Green Bonds in Latin America

Thematic bond issues in Latin America had a record year in 2021. These are green, social, and sustainable bonds (which combine environmental and social aspects), or sustainability-linked bonds (SLB). While they are also debt instruments equivalent to traditional bonds and are evaluated for the same characteristics, the difference is that the use of funds is limited to projects in the environmental or social areas.

An external agent tends to validate thematic bonds and the green or social "nature" of projects or a given issuer as a way to guarantee the latter and avoid “greenwashing," which is defined as using an environmental or social label that does not have a true impact on real variables. As with traditional bonds, they can be placed by sovereign (states) or corporate (companies) issuers. In the case of SLBs, they are not necessarily used to finance sustainable projects directly. They can also be used to repay debt, but assuming the achievement of certain social or environmental goals at the same time, which imply a coupon rate step-up if not fulfilled. This is a relatively controversial point, as one might think that it is in the investor's "interest" not to achieve its targets to receive a higher coupon rate. However, it should be noted that investors do not intervene in the company's management or in the achievement of these goals, in addition to the fact that failing to meet the committed objectives could entail reputational risks that carry other types of cost for investors. From another perspective, one feature of SLBs is that they reflect a corporate commitment, unlike green/social bonds, which target specific projects. A significant number of corporate thematic bonds in the region are of this type.

We present some relevant facts and figures on the regional thematic bond market here:

• Corporate thematic bonds accounted for 28% of the supply in Latin America in 2021, for US$22.2 bn, 5 times more than in 2020.
• 38 issues were made by 32 different issuers. It should be noted that there were 8 issues by 7 issuers in 2020.
• The main issuers in 2021 include JBS, Suzano, Femsa, Interchile, Orbia, Nemak and Natura, companies from various countries and productive sectors.
• Thematic bonds have been trading at very similar levels to comparable traditional bonds (same issuer and similar duration).
• While two-thirds of issues have been in US dollars, greater diversity in issue currencies can be seen.
• On the sovereign level, the Chilean Government has been the regional leader in structuring and issuing this type of instruments. In fact, it is the only country in the world that has issued papers in the three thematic categories: green, social, and sustainable. Chile has placed the equivalent of approximately US$25.7 billion in thematic bonds since 2019, of which US$16.5 billion are social bonds, US$7.7 billion are green bonds, and US$1.5 billion are sustainable bonds. Thus, thematic bonds represent 24.6% of the Central Government's debt stock, one of the highest percentages in the world.
• Peru placed its first sovereign social bond on the international market (in euros) in November and also obtained good results.

Source: Climate Bonds Iniciative, "Latin America & Caribbean State of the market 2021" and BoFA, Global Research "ESG Issues"