20 January 2021
Issuance of green, social and sustainable labelled debt in Latin America in 2020 has not kept pace with the extraordinary growth seen in other regions, particularly Europe.
Latin America issuance of green, social and sustainable (GSS) labelled bonds has not kept pace with the growth of the wider market with issuance falling from approximately USD9bn in 2019 to roughly USD7.6bn in 2020, with the majority of issuance in 2020 (around USD6bn) coming from sovereign issuers, namely; Mexico, Chile, Ecuador and Guatemala who all issued either green, social or sustainability labelled bonds this year.
The Federal Government of Mexico was a particular highlight this year issuing a EUR750mn, 7 year, sustainable-labelled bond (they called an 'SDG bond') in September 2020. This was the first from a Latin American sovereign at the time to issue in this format. At BBVA Global Markets Research, we expect that this will not be the last we see from Mexico in the ESG bond space, following the issue, the Mexican Finance Agency stated that the deal was the start of a sustainable curve, similar to the one planned by the German Finance Agency. The first deal, denominated in euro, attracted a large number of Europe-based investors. The government will likely follow up with a USD-denominated issue as well, to attract investors in North America.
The Republic of Chile also adjusted its green bond framework to include social categories, launching a sustainable bond framework in November 2020 and followed up with the issuance of their first social bond a few days later. This bond was also issued in Chilean Pesos, as opposed to the previous green bonds issued in Euros and US Dollars.
We expect that there will be at least one more sovereign issuer for Latin America in 2021, with the finance ministry of the Republic of Colombia announcing that they have received the approval from the Senate to issue the country's inaugural sovereign GSS-labelled bond.
New ESG bond formats to spur further issuance
Sustainability linked instruments will have a growing relevance in the emerging market spaces, as the barrier to entry for issuers when issuing these types of bonds is lower than for green bonds, without a material deterioration in the ESG credentials of the financing. Additionally, domestic investors are focussed largely on engaging corporates on issuer level concerns, such as ESG disclosures and improving governance, which could make KPI-linked bonds more of an accessible type of ESG financing than use of proceeds bonds.
The International Capital Markets Association (ICMA) has released its guidance on sustainability-linked bonds. This guidance is designed to provide governing practices and standards for issuers, structurers and investors of this relatively new type of instrument. Having been the night-watchmen for green and social bonds, with previously issued principles for these instruments, we expect this will provide a boost to the issuance of sustainability-linked bonds in the short/medium term.
The development of ICMAs Climate Transition Finance Handbook is also likely to result in a pickup in transition bond issuance, i.e. issuance from sectors that are not considered 'pure-green'. These types of bonds require issuers to provide more context of how the finance is intended to be used as part of a wider corporate strategy, in order to avoid fears of 'greenwashing'. Once again, this will prove supportive for emerging market issuers from those sectors that have thus far struggled to come to the green bond market, despite the increased disclosure requirements, as they will be able to access a growing pool of ESG investors both domestically and abroad.
Regulators making steps in the right direction
Across Latin America, domestic regulators continue to make progress on providing financial market participants with guidance and rules on ESG investing. Colombia's regulators are developing their own classification of green activities (taxonomy), whilst Chile and Mexico are also said to be doing the same, using the framework of the EU's taxonomy as a basis for developing their own classifications.
There are a number of central banks that are also members of the Network for Greening the Financial System (NGFS), which promotes the central banks role in greening the financial system. Hence, it may be possible that some of the initiatives that are taking place in central banks in the developed markets (i.e. climate stress testing, increasing ESG related banking regulation) could be introduced in the emerging markets.
As mentioned above, domestic Latin American investors are focused more on improving corporate level ESG credentials, ensuring standardised disclosures and improving corporate governance, and have limited interest in the use of bonds proceeds. However, as corporate issuers begin to develop decarbonisation strategies and start to finance these strategies, this will catalyse both further issuance from issuers, and then more interest from investors as the relevance of these financing instruments increases.
Foreign investors continue to seek both sectoral and geographical diversification. Higher-yielding green emerging market debt provides this diversification and many investors are actively seeking more issuance from non-developed market, local currency issuers to find greater yield.