Green bonds: Starting to take root in Latin American infrastructure

Few financial markets can match the recent growth of the green bonds sector. According to data from the Climate Bonds Initiative, the past five years has seen the market swell by well over 1000%: from $12 billion in 2012 to $161 billion in 2017. And Moody’s expects that figure to surge to $250 billion by the end of the year.

Latin America has been slow on the uptake – just seven green bond issuances in the years leading up to 2017. But the market began to take off last year and is expected to flourish in the coming years. “We expect issuance to continue growing in Latin America,” says Matt Kuchtyak, an analyst in Moody’s Green Bonds and Environmental, Social & Governance (ESG) Risks division. “Growing awareness from market participants, as well as new country-specific green bond standards, will help drive market growth.”

According to the Climate Bonds Initiative, there was around $4 billion of Latin American issuance (barring Mexico) in 2017, up from around $1.5 billion in 2016. That involved issuers from Brazil, Costa Rica, Colombia, Argentina, Chile and Peru. But Mexico recently upped the ante by issuing $6 billion of green bonds to finance the Mexico City Airport, which achieved Moody’s highest rating (GB1).

The bonds, the largest issued in Latin America thus far, were for Grupo Aeroportuario de la Ciudad de Mexico (GACM), through a special purpose trust connected to Mexico’s development bank NAFIN. It raised $4 billion in 2017 and $2 billion in 2016, both in international markets. The $4 billion issuance consisted of a $1 billion 3.88% 2028 tranche, and a $3 billion 5.50% 2047 tranche. The $2 billion issuance comprised a $1 billion 4.25% 2026 tranche and a $1 billion 5.50% 2046 tranche.

Brazil’s national development bank BNDES, Mexico’s NAFIN, and Banco Nacional de Costa Rica have also issued green bonds of their own: a $1 billion 4.75% 2024 bond issued in 2017 to finance wind and solar projects in Brazil; a $500 million 3.38% 2020 bond issued in 2015 to finance Mexican renewable energy; and a $500 million 5.88% 2021 bond issued in April 2016 to be used towards green projects in Costa Rica, including wind and solar.

There have also been green bond issuances by private companies. In 2017, for example, Brazilian pulp and paper companies Fibria and Klabin issued $700 million and $500 million in 10-year bonds, with 5.50% and 4.88% coupon rates respectively. Fibria is allocating the funds toward the conservation of eucalyptus-producing tree plantations, among other projects; Klabin will use most of the proceeds to refinance debt from eligible green projects. In July 2016, Suzano Papel e Celulose, another Brazilian pulp and paper company, issued a $500 million 5.75% 2026 green bond, which it reopened in September 2017 to add $200 million.

Going forward, Uruguay is well-positioned to lead the charge. Its government-led transition to clean energy relies on state-owned utility companies as final offtakers, thereby providing sufficient security for investors.

Another attractive option for investors is Chile. The country benefits from a Aa3 rating from Moody’s and has recently invested heavily in renewable energy, committing to generating 20% of its energy from renewable sources by 2025.

Argentina has similarly pledged to reach 20% renewable energy by 2025. The country is hoping to attract $35 billion of energy investment in the coming years, half of which is earmarked for renewable energy projects. The World Bank has committed $480 million in guarantees for the country to reduce risks for private investors.

The Macri administration is also looking for funding for its 2018-2022 $26 billion PPP (public-private partnership) infrastructure programme, with winners for its first round of road projects set to be announced any day. The country is however fighting FX troubles, and still has work to do to convince financiers and investors of its long-term economic stability.

Multilateral support

To achieve the UN’s 2030 Sustainable Development Goals (SDGs), multilateral development banks (MDBs) in particular have been called upon to look beyond traditional loans and provide technical assistance, policy guidance, and financial instruments to effectively channel public and private resources toward the SDGs. Much of that attention has been directed at the green bonds market.

Amal-Lee Amin, chief of the Climate Change Division at the Inter-American Development Bank, (IADB) comments: “To raise the financing needed to achieve the Sustainable Development Goals, in 2015 the Addis Ababa Agenda for Action called on the global community to move from ‘billions’ to ‘trillions’ in their development financing efforts; demanding that they look to new, innovative schemes to make the 2030 agenda possible.

“Latin America and the Caribbean is a fertile testing ground for innovation in resource mobilisation and it offers private investors and donors opportunities for portfolio diversification and country specific interventions.

In a bid to develop the Latin American green bonds market, development banks such as the IADB have been working with both public and private sectors to support the process from portfolio identification to bond issuance.

Through the issuance of green bonds, the multilaterals have supported national development banks (NDBs) in their efforts to raise private funds from institutional and impact investors in both local and international capital markets. “These issuances support the development of national capital markets, and improve issuers’ ability to diversify sources of funding, and promote low-carbon investments overall,” says Amin. “The IADB’s programme is currently supporting development banks in Brazil, Colombia, Ecuador, Mexico, and Peru.”

The multilaterals have also used the B-bond structure as a way of crowding-in institutional investors. The A/B bond allows the borrower to achieve significantly longer tenors, match long-term asset financing, and provide better conditions than those available in the traditional bank market by reaching a broader investor base.

Other strategic initiatives have been established to propel specific areas of the market. The IADB, for example, has developed a Sustainable Infrastructure Framework, which can be used to structure bonds for sustainable infrastructure and provide consistency and standardisation that simplifies the due diligence process and facilitates the investment decisions of private investors. The framework can also be used by governments and private sector sponsors to improve and demonstrate the quality of infrastructure projects.

Groundwork for growth

Looking forward, cooperation between governments, private investors, and regional and multilateral banks will be crucial to the growth of the region’s green bonds market, according to Helvia Velloso, economic affairs officer at the UN’s Economic Commission for Latin America and the Caribbean.

She says: “Although Latin America remains a small participant in the global green bonds market, the region’s green bond sector has shown important growth potential, with its participation in the total amount of bonds issued in international markets increasing steadily in the past three years. However, almost all green bond issuances from the region have so far been placed by the largest economies and by established corporations.”

For the most part, the region’s green bond issuance has been more focused on energy (often wind and solar projects), transport, and agriculture and forestry, with several multi-sector issuances also covering pollution control, biodiversity conservation, wastewater management, and other strategic sectors.

“The region’s infrastructure and investment needs present a sizable opportunity for the green bonds market, but a lot of groundwork is still needed to increase investors’ engagement,” says Velloso.

That groundwork includes developing local markets by promoting the visibility of their demand for green bonds to potential investors, while at the same time establishing a set of local and international guidelines for issuers to follow.

The region must also foster a friendly regulatory environment for investors to support green projects, including removing barriers that hinder green bond investment, offering incentives to investors willing to fund green bond initiatives, and enhancing private and public credit channels for green infrastructure.

And finally, the role of non-traditional investors must be increased. Many local governments have shown a willingness to fund climate-sensitive schemes, but there is insufficient public-sector capital to match demand. “Institutional investors, particularly pension and private funds, could help cover the remaining gap and play a more significant role in the market by committing to increase the participation of green bonds in their portfolios,” says Velloso.