Mexican Corporate ESG Bond Market Continues to Gro

The financial market plays an important role in redirecting capital toward sustainable activities, including the transition to a low-carbon economy, a more equal society and enhanced corporate transparency. Investors are placing greater scrutiny on environmental, social and governance (ESG) issues from risk, return and impact perspectives and will continue to demand actions to mitigate ESG risk exposure.

Financial institutions and fund managers have many  ESG strategies and are enhancing ESG due diligence. ESG integration is dominant and assesses how to incorporate ESG into investment analysis and decisions. Approaches may focus on impact, risk-adjusted return or both.

Regulators and policymakers are making ESG metric reporting mandatory. Framework standardization, taxonomic development, harmonization of reporting standards, and improved quality and quantity of ESG data remain important challenges to sustainable bond market development.

Global trends indicate that from the investors’ point of view, diversified portfolios adopting ESG investment strategies have shown less volatility in returns and have demanded trackable indicators to measure positive impact of the invested funds. From the companies or borrowers’ side, those with a strong track record of ESG policy adherence have been more resilient during market and economic downturns, and have implemented long- term institutional initiatives to address global challenges, such as climate change and efficient use of natural resources, among others. These actions allow them to mitigate mid- to long-term risks in terms of business sustainability. 

The local bond market for Mexican non financial corporates continues to evolve and adapt to market trends and investors’ requirements. During 2021, the local Mexican ESG-linked bond market grew significantly and Fitch Ratings expects growth to continue, as ESG factors increase their relevance in market participants’ investment decisions.

Since 2017, Mexican corporates have been active in the issuance of ESG-linked bonds, particularly sustainable bonds. Currently, the outstanding amount of ESG-linked bonds for non     financial corporates in the local Mexican debt market is approximately MX$55 billion (US$2.75 billion), with a number of transactions still in the pipeline.

In  2021, more than MX$30 billion of sustainable bonds were issued by Mexican corporates; this represented a significant increase from almost MX$8 billion in 2020. Also, it represented 53 percent of the total amount issued by non-financial corporates in the local Mexican debt market (excluding structure finance and government-related entities transactions ). 

Despite global debt market conditions, since May 2022, the Mexican bond market has remained open and corporates have redirected their financing efforts toward it, taking advantage of its robust liquidity and depth. Up to Oct.15, 2022, non-financial corporates have issued more than MX$60 billion in local bonds, higher than the total amount issued in 2021 (MX$56.6 billion). Out of this, approximately 20 percent were ESG-linked bonds, including the first “social”-linked bond issued by a non-financial corporate (Coca-Cola Femsa, S.A.B. de C.V.-KOF) for an amount of MX$5.5 billion (US$275 million).

There are several sectors participating in the Mexican ESG bond market. The breakdown of sectors in terms of the outstanding total amount as of Oct. 15, 2022, is 41 percent food and beverage, 33 percent  real estate (fibras-Mexican REITs), 9 percent airport operators and the remaining 17 percent  comprises building materials, homebuilding, consumer and diverse manufacturing companies.

The first type of ESG bonds issued in the Mexican debt market were “sustainable bonds,”      identified by the suffix “X” in the issuer ticker.  Issuers were required to use the proceeds of these bonds to finance or refinance investments with a combination of social and environmental benefits, and are aligned to the United Nations’ Sustainable Development Goals (SDGs). 

Subsequently, corporates issued “green bonds,” identified by the suffix “V” in the issuer ticker, which were aligned to the International Capital Market Association (ICMA) Green Bond Principles (GBP) framework. Green bonds enable capital-raising and investment for new and existing projects with environmental benefits. Corporates that issued green bonds included Fibra Prologis’ US$375 million in 2020 (and a further US$70 million re-opening in 2021) and AC Bebidas’ combined MX$4.65 billion in 2021.

Recently, issuers had accessed the market through “sustainability-linked bonds” (suffix “L”). Sustainability-linked bonds (SLBs) aim to fund projects that contribute to sustainability (from an environmental, social or governance perspective). These bonds are aligned to the ICMAs Sustainability-linked Bonds Principles (SLBP) framework.

SLBs incentivize borrowers to establish predetermined sustainability performance targets (SPTs), including Key Performance Indicators (KPIs) and external valuation. This is key for performance measurement, as interest rates of the bonds may step up if the KPIs are not met in a specific time period. An example is Grupo Herdez’ 2022 combined bond issuance for MX$3 billion, whose  main measurable KPI is the reduction of water usage intensity per produced ton by 2028.

SLBs have no ring-fencing for the use of proceeds and can be used for general corporate purposes, which is an advantage compared with green bonds (GB) and social bonds (SB) that need to be used toward green or social projects. Another advantage is the cross-sector appeal, as no specific project is required. 

Finally, Mexican corporates also issued “social-bonds” (suffix “S”) whose main objective is to raise funds for new and existing projects with positive social outcomes. They are aligned with ICMA’s Social Bond Principles (SBP), which look to support issuers in financing socially vigorous and sustainable projects that achieve greater social benefits. 

As markets evolve and investors seek stable returns and positive impact, the ESG-linked bond market will continue to attract issuers willing to commit, adapt and be transparent with market participants.