Connecting and developing markets

The Inter-American Development Bank (IDB) is the largest source of development financing for Latin America and the Caribbean. The Connectivity, Markets and Finance (CMF) Division works with the public sector financial institutions to design funding solutions that mobilise private investments and ensure inclusive and sustainable development

According to Juan Antonio Ketterer, division chief of the IDB's CMF Division, the most important activity in the coming decade will be to unlock and scale-up sustainable finance. Two specialists within the division outline the key lending and technical assistance initiatives that the IDB has been working on in the past decade

Environmental Finance: How is the IDB supporting the development of sustainable bond markets in Latin America and the Caribbean and what opportunities do you see in the region?

Maria NettoMaría Netto, principal specialist of the Connectivity, Markets and Finance Division at the IDB: When we started working on green bonds five to six years ago, we mostly focused on public banks because they are our traditional clients and were used to international bond issuances. However, as time has passed, we have seen the increasing sophistication of issuances and a diversification away from the low-hanging-fruit, such as green bonds focused on renewables, for example.

We now work with a variety of sectors and a wide range of public and private institutions. For example, we recently provided technical assistance to Mexico's Trust Funds for Rural Development (Fideicomisos Instituidos en Relación con la Agricultura, or FIRA) to issue the first internationally certified agricultural green bond in October 2018. The IDB supported the development of a methodology to assess the environmental impacts of protected cultivation in Mexico. We are also working with Eletrobras in Brazil to develop its first green bond framework and we are working with water utilities in Chile and Colombia.

There are also numerous opportunities to help build climate resilience, through the issuance of blue bonds for the Caribbean or the protection of bioeconomy and biodiversity throughout Latin America. With the Covid-19 crisis, we have also seen fixed-income investors become more focused on good governance and social benefits.Juan Antonio Ketterer

Overall, we see a lot of potential for those issuers who have not yet taken advantage of the thematic bond market.

We are also looking at ways in which the IDB can be a neutral broker in the market to promote more transparency, best practice and education on several issues. We have been working at the national level in several countries to develop public and private dialogues and work with regulators to develop good taxonomies and transparent practices in the market. For example, we are working with the Brazilian financial innovation laboratory (see box).

The other way we support the market is to provide public-private instruments whereby IDB can provide a credit enhancement. We have seen increasing opportunities for blended instruments that can help investors access these products and increase the credibility of them.

We started with a view on sustainable development, but now we are looking for ways to diversify the pool of investors, offer new financial instruments and engage with governments and regulators.

Brazilian Financial Innovation Laboratory

Over the past three years, the IDB, in partnership with the Brazilian Securities and Exchanges Commission (CVM), the Brazilian Development Finance Institutions Association (ABDE), and the German Development Agency (GIZ) have been implementing the Financial Innovation Laboratory (The Lab), a forum for intersectoral interaction of over 600 specialists, representing about 190 institutions, from the entire Brazilian financial and capital markets.

It is dedicated to thinking, designing and implementing innovative models to promote sustainable finance in Brazil, in line with the United Nations Sustainable Development Goals (SDGs) as well as carbon pricing in line with the Paris Agreement.

Operating through four key thematic groups, including on Green Finance, Social Investment Impacts, ESG transparency and Fintech, the Brazilian "Lab" achieved a great number of innovation boosting local sustainable financial markets, developing financial solutions and instruments and regulations, spurring the green and sustainable bond markets, social investments alternative funding through crowdfunding and venture philanthropy, promoting adoption of taxonomies and transparency by financial players to integrate ESG factors and climatic risks in their business.

More information: www.labinnovacionfinanciera.com

EF: Can you tell me more about your Green Bond Transparency Platform and how that is attempting to bring increased transparency to the market?

Alexander VasaAlexander Vasa, senior specialist of the Connectivity, Markets and Finance Division at the IDB: The Green Bond Transparency Platform is an online, free-of-charge, public good (see box). It provides the following information on green bond players in the Latin America and the Caribbean market:

Which green bonds have been issued and by whom?

Which bonds have received which certifications and external reviews pre- and post-issuance and by whom?

What are the environmental impacts of the projects financed by each bond?

The platform provides a way to aggregate this data for analysis and enhanced decision making according to project categories and key performance indicators, by currency and external verification status.

The platform gives issuers a simple way to upload granular and disaggregated data via standardised excel sheets on projects, project categories, allocations, disbursements, and key performance indicators that issuers have committed to report on in their framework or other commitments, such as for KPI-linked bonds. Therefore, issuers can reduce the time it takes to respond to inquiries.

It also provides investors with a way to compare the environmental performance of each bond and to answer questions like, what is the green impact of my portfolio? What are the emission reductions that my bond investment achieved? What data has been reviewed externally and what are the conclusions of these reviews? Which methodologies have been used to calculate the impacts?

To achieve this, the platform allows external reviewers to link their review results to a bond issuance – a tag appears on the respective bond issuance that has received the external review. We want it to be easy to aggregate this data and for investors to analyse their portfolio impacts.

We also want our platform to become a benchmark for the market. We believe that if it can work in the Latin America and Caribbean region, it can be scaled globally.

EF: Can you outline some of the market challenges that the platform is looking to address?

AV: Some of the main challenges in current green bond reporting are consistency, accuracy and depth, and different methodologies being used for impact calculations, which make aggregation difficult.

The platform aims to illustrate the current state of the market. We hope that the availability of data will spark a discussion with partners about which data is material for investment decisions and how to achieve meaningful data harmonisation over time.

Since we announced the initiative at the COP 25 in December 2019, we have also been working with other data platform innovators such as NASDAQ and Luxembourg Stock Exchange, as well as in impact reporting technical working groups, to harmonise nomenclatures with a view to facilitate cross-platform data interoperability. We plan to continue to engage in technical dialogues and are running a webinar series on the data trends captured in the platform by key market actors.

The Green Bond Transparency Platform

This platform is an initiative developed by the Inter-American Development Bank with the objective of supporting the harmonisation and standardisation efforts on Latin America and the Caribbean green bond reporting. Its goal is to contribute to transparency and comparability, helping attract new investors to the region and providing a greater level of confidence to existing investors. The platform uses Blockchain (DLT) technology and by accessing the platform, issuers, investors and other market actors can upload and research information on transaction details, bond performance, use of proceeds, and environmental impacts of the region's green bond issues.

More information http://greenbondtransparency.com

EF: The social bond you did with Ecuador was the world's first sovereign social bond. Can you tell me a bit more about this and the other innovations occurring in region?

MN: Ecuador partnered with IDB to issue a first of its kind social bond with the aim of diversifying its financing sources for addressing the country's increasing housing deficit which affects almost half of households in Ecuador. The proceedings from the issuance, around $1.35 billion will be offered to benefit 24,000 middle- and low-income households. IDB backed the issuance with a partial credit guarantee to attract international investors and reduce the cost of financing.

We also assisted Chile with its first sustainable sovereign bond by supporting the Chilean Ministry of Finance to prepare the framework document and second party opinion. The framework was evaluated by Vigeo Eiris, who confirmed its alignment with the standards of the International Association of Capital Markets (ICMA).

The €1.6 billion ($2.1 billion) sovereign bonds were the first time that a government in our region has issued a green and social bond in local currency. The government announced an over-demand of 3.1 times and a record adjudication of 48% to foreign investors.

We also recently supported Peru with the issuance of a small social Covid-19 bond. We think there are several opportunities to link social issues to sustainability bonds going forward. For example, we structured and subscribed a one of its kind gender-focused social bond issued by a development bank with FIRA in Mexico.

The deal, worth U$S100 million, will finance the growth of women-led small- and medium enterprises portfolio (WSMEs), as well as the purchase of social interest houses by women in Colombia. The financing will contribute to the development of capital markets and thematic bonds in Colombia and the region. We are seeing an increasing interest in the region to start promoting such types of bonds, especially as part of their green recovery efforts.

EF: What other market or regulatory developments do you hope or expect to see for the region?

MN: One priority is to increase transparency of information and develop taxonomies on what is green. We have been doing this in Chile.

Another priority is to promote the good functioning of the markets themselves and help issuers with adopting transparent ways to present relevant information. For example, in the case of Brazil, through Brazilian Financial Innovation Laboratory we supported the process being led by the securities commission (CVM) to call for a new transparency policy for investors and issuers. These can help the stock markets and investment funds to use better information and share it in a transparent way. We also worked with the Brazilian government to promote capital market investment for green infrastructure, through the Financial Innovation Lab.

We are also working to help our clients understand the growing importance of environmental, social and governance (ESG) ratings as we have experienced a few occasions where issuers were not fully aware of the importance of real and accurate ESG ratings.

We have had to convince the clients that it is beneficial to be attentive to these reviews and ensure that the information available to ESG rating agencies is thorough and up to date. You can have great KPIs or a great project, but if someone out there did an unsolicited rating of your entity – using generic, publicly available information – then it can be incorrect and quite damaging.

We are now supporting our clients to ensure the ESG ratings are up to date before they issue a bond. We also welcome harmonisation efforts on the ESG front.

For more information about CMF Division's Green Activities and Initiatives visit the Green Finance LAC Platform: www.greenfinancelac.org/our-initiatives

IDB Green Bond Technical Assistance Programme

The program was the first of its kind when it started in 2016. Technical assistance is available for commercial financial institutions and National Development Banks (NDBs) to support their efforts to raise private funds at adequate maturities and terms, in both local and international capital markets, through the issuance of green or sustainability bonds. Those issuances have attracted national and international institutional and impact investors and therefore diversify issuer's sources of funding, while promoting low-carbon investments or investments with high positive social impacts. We have supported Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, and Peru with technical assistance to structure green bond deals.

Contact: Flor Evelyn Amaro Andrade
Email: florama@iadb.org