Five Reasons Why the Mexican ESG Bond Market is Gaining TractionBy Javier Bernal | Tue, 08/16/2022 - 15:00
The Mexican ESG bond market has been gaining traction in the last couple of years to become quite a compelling story among Latin America and the emerging market space.
There are many reasons why this market has developed a deep foundation and today shows potential growth. Institutions, authorities, and people have taken action in a way that has ignited this story. Here are the five main building blocks that led us:
- Global Green Finance leadership awareness and call to action: Seven years ago (2015), the Mexican local financial system was able to recognize the new global trend of ESG (environmental, social and governance) bonds. In particular, we became aware of what was going on in Europe, where green bonds were revolutionizing the market and we knew we would need to act soon. Important personalities within the UK financial system came to Mexico to share their experience regarding green finance and the green bond market dynamics. I am referring to a historic visit of Sir Roger Gifford (685th Lord Mayor of London) and who led, with great commitment, the city of London’s Green Finance Initiative and the UK government’s Green Finance Taskforce. He visited our country with Sean Kidney (CEO of the Climate Bonds Initiative (CBI) in the UK), a key not-for-profit international organization working to mobilize for climate action. This anecdotal visit across the Atlantic opened the minds of local top executives of the Mexican financial system, stock exchange, banks and brokerage houses to the need to join the new wave. It’s incredible what a business dinner can provoke, in this case, organized by the UK Embassy in Mexico.
- Structuring the Green Finance Advisory Board (CCFV): The next day, we designed on a piece of paper an organizational chart of what a “Green finance think tank” would look like. Initially, we thought it would have to be founded and led by institutional investors. Not only that, we needed representation from all organizations, not only those in the financial space. We needed to include the owners of the green and sustainable associations that owned and developed all the sustainable infrastructure in Mexico. After a huge number of meetings during the first six months, we gathered the first 30 top executives to be volunteers and gave life to this advisory board. It had two main objectives: mobilize capital for green infrastructure and build local capacities to adopt the best global standards and principles to develop a green bond market. Next, the Mexican Green Bond principles were born. Informing the market and sensitizing it to the relevance and the advantages of the concept of “segregation and use of proceeds” as well as the “transparency” ingredient in annual reporting (both central values of a label) took some years.
- Systemic dialogue among the leaders of the financial private sector and authorities: Several meetings were held to plan a roadmap among all parties involved. The dialogue with the top regulators was constructive. They were highly aware of the new potential impact of climate change on global economies (systemic risk) as well as the material financial business opportunities of the transition process. We had to do something big and keep moving forward. We would need to address the potential negative impacts of physical and transition risks and design a plan to understand how to identify, measure and hedge these risks. Also, new financial sustainability solutions were to be developed, starting with designing a strategy to deploy capital with ESG impact as soon as possible. Once consensus was reached, this would be a quite significant opportunity to put our country top of mind among local and global investors, with the creation of the local label ESG bond market. The framework to list a labeled bond in the Mexican Stock Exchange was quickly put in place; in this case, starting with the “green label” (Bono Verde “V”). The first issue was in dollars and then in Mexican pesos. Development banks made the first placements and corporate and commercial banks followed with a great deal of enthusiasm and consciousness of this new era in the local, private debt-listed market.
- New labels — a necessary condition to expand to not only green but social: In a very anecdotal way, the social impact had to be factored into this equation, especially in countries like ours where the gap on this front is unsustainable. The social bonds were launched with the “S” label. Many issuers found that they could amplify the financing or refinancing of loan portfolios that had both the green and the social impact profiles. The sustainable bonds, “X” label, became a good and efficient format to address both purposes. In the first three years, we had some placements but finally, from 2019 and onward, the market started to gain traction, especially in 2021 and 2022. We have now hit a record size for the ESG bond market.
- Today, the ESG bond market is around US$19 billion: Here are some metrics related to the different labels, types of issuers, formats, currencies, and economic sectors looking for ESG impact. The market size for Mexican labeled bonds is US$18.9 billion, including sovereign bonds. Thirty-seven institutions and organizations have issued 90 tagged bonds with different labels. The most common labels are the sustainable bonds (40 issues), followed by green bonds (21 issues) and sustainability-linked bonds (13 issues). The latter was introduced in 2021 in the Mexican market and quickly gained relevance with private corporations, which represented 53.7 percent of the total issuance that year. In 2022, the public sector is controlling the conversation by issuing the largest amount (US$1.7 billion) with the first sustainable sovereign bonds in the local market and the first sustainable bond issued by a government-owned company (CFE, US$1.7 billion), together accounting for 67.6 percent of the total amount issued so far this year. All these efforts are taking place in 35 distinct sectors. The sectors that have received the most positive impact are solar energy, efficient use of water, wind power, and sustainable transport. This is a growing trend in Mexico and the growth has exceeded all expectations but we still have a long way to go to be able to reach our goals and transition toward a more sustainable, equal, and resilient economy.
Thanks to all the organizations that are part of the CCFV, their executives, authorities, stock exchanges, strategic partners, founding partners, sponsors, and the executive team. With the added efforts of all stakeholders involved, Mexico may become a point of reference for development of a green market in the region.