Sustainability Bonds See Potential in Latin America Despite Slowdown

Latin America Sustainability Bonds

(Credit: Pixabay)

by | Nov 11, 2022

Latin America Sustainability Bonds

(Credit: Pixabay)

Sustainability bonds are not being issued at last year’s peak pace, but a higher portion of the financial tools are being used in Latin America than in any other region, and the area continues to attract attention from international investors, according to S&P Global Ratings.

S&P Global Ratings has released research on green, social, sustainability, and sustainability-linked bonds (GSSSB) in Latin America and estimates there will be a 40% drop in issuance in 2022 compared to 2021, ending up being less than $30 billion. That said, S&P says an increasing number of frameworks for the bonds issued by Latin America-based companies will support the future use of GSSSBs.

The share of Latin America sustainability-linked bonds is 30%, far surpassing the global share, S&P Global Ratings says. The report estimates that the region will maintain that high share in the short and medium terms, especially with increased interest from industries to meet investor demand and pressure regarding sustainability concerns in the region.

Bonds are down across the board globally, and sustainability bonds are performing better in Latin America than non-GSSSB bonds, declining 25% through the first half of the year compared to a 60% drop by other bonds. Even with the decline of the bonds’ use in 2022, sustainability bond issuance in Latin America has risen 34 times since 2018. They account for 3.3% of the world’s share in 2022, compared with 4.4% in 2021.

Globally, GSSSB issuance is estimated to be a fraction of the record more than $1 trillion from last year. Sustainable financing has significantly cooled in 2022, falling in most areas, according to Refinitiv.

Despite that emerging markets continue to play a significant role in sustainable financing. A report by Janus Henderson finds the markets have potential in Asia as more countries make regulations and net-zero goals.

All countries in Latin America have made commitments toward the Paris Agreement, but investments and governmental support need to significantly increase for targets to be reached. The United Nations Environment Programme says government commitment needs to increase five-fold to maintain a path to net zero in the region.

The report says sustainability-linked bonds will continue to be an important financial tool for making transitions in Latin America. However, there needs to be more of them that target specific sustainability targets that align with international net-zero efforts as well as standardization such as the ICMA’s Sustainability-Linked Bond Principles.

An example S&P Global Ratings gives is Uruguay launching a sustainability-linked bond framework in September of this year, connecting payments to climate mitigation and nature conservation goals. The report says other bond issuers could follow suit with similar requirements down the road.

Financial institutions in the region also have increased their issuance of GSSSBs. Over the first half of 2022, banks issued nearly 15% of the bonds in Latin America, a 300% increase year over year and the only sector that has grown this year. S&P Global Ratings says this is in part because corporate funding in Latin America is largely done through banks and on the local level and not through international capital markets.

Examples include Brazilian banks Itaú and Banco do Brasil offering more than $100 billion for sustainable development, agriculture, and renewable energy projects through 2025. Most funding still comes from private groups or governments.

Government regulations and establishing green and sustainability taxonomies will also help grow GSSSBs in the region, the report finds. Many countries have started initiating standards, such as Colombia’s green taxonomy which was established this year based on the European Union framework.

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