International Finance
Banking and Finance Magazine

Latam’s green bond market is flourishing

The region's green bond market offers a massive pipeline for investments in a potential trillion dollar infrastructure

Latin America’s first green bond was issued in late 2014—and since then 11 countries have issued these bonds with Brazil. It is observed that Brazil is currently leading the market with the highest number of issuances. In terms of volume, Chile is on the top of Latin America’s green bond market.

According to a report published by Climate Bonds Initiative, issuers in the region have contributed 2 percent of global green bond issuance volume last July. The report found that Brazil accounts for 48 percent of total Latin American green bond issuers—with Chile and Mexico at 16 percent and 13 percent respectively.

Even though other economies such as Europe dominate the green bond market, Latin America is relatively new with massive potential for growth. The year 2017 proved to be remarkable for Latin America’s green bond market, with issuance of around $4 billion in the region. However, the market slumped significantly in 2018, contrary to the global market record. It is noteworthy that despite sluggish growth in 2018, Brazil ranked among the top 10 emerging markets in green bond issuance for a cumulative period between 2012 and 2018.

Sovereigns expected to see massive growth
The green bond market in Latin America is largely dominated by corporate issuance. The number of government-issued bonds or sovereigns has been relatively low in comparison to bonds issued by non-financial corporates. The corporates have been quite strong in the region but they vary in degrees between different countries.

In Brazil, for example, most of the markets are dominated by non-financial corporates. That said, Argentina is dominated by local governments while Costa Rica is by government-backed entities. So there are big differences with public-sector domination seen in some countries.

Thatyanne Gasparotto, analyst at Climate Bonds Initiative told International Finance, “We have been anticipating the arrival of sovereign issuance in the region. And when Chile came out, it sent a signal to a lot of other countries and they began exploring the possibility of issuing sovereigns. We have seen some countries already expressing it publicly, like Mexico showcasing its STG framework, just a couple of months ago. Also, Columbia is looking to do the same.”

Another analyst believes sovereigns will grow in Latin America as governments try to build green infrastructure and align with the climate goals. Miguel Almeida, analyst at Climate Bonds Initiative, told International Finance, “Other countries have already signaled potential sovereign green bonds such as Mexico, Peru, and Columbia. So we are not just expecting sovereigns to grow, but also, depending on the country, some local governments and developed banks issuing more.

Bruno Bastit, an analytical director at S&P Global, in an interview with International Finance, was asked whether sovereigns are set to grow in Latin America in the coming years. His quick response to the questions was “Yes we do.”

Bastit said “Chile has been leading the way so far, issuing the first euro-denominated sovereign green bond in the region, and we expect other countries to follow suit. Indeed, we’ve seen some positive developments coming from the governments of Colombia, Costa Rica, or Mexico. Several Latin American countries, including Chile, have announced their intention to achieve net-zero emissions by 2050, and green bonds would play a crucial role in achieving this objective.”

Energy, transport and land use space to issue green bonds
It is important to note that green bond issuance in Latin America is highly concentrated in terms of countries, issuers and sectors. A majority of the issuances have been directed toward finance projects in energy and transport sectors.

Almeida said the energy sector really dominates in Latin America. “This is because if you include Chile’s green sovereigns, which is mostly financed clean transports. Most of the funds were for Santiago’s metro infrastructure, so they are related to transport. However, if we remove the sovereign from the equation, energy really dominates,” he explained. “Also, we have quite a big deficit for building projects, when compared to the global market, in addition to waste and water infrastructure. Looking forward, there is a really big need to finance low carbon infrastructure in the region and that will involve more projects related to transport in other countries apart from Chile. And even then waste management and water infrastructure management has to be greener.”

Another powerful sector in the region is land use and is mostly related to forestry and paper. In fact, Brazil has a huge agricultural production.

Gasporotto explained that the big distinction between Latin America and the rest of the world when it comes to green finance is the land use space. She said “I would say that is the big difference when compared to Europe, say for example, which has a very large low carbon building stock. However, this doesn’t mean Latin America won’t get there. It’s just how the economies are structured and where the low hanging fruit is. I wouldn’t say it is on the low carbon building side at the moment, but rather in the land use space. We began to see that with the forestry issuances and now we are moving into bio-energy which has picked up pace.”

Effects of Covid-19 on green issuance in Latin America
An unprecedented event like the Covid-19 pandemic has pushed the global economy into a state of recession. The International Monetary Fund (IMF) claims that the impact of Covid-19 will be more severe than the 2008 financial crisis.

In this context, Almeida spoke from a data perspective on how the pandemic will affect the green bond market. “The level of issuances has decreased a lot since early March. What is happening is on the flip side other labels are increasing in usage, especially social bonds to finance projects related to healthcare. We don’t really expect it to be a substitution between the two, it is more about issuing bonds that can cover social-environmental aspects.

Especially when it comes from the public sector where they might have very different types of projects they can’t finance, issuing a sustainability or STG bonds, that pace is really what’s gonna pick up in the medium term.”

Thatyanne too agrees with Almeida. “I think we had a decrease in issuances overall, and this is not in particular to green. And what’s interesting to see is that the investor’s appetite has no gone away, the limited green issuances that have come out when we look at the global market has really been successful in light of the lack of products in the market and investors continue to signal that they do want to see green labelled bonds with transparency and clear use of proceeds,” she said, From Thatyanne’s standpoint, there are other challenges, such as domestic complexities, in countries like Brazil which have very specific regulations in issuing sovereigns.—and the capitalisation of plans will be complicated with the pandemic. “Let’s just say that Chile issuance was a benchmark and since then a lot of countries have started looking at it.”

The biggest complexity for Latin America has been around currency depreciation during the crisis. In many countries there was already a downward trend before the pandemic occurred and the situation has now worsened. The region mainly takes debt in US dollars with Brazil being an exception.

Currency depreciation has, in some ways, complicated the economy to continue accessing international capital markets more frequently. “I would say it’s a constraint on the capital market side effects Latin America more than other regions in the world and obviously green goes with that,” Thatyanne said. “But the silver lining is that investors really want green so what we are working here in the region is to promote green stimulus packages which could be an alternate source of financing for these economies in the near future in light of the crisis.”
Bastit, on the other hand, explained that the Covid-19 crisis has led to a slowdown in emissions. It appears that there have already been some notable issues in the first quarter of the year from corporates in Brazil and Uruguay in the pulp and paper and energy sectors. Besides corporates, possible sovereign issuances throughout the region may actively help to support that growth.

Trillion dollar infrastructure to be built in the coming decade
It is a known fact that green bonds in Latin America is a new market. In the region, Mexico and Brazil were the sole markets initially, but in the last year and a half other countries such as Columbia, Chile and Costa Rica, for example, have decided to test the market and are anticipated to see major issuance in the coming years.

“In Latin America, however, most of the infrastructure stocks are yet to be built. So there is an opportunity to actually derisk from a project finance point. In that regard, we have just a massive pipeline of investments in the trillions of dollars of infrastructure that needs to be built in Latin America over the next decade,” Thatyanne said. “So I would say that especially in the green finance space, where investors are looking at that type of assets and in Latin America we have an endless pipeline to offer. Now in terms of financial profile, the risk will be the same.”

In addition, Bastit said “One trend we have seen with green bonds investors is a higher level of scrutiny of issuers’ corporate practices to ensure some coherence between green bonds and the environmental profile of that entity.”

More Latin American countries to foray into green bonds
The current crisis is creating a lot of uncertainty which might impact the green bond market and the situation is being closely monitored. Nevertheless, the region’s outlook remains positive “as we see a growing interest from both investors and issuers, sovereign and corporate alike in green and sustainable debt instruments,” Bastit explained.

“I think there is a lot of room to grow for Latin America. I would probably say all the main countries in the region have either issued or developed initiatives around sustainable finance and with even a highlight for Central America and the Caribbean, with smaller countries, which could be a challenge to access international capital markets,” Thatyanne said. “Also, so much has been done with the regulation and stock exchange level with Panama, Costa Rica, for example. We think it’s all very new and the region is just starting to tap the potential. I think more countries are coming into the fold. So far, 11 countries have entered the market and a good two odd countries are yet to enter.

“Looking forward, I would say diversification of both issuers and asset categories. There is a lot of potential in the land use space as well. Energy is natural to keep growing because renewable energy is very big in the region and will continue to grow. I also think the market is highly concentrated in Latin America. In Brazil, we have a lot of non-financial corporates, financial corporates in Columbia, we have sovereigns in Chile. I think that concentration would begin to dissolve over the next few years as the market reaches out to other types of players.”

Miguel expects more Latin American countries to be added to the mix in the coming years. When it comes to the development of green finance, the same trends apply but to different degrees. It often happens that when one country starts doing things differently the trend is followed by the rest creating competitive pressures which together in the specific region will allow the market to develop in many ways.

“We have seen many countries issuing green bond guidelines and wider sustainability bond guidelines to develop the market in their respective countries. So the ecosystem infrastructure for more issuers to come in is also important. There are some organisations which are working, also stock exchanges, for example, CFE in Mexico or green finance council in Brazil allow more issuers to come into the market where there is more info available and support as green bond issuance has different requirements,” Miguel explained. “We expect to see infrastructure growth when it comes to transport and agriculture. There is also a potential for blue economy projects. These are related to the sustainable use of ocean resources such as fishing, marine renewable energy like offshore wind and tidal wave energy. And also in Latin America, there are a lot of oil-producing countries and many countries have very big coastlines.”

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