Financial Mechanisms for Sustainable InfrastructureThu, 11/01/2018 - 16:08
The desire to address climate change and abide by environmental regulations has infrastructure developers and investors seeking to promote sustainable growth. Roberto Ballinez, Executive Public Finance and Infrastructure Director of HR Ratings, says awareness of social and environmental impact calls for sustainable mechanisms for project financing. HR Ratings, he says, is at the forefront of financial innovation, breaking ground with its methodology to rate green and social bonds.
“HR Ratings’ ratings process is our differentiator. We are headed in the right direction as the market for these financial tools is growing.” On the path to sustainable infrastructure, the market has the option to invest in a green, social or sustainable bond. All financial resources obtained from the issuing of the bond must be allocated to projects that represent a social and environmental benefit.
According to HR Ratings’ Directors, the global market for social bonds is growing, as they tap into a market that aims to invest in projects that improve social welfare. Pioneered in the UK in September 2010 by Social Finance, they have quickly spread. Aligned with the UN Sustainable Development Goals (SDGs) the international community is increasingly appealed to place its investments in them, encouraged by international organizations such as the IFC launching social and green bond programs. In Mexico, NAFIN took the first leap of faith on social investment mechanisms in 2017, issuing the first social bond in the country with the MSE for MX$4 billion. The funds will be allocated to education, access to financial services for low-income communities, microcredits for women and SMEs, among other targets.
Luis Quintero, the agency’s Executive Corporate Director, agrees that investor interest in projects is piqued when there is a green element. “Our perception is that investors are increasingly demanding a green and social component for the projects they invest in. Besides the usual race for profits, sustainable awareness is gaining momentum.” Grupo Rotoplas pioneered with the first sustainable bond issuance in Latin America for MX$2 billion, followed by Banobras for MX$10 billion, which was five times oversubscribed. Both examples are a good thermometer of what investors are looking for, says Ballinez. “There is still some reluctance, but the market has provided a first step that gives private investors some certainty and encouragement to bet on sustainable bonds.”
Despite the increasing popularity of financial mechanisms for sustainable infrastructure, green and social bonds are still unknown to many. Now that awareness is beginning to grow, new mechanisms are emerging to ensure a smooth process. “HR Ratings previously had a methodology only for green bonds and was unable to rate the social component of projects, hindering our ability to incorporate sustainable bonds,” says Ballinez. To meet market demand, the Credit Rating Agency (CRA) developed a methodology for both social and green bonds, opening the path for sustainable bonds that can be rated in Mexico.
In the case of green bonds, investors want to be socially responsible and environmentally aware when placing their capital, says Quintero. “When choosing between two similar projects, the possibility to go for the green one is higher,” he says. But it is crucial for investors to understand that the presence of a green bond rating for a project does not come with any direct financial benefit, as the credit rating is independent. Social bonds work somewhat differently, in that they are not exclusively issued for infrastructure projects. “The first social bonds have been mostly directed to infrastructure developments but their goal is also to support that segment of the population looking to escape the poverty threshold and to break the cycle of inequality,” says Quintero.
Keeping at the leading edge of financial mechanisms, HR Ratings’ products provide the framework to rate new sustainable projects. “We believe that we will keep growing with the market, supporting and guiding investors on social and green ratings,” says Quintero. “It is paramount for us to keep innovating and we strive to have updated methodologies, in order to act as a catalyst to incentivize market growth.”