Pathways for Latin America’s Growing Sustainable Finance Market

The Latin American and the Caribbean region, also referred to as LAC, is bolstering its commitment to green finance. In 2021, the region represented 2.6 percent of the green, social, and sustainability global debt market with US$48.6 billion in cumulative issuances. Nevertheless, a closer look shows all the developments that are happening and the importance of monitoring these developments. The support from local and international players has brought us to the point of continued annual market growth, no matter the circumstances. For 2022, we can expect further expansion in the region across thematic labels, diversification of sectors invested in, and types of issuers.

Labels besides green are on the rise. Social, sustainability, and sustainability-linked bonds will continue to increase as developing countries strengthen their commitment to social issues. In 2021, Mexico, Chile, Ecuador, Guatemala, Colombia, and Uruguay either issued green, social, sustainability or sustainability-linked bonds. Instruments are becoming more complex and appealing to local investors. Starting from sovereign bonds setting benchmarks, Colombia was the first LAC country to issue a sovereign green bond in local currency, while Chile was the first to issue a sustainability-linked bond. Uruguay has also announced its intention of issuing a sustainability-linked sovereign connected to its NDC (nationally determined contribution). This is just the beginning. In 2022, we expect to see more sovereign issuances and other issuers following national trends.

We also expect to see more diversification in the use of proceeds. Energy remains the most funded sector in the LAC region for green-labeled instruments. However, issuances financing water projects and the agriculture sector will continue to grow in 2022. It is fundamental to consider the vast opportunity to set international sustainable agriculture or forestry preservation practices to mitigate climate risk in the long term. LAC has the assets and scale to lead the way. In addition, the impact of climate change resulting in economic losses from disasters is increasingly a risk to people’s livelihood and insurers’ portfolios. Thus, considering climate risks is a priority. The region has a deep necessity to develop projects related to adaptation and resilience, as most counties have high vulnerabilities to climate change impacts. Therefore, a higher understanding of adaptation and resilience criteria will also be seen through 2022 and 2023.

While climate benefits are central, there is a growing demand for capturing and addressing other social and sustainability benefits in the use of proceeds, from gender equality to job creation, biodiversity, and pollution control. In general, the use of these instruments is on the rise.

Further down from thematic bond issuances, another movement we can expect are more comprehensive efforts in greening the financial system. After all, green, social and sustainability bonds are instruments used by issuers to leverage change at an institutional level. The preparation for issuing green bonds is a tool to start understanding what information the issuer requires on their assets, what changes are needed in their organization, and how to review where their risks are allocated. As the market diversifies and becomes greener, new instruments also enter the market. We can observe a diversification in short-term debt instruments, such as the Cheques Verdes issued in Argentina, the Fibras Verdes in Mexico, the CRAs in Brazil, and Commercial Papers in Peru. There is also growing interest in sustainable finance among insurance companies setting green policies.

A pivotal element to the growth in the market is the clarity on processes and standards; therefore, advances on setting common definitions will continue to play an essential role in the region. The expectation is for more standardization in reporting requirements, transparency, and financial and impact data disclosure. Green and ESG credentials are critical for sustainable certifications, accreditation, and ratings. In LAC, we specifically observe a growing appetite for certification and more certified deals in the agriculture, hydroelectric energy, and transport sectors.

Taxonomies will play an important role in defining common standards; new countries in emerging markets such as the LAC region are developing local green and sustainable taxonomies. Nevertheless, harmonization with international standards with these taxonomies will be central for market development in the region. For instance, the Colombian taxonomy, the most advanced in the region, is aligning its classification methodology to the EU taxonomy for international interoperability. Other taxonomies in the region are also being developed in Chile, Mexico, and the Dominican Republic. These efforts will continue to bring new criteria and methodologies to the market while seeking international alignment.

Alignment is essential for the implementation and usability of taxonomies. This will become more evident with the release of local taxonomies and the issuance of green bonds according to these taxonomies. However, usability goes beyond thematic bonds; we will see an increase in taxonomy use as they go from being utilized for creating regulations and policies to product development and asset information disclosure. For emerging markets wanting to attract international capital, the development of usable taxonomies will become essential.

Transition will also trend in 2022 as institutions set pathways to achieve net-zero targets. It will become essential to fit transition into the taxonomy landscape and take it forward with a strong scientific basis. Transition will have a strong focus in the LAC region in hard to abate sectors, such as cement, steel, basic chemicals, agriculture, and hydrogen. The Climate Bonds Initiative is developing guidance on credible transition standards.

2022 will be a positive year for the LAC sustainable finance market.