International bond sales from Latin America stood lower in January than in the same period last year, but the region’s issuers showed an increased commitment to environmental, social and governance (ESG) notes, an accelerating market trend that is growing in importance, sources told LatinFinance.

After a busy end to 2020, with savvy issuers rushing to the international market on expectations of greater volatility and higher interest rates, Latin American bond sellers printed a total of $29 billion last month, a drop from $39 billion in the same month in 2020.

ESG bond sales totaled $8.6 billion last month, accounting for roughly 40% of volume from corporate issuers and private-sector financial institutions and 22% from sovereigns. Some of the larger and more active issuers, including Mexico, have announced plans to sell more ESG bonds in both international and domestic markets in 2021.

“It responds to growing investor demand for that type of issue, and those issuers that can fulfill the requirement are, of course, taking advantage,” said a New York-based investor who was not authorized to speak on the record.

CORPORATE ISSUERS
ESG was one of the fastest-growing segments in the bond market in 2020 as investors showed increasing interest in green and socially responsible investments, sources said.

Brazilian pulp and paper company Klabin opened the year for corporate issuers in the ESG space with $500 million worth of 10-year bonds in the first full week of January. After that, other companies followed with ESG bonds in quick succession: BTG Pactual with $500 million, Mercado Libre with an inaugural $1 billion, Simpar with $625 million, Itaú Unibanco with $500 million, Amaggi with $750 million and Movida with $500 million.

“My view is that Latin American companies have realized that the additional work to execute a sustainability-linked or green bond is minimal, but it brings a substantial incremental amount of demand, especially from Europe,” said a New York-based banker, who was also not authorized to speak to reporters.

Most corporate issuers sold sustainability-linked bonds, also known as KPI-linked bonds for the key performance indicators that are included in the terms of the deal. KPI-linked bonds focus on the impact of ESG capital on sustainable development goals (SDGs), rather than on the immediate use of proceeds. These assets are tied to achieving specific goals and accrue additional payments for bondholders if the issuer falls short.

“Investors have very well received the KPI format,” a second New York banker said, adding: “This is something you see more in the corporate world where things are quite focused, making it easy to measure the achievement of KPIs. In the case of sovereign issuers, goals are quite broad, so it’s a lot harder to measure performance that can be translated into the coupon for your bond.”

SOVEREIGN ISSUERS
Chile was the only sovereign issuer from Latin America to sell ESG bonds in January this year, but other countries are preparing to issue similar securities in the next few months both at home and abroad.

Chile placed $4.25 billion in green and social bonds in a four-part deal in dollars and euros on January 19, covering 70% of the $6 billion it plans to issue in 2021 as part of a long-term strategy to diversify its investor base.

The country plans to issue the remaining $1.75 billion in international bonds as “plain vanilla” instruments, but it also intends to sell social bonds in the local market in a transaction similar to one from November last year, when it printed CLP1.6 trillion ($2.23 billion) in euroclearable notes to non-resident investors.

Mexico did not go for ESG bonds when it raised $4.5 billion, or roughly 35% of its planned international bond sales for this year, in the euro and Formosa markets in January. But it is getting ready to issue new notes under an SDG bond framework this year.

“Following the criteria of sustainability, Mexico this year has a budget of eligible expenditures of around $14 billion in green and social policies,” Deputy Finance Minister Gabriel Yorio said in an interview during LatinFinance’s Capital Markets Summit on January 28th.

Mexico does not plan to finance all those projects in the bond market this year, but it could carry out a similar deal to its first SDG bond sale in the European market in September 2020, when it priced €750 million worth of 2027 notes to yield 1.603%, Yorio said.

The country could also tap Japan’s Samurai market with SDG bonds, following a non-deal roadshow in December, and it is considering “either a tranche or a small issuance of SDGs” in the dollar market, he said.

Colombia’s finance ministry spent 2020 developing a green bond framework and is now getting opinions from outside parties. As a result, the country’s ESG bond plans for 2021 only involve the local market, starting in July, César Arias, Colombia’s director of public credit said during the summit. (Click here for a video recording of the summit)

“It’s a long journey if you want to do it well. There is a huge debate in the community about greenwashing, which I think will only gain more force. So the approach that Colombia has taken is that even if it takes a few more months, you should take the responsible route of being very transparent, very accountable to investors,” Arias said.

This slower approach starting in the local market could convince government agencies and local companies that they have to include more green and socially responsible projects in their budgets and business plans, according to Arias.

“That is why we have decided to do it gradually and at a smaller scale and in the local market,” he said.