Some countries in Latin America are emerging as innovators in the development of green, social, sustainability and sustainability-linked bonds (GSSSBs).
Chile issued the first sovereign green bond in the region in 2019 and the first sovereign sustainability-linked bond in the world in 2022. In 2020, Ecuador issued the first sovereign social bond in the world. Chile is the only sovereign that has issued all four types of GSSSBs, according to Bank of America.
These instruments are an increasing feature of the region, accounting for 28% of 2022 total bond issuance. By contrast, the share of GSSSBs in global bond markets is currently at 14%, according to S&P Global Ratings.
So far this year, Chile has led the way with 35% of total issuances, followed by Mexico at 30% and Peru with 15%, estimates the UN Economic Commission for Latin America and the Caribbean.
Sustainability more relevant
One of the most important changes has been the approach to climate finance, said panellists at the Pioneering Latin America’s Sustainable Finance conference (pictured) on September 22, organised by think tank Canning House.
“Bringing the financial sector to the climate conversation to the sustainability conversation was a no-no. If you wanted to talk about climate change, the person to go to was the environmental ministry. Definitely there has been more engagement [of the financial sector], particularly in the past seven years,” said Sandra Guzman Luna, general director of the Climate Finance Group for Latin America and the Caribbean.
At least 13 banks in the region are setting interim emission reduction and decarbonisation plans for their lending and investments before the end of the year, says S&P Global Ratings.
The Task Force on Climate-related Financial Disclosures created by the Financial Stability Board was unknown until six years ago, added Elena Morettini, global head of sustainable business at Globant, a technology solutions company.
There are more technological instruments to rely on these days, she added. “Monitoring and controlling green assets through any type of technology, including blockchain, is one of the tendencies,” she said.
“Drones have done a tremendous job in assessing the quality of green assets with real-time data and platforms that can actually gather all those data and have it in a final output, whichever framework of reporting we want to use.”
The importance of appropriate screening
While everybody involved wished for an increase in GSSSB issuance, there is a greater focus on how to make sure the proceeds are used to make a real sustainable impact.
Sustainability-linked bonds impose financial penalties if targets are missed, but there are still doubts with regards to the effectiveness of the penalties. Tighter impact reporting and enhanced disclosure practices and appropriate screening are key, the conference heard.
Silvina Bruggia, director of sustainable finance, emerging markets at LSEG Data & Analytics, said: “There is still a lot of work to do in terms of data transparency, disclosure, adoption of global standards and the lack of international rating.”
Greater regulatory harmonisation would also enable better comparisons between national regulations to help investors make informed decisions. There has been some progress in this area, with a Common Framework of Sustainable Finance Taxonomies for Latin America and the Caribbean launched by a number of international organisations and UN agencies on July 10.
With frameworks providing guiding principles, national governments need to formulate their own financial taxonomies.
In 2022, Colombia was the first country regionally to release a green taxonomy. In the next few years, Mexico, Chile and Peru are also expected to launch local taxonomies, says Scotiabank. Chile and Brazil have implemented environmental, social and governance (ESG)-related disclosure requirements, which took effect in December 2022 and January 2023 respectively.
While it is laudable for companies and sovereigns to come up with clear green objectives to achieve, ambitious goal-setting should also be coupled with guidance around transition plans, the conference heard.
Jane Goodland, group head of sustainability at the London Stock Exchange Group, said: “Transition plans are really important because they require companies to have a much more granular view about how they’re going to achieve these targets.”
What comes next
Finally, much effort has been directed towards the environmental side of ESG, neglecting other aspects of the ESG equation. “In Latin America, the participation of local and indigenous communities is such an important part. When we talk about the understanding about wellbeing at the national level, companies are still not talking with indigenous communities,” said Ms Guzman Luna.
Across the region, many communities have long resisted the expansion of mining, which is necessary to supply the minerals needed for the current green sustainability agenda.
Aside from impact concerns, the region should also focus on building stronger local financial markets, the conference heard. “Today we are talking more about the connection between Latin America and the global markets. The depth of the local markets is also a challenge, which ends up delaying the growth of the sustainability data in general,” explained Ms Bruggia.
Meanwhile, issuers are working to take advantage of the increased demands for sustainable assets. GSSSB issuance in the region is predicted to return to growth this year, after a weak 2022.
