Latin America and Caribbean - Green Finance State of the Market 2019

PAGE joins hands with the Inter-American Bank and the Climate Bonds Initiative for a regional overview of Green finance in Latin America and the Caribbean. The report uncovers the progress that has been made and the opportunities lying ahead for Latin-American countries. It looks at regional themes in green bond issuance as well as issuance from companies that operate in climate-aligned sectors and potential green bond issuance from public sector entities. It also provides examples of key policies and initiatives and country-level overviews for Argentina, Brazil, Chile, Colombia, Mexico and Peru, as well as for Central America.

MARKET SNAPSHOT

LAC has been picking up strongly in 2019, driven by Chile’s two sovereign green bonds. Still, only 8 of LAC’s 33 countries have seen green bonds issued so far.

The amount issued in H1 2019 is USD3.7bn, three times higher than H1 2018 and 40% higher than H1 2017. This has compensated for slower growth in 2018 and issuance to date, including a couple of deals closed after the end of H1 has already made 2019 a record year for the region.

There are significant differences in issuer types between countries. For example, Brazil is dominated by non-financial corporates, Chile by the sovereign deals, Mexico by development banks, and Argentina by local governments. More diversity in each market and the region overall would be a welcome development. Peru, Mexico and Colombia have already indicated potential sovereign issuances.

Overall, LAC’s use of proceeds is quite unique. Energy allocations are high, as elsewhere in the world. Land use and Industry represent a relatively high share compared to the global market, while Buildings and Water have a lower share. However, there are significant differences by country.

Over 80% of issuance is in hard currency, mainly USD. However, there is also issuance in local currency: all deals from Colombian issuers are denominated in COP, for instance.

There is a high share of private placements. This is particularly true of local financial institutions.

The vast majority of volumes benefit from an external review: mostly Second Party Opinions (SPOs) but also Certified Climate Bonds, including the two Chilean sovereign green bonds.

According to the report, Green bond issuance is expected to grow across the Latin-American region but it is driven by much needed investments in green infrastructure. Sustainable agriculture and blue (ocean-based) activities also present opportunities. The analysis of climate-aligned issuers revealed greatest potential for green bond issuance among energy and water companies. Several potential public sector issuers were also identified across the region. The report also highlighted that more issuance from sovereigns and financial corporates could boost the market, especially if combined with supportive policy and further stock exchange initiatives.

The introduction of climate policies and related initiatives, especially around green finance, has grown rapidly in LAC in the last two years. Governments and industry groups are increasingly aware of the urgent need to invest in green infrastructure and promote sustainable development, and are becoming more active.

Most LAC countries have Nationally Determined Contribution (NDC) targets under the Paris Agreement, typically ranging between 20-30% in terms of GHG reduction by 2025-2030 versus baseline levels. Among the most ambitious countries is Brazil, which has a 37% reduction target by 2025 and 43% by 2030 compared to 2005 levels.

In order for these to be met, green finance needs to scale up significantly. Governments should be bold in encouraging investments in green projects, especially on the policy front, which becomes a key aspect given the significant differences by country.

The report was prepared by the Inter-American Development Bank and the Climate Bonds Initiative with support of the Partnership for Action on Green Economy.

Read the full report here