Green and sustainable bonds have spread in Latin America as developing nations seek to raise capital to ramp up their climate transitions and bolster long term sustainability.
A greater choice of green, social and sustainability-linked bonds appearing show that the market is expanding quickly. The use of sovereign bonds, including those issued in local currency — still small compared with the US and Europe ̶ is also growing, explained Edward Kempson, counsel at Latham & Watkins.
“Relatively, the market is still much smaller than Europe or North America, but there has been significant growth across 2020 and into 2021,” he said. “It is certainly a region that needs a significant injection of sustainable finance to help with the transition. There's a fair level of reliance on high carbon emitting industries and extractive sectors that do need to facilitate their transition trajectories and sustainability profiles.”
Latin American markets for green bonds are now over $30 billion, from $13.2 billion in 2019, figures show.
“The market has seen explosive growth in the last two years in particular,” said Kempson, Latham’sglobal sustainable finance practice coordinator. “We've seen that across a range of different products:green bonds, loans, and sustainability-linked products.”
COP26-lications
Bonds for scaling energy and sustainable infrastructure are likely to further accelerate after the COP26 climate summit.
“Further focus at the regulatory, supranational and at the corporate and financial institution level is going to help to further mobilise the market,” said Kempson. “Expect markets to continue to grow, both in Latin America and globally. This is one of, if not the most, important trends around ESG.”
Simone Utermarck, sustainable finance director at the International Capital Market Association, expects the conference to give further impetus to the surging sustainable bonds market.
“Some of the announcements that have already been made during COP, especially on finance day, will directly or indirectly impact the green and sustainable bonds market, which has proved very well suited to raising the investment needed to achieve the goals of the Paris Agreement,” she said. “Sustainability-linked bonds especially have emerged as an ideal instrument to finance the transition required to getting there.”
Christopher Flensborg, head of climate and sustainable finance at Swedish Investment bank SEB, said the Latin American climate finance market could be re-energised after COP26.
Innovation nations: Colombia and Mexico
Two countries that exemplify the increase in sustainable issuance in recent times are Colombia and Mexico, where recent domestic green bond issuance signals a maturing market.
Sovereign bonds issued in local currency indicate that investors are hungry for debt beyond dollars or euros, explained Leisa de Souza, head of Latin America at the Climate Bonds Initiative.
“This is a developing trend and a very positive sign of what is happening in the market,” said de Souza.
Bryan Carter, head of emerging markets debt at HSBC, agreed that Latin American sustainable funds would continue to grow and said his bank’s emerging market debt fund held sovereign green bonds from Chile and Colombia.
Sovereign bonds in local currency are not a novelty or “one hit wonder,” he explained, they are here to stay.
“This is now something that we can think about as being a fixture of the asset class,” Carter said. “If that sets a standard for other countries, then we can start to think about green bonds being a staple of the asset class and a dedicated part of the benchmark.”
Developing a robust taxonomy classification system for the investments gave investors greater comfort and had led to increased investment, de Souza added.
“This shows the appetite for other currencies and is a positive sign for market maturity in what investors are looking for,” said de Souza. “Previously, if you didn't have hard currency it would be harder for [investors] to come in and invest.”
Colombia's sovereign green bond was issued after the government’s work to create a green taxonomyfor the country's decarbonisation investments, with the CBI’s assistance. Colombia has recognised that these investments are critical to tackling climate risks, explained Carolina Barreto, CBI’s programme manager for Latin America.
“The regulator is very interested and active in signalling that financing a low carbon economy is important, not for branding or for reputational purposes, but to correctly manage the financial risks arising from climate change,” she said.
Mexican offerings have also expanded. The first unsecured sustainable bond from a Mexican real investment trust was issued last month. In Mexico, companies rather than the government have driven innovations, said Rogelio Gonzalez, director at Fitch Ratings.
Innovative issues can drive investment by creating a virtuous circle, he said.
“Besides companies being more proactive in achieving ESG goals in their operations, portfolio managers need to invest in green or sustainability bonds,” said Gonzalez. “That is going to continue and we’ll probably see more issuance in the near future.”
Matured markets
Latin American labelled bond issuance increased during the Covid-19 pandemic when markets were affected by economic shutdowns.
Issues across developing markets in general increased throughout the pandemic, amidst investors’ deep appetite for sustainable investments. The Latin American markets matured during the pandemic to target the region’s economic recovery, said Nneka Chike-Obi, director for ESG research and sustainable finance at Fitch Ratings.
Sustainability-linked bonds represented 81% of all the green, social, sustainability and sustainability-linked bonds issued by July 2021, Fitch figures show. This indicates a lasting trend, not a market blip, Chike-Obi said, as they had proved more suitable for some sectors that needed to transition.
“Quite quickly from the middle to the end of 2020 there were a lot more sustainable bond issues, including pure green bonds that had nothing to do with Covid-19 at all,” Chike-Obi explained.
Latin American markets have seen further growth in the last two years in social and sustainabilitybonds ̶ which have a mix of green and social purposes — raising finance for affordable housing, basic infrastructure, employment generation and socioeconomic advancement, Utermarck added.
