There is growing interest in issuing green, social and sustainability bonds among Latin American sovereigns. But, unlike their European counterparts, the region does not gravitate towards a single taxonomy.
Since Colombia launched the region’s first green taxonomy in April 2022, many other Latin American countries have announced that they are working to create their own, including Brazil, Chile and Mexico.
Experts often say that the lack of a universal taxonomy to define what is “green” is an obstacle to the development of a GSS bond market. But this is not the case in Latin America. While a universal green taxonomy in the region would certainly help investors, it would not work for issuers. Many Latin American countries have their own GSS emission targets. These were key themes at an OMFIF workshop on September 20, where finance officers from debt management offices and investors shared their knowledge and best practices in issuance. of GSS in Latin America.
In Brazil, the emphasis is more on the social element than on the ecological element. As a result, Brazil is likely to launch a sustainable bond framework, similar to the structure of Mexico’s Sustainable Development Goals, rather than a classic green framework. This will give it the flexibility to issue social bonds alongside green bonds. Brazil will probably end up issuing more social than green bonds anyway, given that there is a larger budget for social policies than for green ones. In fact, Latin America has led the way among sovereigns for social bond issuance since Ecuador issued the world’s first sovereign social bond in 2020.
Some market participants say a Brazilian green bond would raise “greenwashing” concerns, given that Brazil has not made progress on its deforestation commitments with respect to the Amazon rainforest. There is also the question of whether Brazil even needs to issue labeled bonds since it rarely uses international debt capital markets.
Brazil is not the only Latin American sovereign looking to debut in the GSS bond market in the near future. Costa Rica and the Dominican Republic are set to issue sustainability bonds, while Guatemala and Colombia are looking to add green and gender-specific bonds to their GSS issuances. Meanwhile, Uruguay has released a sustainability-linked bond framework, following Chile becoming the world’s first sovereign state to issue an SLB bond earlier this year.
However, market conditions are not ideal even for early GSS issues. There was a decline in debt issuance volumes by both developed and emerging markets. This was due to the macro environment; the volatility will also continue next year. Debt capital market officials are therefore urging issuers to choose windows wisely and anticipate their issuances until early 2023, rather than waiting until later in the year.
Central and Eastern Europe also continues to issue GSS bonds. Last year, Latvia, Serbia and Slovenia issued their first GSS bonds. Meanwhile, in May, Austria issued a first green bond with an exchange of 4 billion euros, maturing in 2049. Other CEE sovereigns are expected to follow, including Romania, which is working on in place a framework for issuing green or sustainable bonds. This deal is expected to hit the market in 2023. Romania’s entry into the green bond market is long overdue, given that it is the largest issuer in international debt capital markets among the rulers of the CEECs.
Like other recent GSS sovereign issuers in the CEE region, Romania is likely to adopt the Green Bond Principles and Sustainable Bond Guidelines of the International Capital Market Association, the international market standards for green and sustainable bonds. The framework is also likely to be aligned with the taxonomy of the European Union, with regard to the definition of green categories.
Senior debt capital market officials say issuing GSS has been a priority for CEE sovereigns and that they would have made more progress had it not been for the conflict in Ukraine. The priority this year has been simply to get core funding. Sovereigns have had to carefully manage volatility when putting bonds on the market. They also need to diversify their issuances, increasingly looking to Asian currencies as additional sources of liquidity and private placements.
GSS bond issuance reached $418 billion in the first half of 2022, down 27% from the same period in 2021, according to the Climate Bonds Initiative. However, signs of recovery appeared in the second quarter, with green emissions increasing by 25% compared to the previous quarter.
Burhan Khadbai is Head of Content at OMFIF’s Sovereign Debt Institute.
