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Sovereign issuances take LatAm green bond market to nearly $8B

In the face of a sharp economic downturn spurred by a pandemic, 2020 was still a very good year for green bond issuances in Latin America.

The amount of funds raised in the region through the environmentally focused instruments totaled $7.82 billion, up 68.7% compared to 2019. And experts expect that growth to continue.

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"Demand remains strong for 2021, for both use-of-proceeds green, social and sustainable bonds but also the newest ESG bond label, Sustainability-Linked Bonds." said Marilyn Ceci, global head of ESG Debt Capital Markets at J.P. Morgan.

Green bonds are the fastest-growing asset class globally, according to Sean Kidney, head of the Climate Bonds Initiative. While he acknowledged that growth continues to be a "patchy story" in Latin America, Kidney argued that the case has become stronger for regional countries looking to tap environmentally conscious investors.

"The headline story for the year in LatAm continues to be sovereigns," he said. "There is a growing appreciation that the pandemic is a climate crisis and that there is going to be more of this over the century because of fundamental climate change. We have to win this, and the first area where we make it work is sovereign expenditure."

In 2020, Chilean green bond issuances reached a record high of $4.21 billion, with the government accounting for about 90% of the total. Kidney noted that Chile, which raised the funds to finance multi-year environment-related projects ranging from subways to green buildings, could set an example for other nations to follow.

"They got the cheapest interest rate for Chilean sovereign bonds in every country they issued ... Other countries like Colombia are now poking around the idea as well," Kidney said. "This will be the growth story of 2021."

While Colombia is reportedly looking into a green bond issuance, Mexico has taken a different path under President Andrés Manuel López Obrador, known as AMLO.

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"The new president came with a more social approach," Carolina Barreto, Latin America manager for CBI in Mexico City, told Market Intelligence. "So it is now a combination of green and social bonds as well." In September, the Mexican state issued an $890 million so-called SDG framework bond, a debt instrument that is tied to financing projects targeting sustainable development goals as defined by the United Nations.

Some countries, meanwhile, will likely remain unable to move into green bonds. Kidney noted that while Argentina has potential, the country's financial risk is preventing issuances from moving forward.

Nonetheless, green markets have shown general resiliency during the outbreak. Experts have praised the somewhat defensive feature of ESG-related portfolios during the pandemic. At one of the lowest points of the COVID-19 crisis, in early March 2020, Uruguayan company Atlas Renewable Energy still managed to place some $253 million in debt.

A 2021 breakthrough?

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With the exception of some small- and medium-sized transactions, banks in Latin America have remained absent in green bond markets. In 2020, Brazilian Banco Votorantim SA issued $50 million on a green bond, while Banco de Bogotá SA placed some 300 billion Colombia pesos, or $85.9 million, locally.

But while there have been few ESG-related issuances in the market, environmental and social matters in the region are gaining prominence. These range from financial inclusion lags in Mexico and Colombia to the Amazon basin rainforest in Brazil. In that regard, the largest banks in the country joined forces in 2020 to come up with a plan to develop the region but did not come to the market last year.

According to CBI experts, that is set to change soon enough.

"Bank issuance in Latin America has been surprisingly weak," Kidney said." Banco Central do Brasil is clearly aware of the green agenda, as is Banco de México. Every bank is going to be under pressure to increase lending in 2021, [for which] I think we will see a breakthrough in commercial bank issuance this year."

There are signs of promise to that end. At the end of 2020, Banco Bradesco SA said it had issued its first-ever bond linked to ESG criteria, worth 1.2 billion reais. Weeks later, Itaú Unibanco Holding SA, the region's largest commercial bank, issued its first sustainable bond, worth $500 million, to fund green-related projects.

"In Latin America, it is important to understand that the capital market is not as strong as the loan market is. Credit is extremely important in the region," Barreto said. In that sense, analysts are expecting a variety of environmental-linked instruments adding to the traditional green bond.

"All the same idea: capital with purpose," Kidney said. "Guess what? We can make money and fix the planet at the same time. We have to win this."