In terms of volumes, 2016 has been yet another record-breaking year for the green bond market, with issuances doubling from US$48bn in 2015 to over US$90bn in the last 12 months, according to data from Bloomberg and the Climate Bonds Initiative. Moody’s estimates that the market could double again in 2017, potentially crossing the US$200bn threshold.
“With continued momentum, attributable to the Paris climate agreement and factors such as issuer and geographic expansion, green bond issuance will likely reach another milestone in 2017,” Moody’s analysts explain in the report.
As much as a third of that growth has been driven by China, which embraced the Paris Agreement’s push towards sustainability by issuing US$32.9bn green bonds this year. With a Trump-led US casting doubts over its continued commitment to low-carbon policies, many industry participants are shifting their expectations towards China’s leadership in that domain.
“We expect China to be taking the lead in the coming years in terms of focussing on renewables, promoting sustainable resources and developing climate finance, and we support that 100%,” says Justine Leigh-Bell, Director of Market Development at Climate Bonds Initiative (CBI). “President Xi has been very clear that green finance was a key strategy in China’s five-year plan. This will happen whether or not the US gets on board.”
But while the embrace of renewables and “green” finance is now a global dynamic, Latin America holds possibly the greatest untapped potential when it comes to sustainable energy. Realising that potential, though challenging, could also transform the region in the next few years.
Though still far from China’s levels, green financing in Central and South American countries displayed a very positive dynamic over the last twelve months.
Argentina and Brazil have returned to the international debt markets after a tough few years, with some green bonds filling the pipeline. Some of Brazil’s corporates have gone for climate-linked notes – and more issuances are expected.
“The fixed income market in Argentina only set off last year, at the end of the default. Argentina was out of the international markets for more than 10 years,” explained a trader based in Argentina.
“The first thing our local companies need to do is start issuing debt, and provide more liquidity to their bonds. If the first thing a company does is to try and sell a green bond, it is not going to be liquid enough for investors to notice,” he added.
In Brazil, the story is rather different; the bond market is already quite buoyant.
“I firmly believe that 2017 will be the year of green bonds for Brazil,” said Leigh-Bell. “It is a heavily corporate-leaning market, which will be led not by the government, but by large industry players.”
The expert pointed to three major deals this year. BRF SA raised US$549mn in the first euro-denominated green bond sale in May 2016. A month later one of the country’s leading pulp and paper producers Suzano tapped the debt market with a US$500mn green issuance, before selling a further US$299mn in December. Its industry peer Fibria priced a US$700mn senior unsecured green bond in January 2017, halving their own new issue premium with a 5.5% first coupon.
The key is to ride this momentum by building on the existing framework, adding more complex and innovative instruments in the process.
“We try to start from what they already have and innovate. BNDES recently formed its sustainable energy fund, which we helped structure, and they are looking to buy all available bonds tied to sustainable energy. It will be open to international and local investors and go live in June, with a target of US$500mn equivalent.”
Mexico was another bright spot this year, with the state-owned bank Nafin issuing the country’s first green bond in December 2015 (US$500mn), followed in September 2016 by Mexico City’s MXN1bn (approx. US$50mn) municipal green bond.
Mexcio City Airport US$2bn green bond in Q1 was of the largest issuances in the LatAm debt markets last year. Investors flocked to the paper, with Blackrock reportedly being one of the biggest buyers.
“Mexico is up and coming and we suspect by the end of the year we could see a Mexican green sovereign – discussions are already under way with Finance Ministry. Low-carbon transport infrastructure is the main attraction for them.”
She also pointed to Mexico’s pioneering role in developing this market, with domestic green bonds both attracting strong appetite from investors.
Turning to the Andes, so far green bonds only made up a small segment of the overall debt issued, but a series of major sustainable energy and infrastructure projects planned for the upcoming year could blow this market wide open.
In December 2016, Bancolombia became the first Andean commercial bank to use this instrument, issuing COP350bn (US$115mn) green bond and paving the way for the private sector to take the lead in addressing climate change.
“This bond is part of our corporate commitment to sustainability. We want to reduce our direct environmental footprint and encourage clients and partners to do the same by providing services and products that enable them to invest in areas like renewable energy and sustainable buildings,” Bancolombia President Juan Carlos Mora said.
The government’s sustainable growth programme, dubbed the 2014-2018 National Development Plan, set three clear objectives: one, advancing towards a low carbon economy and sustainable growth; two, protecting and ensuring the sustainable use of natural capital; and three, achieving resilient growth while reducing the country´s vulnerability to climate change.
Similarly, Peru is also focussed on addressing climate change, and using sustainable energy and infrastructure projects to improve quality of life. A cornerstone of President Pedro Pablo Kuczynski’s platforms is an US$80bn country-wide infrastructure development programme, which, he hopes will help drive growth to 5% a year by 2018 through a combination of more robust private and public infrastructure investment, a lower value-added tax, tax incentives and bank credits for small businesses.
Both countries are clearly in a strong position to attract capital, and with the emphasis on “green” projects getting stronger, there is a lot of potential for climate bonds.
“Since Bancolombia issued, the market is in process of being mobilized: we are having meetings with stakeholders, both in public and private sectors,” Leigh-Bell says. “But one successful issuance is still a long way off from any large-scale developments. In Peru, similarly, we are seeing a lot of interest and engagement, but nothing has really materialised yet.”
According to the expert, there are three main reasons for this shortage of progress.
One is lack of awareness, an understanding of this market, and the opportunity at hand. The second is understanding the instruments – the types, structures and regulations relating to green bonds. Finally, another challenge is finding bankable projects and portfolios: in many emerging markets the capacity to issue is limited, and with low credit levels it is even harder to issue internationally.
“Local investor bases are too narrow and policy incentives too limited to take issuance to another level. The role of government is fundamental in terms of making this market more appealing, educating the issuer base and breaking down barriers,” she concluded.
For green bonds, these challenges remain across the whole region in varying measures. But there is also cause for optimism. Growing interest in green financing means that educating and instilling confidence in investors is just a matter of time.
Many investors already buying green bonds for their attractive yields and pricing, or setting up ‘green funds’ that exclusively invest in climate-aligned instruments, only to then learn more about the added bonuses the “green factor” carries.
“We expect to see existing products to take a wider variety of shapes, which will help attract both foreign capital and domestic buyers; there will be tweaks to things like infrastructure bonds with added tax incentive for institutional investors to select the sustainable, green projects, for example,” Leigh-Bell suggested.
Regulation has been one of the leading pain points for sustainable finance; a lack of leadership in unifying the standards and frameworks globally has been challenging, especially with the US looking to reassess its focus on climate-linked priorities.
But as China – with its strong culture of regulation – assumes a more prominent position, more progress is expected. The government and the Central Bank are already in process of setting up a framework for green bonds and similar instruments, assisting all the involved parties to create the right environment for domestic issuances. Getting the incentive structure right and cementing the legal parameters is a must. If applied internationally, this could very well be the push that green financing needed to become a truly global phenomenon.
