Brazil, IDB, to Create FX Hedging Tool for Green Investing
Posted by Colin Lambert. Last updated: December 4, 2023
Brazil’s Ministry of Finance and the Inter-American Development Bank (IDB) have initiated the creation of a financial solutions platform aimed at reducing foreign exchange risk for investments aligned with socio-environmental principles and climate change adaptation and mitigation.
These tools are aimed at attracting green investments to Brazil’s Green Transformation Plan, initially, the platform has the potential to mobilise coverage of up to $3.4 billion, a figure that may increase over time.
Speaking at the launch of the initiative at the United Nations Conference on Climate Change (COP28), Brazil Finance Minister Fernando Haddad, said, “This instrument aims to minimise the impacts of unexpected movements in the exchange rate, triggered by extreme economic events, which could have a negative influence on the decision to invest in countries like Brazil. Soon, together with the IDB, the Brazilian government will present to the market the solution that should be available in 2024 for new investments in the ecological transformation agenda.”
One of the pillars of the Green Transformation Plan is the mobilisation of foreign direct investment, mainly long-term. More specifically, one of the historical obstacles in emerging and developing economies has been the exchange risk associated with international investments and financial flows.
Once completed, the platform will have three dimensions: full swaps, credit lines for foreign currency investments liquidity in case of exchange rate devaluation events, and “tail risk” hedging mechanisms for extreme devaluations. The platform will be available for investments in environmental adaptation and mitigation projects, such as reforestation, storm-resilient infrastructure in cities, energy transition, green hydrogen, or low-carbon agriculture.
“Brazil is committed to leading this agenda, providing instruments that enable attractive returns for investors, thus promoting a virtuous cycle of sustainable investment and environmentally responsible development,” Haddad says.
IDB president Ilan Goldfain, adds, “At the IDB, we are supporting governments in the region in their efforts to attract investments with a positive and transformative environmental impact. To address the problem on the scale needed, financial innovations and private sector participation will be critical.”