Latin America's green bond markets set for expansion

Latin America's green bond markets set for expansion

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Bancolombia first set foot in the market in December. Colombia’s largest commercial bank issued a 350 billion peso ($116 million) green bond to local investors, saying it would use the proceeds to fund private-sector projects that address climate change. Davivienda followed in April with a 433 billion peso deal, which the Bogotá-based bank said was the largest green bond issue by a private financial institution in Latin America.

On both occasions, the International Finance Corporation (IFC) was the sole investor. But an investment banker in Colombia says local bond buyers are coming around to the idea of green investments. The IFC has suggested that Latin America could fund more than $1 trillion in climate-focused projects by 2040, including some $25 billion in Colombia, with green instruments.

“When you have natural disasters like we do in Colombia, green bonds are another way to push the infrastructure agenda,” the banker says. In April, for example, flooding and landslides in Colombia killed more than 250 people and damaged infrastructure. 

The government has indicated its support for financing projects that combat climate change. Clemente del Valle, president of the national development bank FDN, has opened the door for it to finance green projects with targeted debt capital markets instruments.

“Next year is when we start to really leverage, so we will look at all the options in the capital markets,” he says. “We want to get more active in energy, so we could look at green bonds.”

Slow start

Globally, green bonds are taking off. Moody’s estimates that the market could reach $206 billion in 2017, more than double last year's $93.4 billion. The US' withdrawal from the Paris climate change accord is unlikely to hamper that potential, say investors. In part, that's because the country has accounted for just a sliver of the global green bond market to date. It's also because of corporate borrowers like Apple, which printed a $1 billion green bond in June in a show of support for climate protection initiatives. 

European issuers have a heavy presence in the green bond market, but much of the recent activity has come from emerging markets. China alone was responsible for more than a third of total green bond issues last year. Latin America has been slower to embrace the trend, with only seven trades between 2014 and 2016. But that could soon change as issuers and investors become more comfortable with green bonds.

Mexico's afores, insurance companies and fund managers gave a clear signal of encouragement earlier this year. In May 57 institutional investors, managing a combined $214 billion of assets, signed a declaration of support for green bonds in the Mexican market. Climate change represented a big risk to society and the economy, and green bonds offered an opportunity for institutional accounts, the declaration said. 

Issuers had already seen appetite for green paper in the local market. Mexico's capital, for example, became the first Latin American city to issue a green bond late last year. It raised $50 million to improve street lighting, public transit and water treatment facilities. 

In Brazil, a group of fund mangers has similarly committed to backing development of a local green bond market. Brazil’s national development bank BNDES is also driving the market forward. It mandated local asset manager Vinci Partners to manage a 500 million-real ($151 million) sustainable energy fund in March. Two months later, it printed a $1 billion green bond.

As investor enthusiasm grows on green bonds, the market in Latin America may be limited by the interest from issuers. Increasing numbers of environmentally friendly projects are being bid out across the region. Mexico's energy reforms, for example, have opened up financing opportunities for renewables. “Mexico is moving to a market-driven situation, so you can determine power prices,” says Ralph Scholtz, the head of project finance in Latin America for the Japanese lender MUFG. “Part of this meant that auctions were conducted for renewable solar and wind opportunities.”

But financing for such projects is linked to engineering, procurement and construction contracts. Bond investors are typically reluctant to assume construction risk — and new renewable energy projects are no exception. 

Green bonds from corporate issuers are a surer bet. Familiar players in the capital markets, such as investment-grade power companies, state-backed lenders or robust financial institutions, are best placed to tap this investor base. 

Now, the pool of issuers able to raise money for projects that benefit the social good is set to broaden. The International Capital Markets Association, which determines green bond principles, published guidelines in June on social and sustainability bonds. Social bonds can raise capital for projects with benefits to society, such as affordable housing or food security. And sustainability bonds have both green and social benefits. With its entrenched inequality, Latin America may find the emerging financing sources a boon. LF