hedging transactions to minimize the exchange rate risk of at least 60% of the foreign currency funding, or confirmation that such protection is not necessary due to natural hedge.

The selection criteria for this first bidding process will be allocated based on the stated leverage ratio, the impact index (quantitative ratio between foreign capital obtained and present amount of implicit subsidy of the public catalytic capital line allocated for eligible activities), and further priority criteria in case of ties between proposals.

The blended finance subline will allow the final borrower to obtain funding at lower costs and with lower currency risk exposure, as financing will partially occur in BRL.

2. Liquidity subline

The liquidity subline is intended to provide financial support to companies with foreign currency debts and revenues in BRL, offering financing for projects with inflation-indexed revenues that experience temporary cash flow shortages due to currency volatility. This subline can be used if the currency devaluation exceeds a predefined trigger, the company cannot provide evidence that its cash flow cannot meet project's debts and the project is considered potentially solvent. It provides a mechanism to companies that may wish to consolidate investments in Brazil but suffer significant BRL devaluation.

3. Currency derivatives or other financial assets subline

This subline is intended to lower costs on currency protection mechanisms in Brazil (i.e., currency hedging products) in order to minimize, whether partially or fully, investors’ currency risk. 

4. Project structuring subline

This subline is intended to finance projects and studies in Brazil in connection with R&D activities, projects related to the export of services and goods and supporting the development of “green economy” infrastructure.

We shall continue to monitor upcoming developments and considering its potential opportunities for business or investment strategy to keep you informed and to provide any further information on this initiative.