Sustainable Bonds, An Alternative Financing Source for States

To counter the lack of investment in public works, experts argue it could be viable to make use of the federal legal framework as well as instruments of the Mexican financial system to start issuing sustainable bonds.

During Moody’s annual Inside Latam Mexico event, María Martínez, Senior Analyst, Moody’s said that against a backdrop where public work investment has shrunk and inflationary effects are making traditional financing instruments more expensive, federal entities should exploit the potential benefits of the Law for Financial Discipline for Federative Entities (LDF) and start issuing sustainable bonds.

Martínez stated that the number of sustainable bonds in circulation has been increasing steadily in recent years. She considers that owing to the reduction in Mexico’s public infrastructure investment, the market may soon be demanding more of such financial instruments. Martínez pointed out that the recent changes to the LDF will allow better accessibility to environmentally-focused bonds.

Víctor Medina, Director General for Credit, the Government of the State of Mexico, said that thanks to the improvement in processes and transparency set by the LDF, it is now easier to make decisions regarding debt. “Today, we provide access to financial information every quarter and we conduct annual evaluations that determine the level of leverage and debt servicing, which in the end gives us important information that helps us in the decision-making process,” González added.

González considered that the recent modifications of the Stock Market Law will benefit municipalities and states as it will facilitate their access to further financial instruments. Martínez concurred and said that these instruments could be key for states to reactivate their industry with projects aiming to address issues such as water scarcity. “States will look for new financing mechanisms to reactivate their economies. These bonds allow the construction of projects that positively impact society and cultivate environmental protection,” González added. 

According to Martínez, sustainable bonds are different from green bonds that are especially focused on environmental protection projects. Meanwhile, sustainable bonds offer a wider range of investment opportunities. This allows entities to invest in gender-equity-focused projects, for example. ”What sustainability offers is that it enables the financing of both social and environmental projects. Sustainability gives us this flexibility,” she said. 

Currently, Mexico City is the only state that opted to use green bonds. The State of Mexico became the first Mexican state to issue fully sustainable bonds worth US$150.5 million.