While we have continued to feel the impact of the pandemic and geo-political uncertainty in the first half of 2022, sustainable finance in Latin America is resuming its growth trajectory. This important trend is led by market-leading sustainable debt issuers and investors, and the emergence of clear Environmental, Social and Governance (ESG) strategies, standards and improving reporting.
Issuers across Latin America are on track to benefit from this growing market and support the region’s environmental and social development.
Sustainable finance gains traction
“After impressive sustainable finance activity in LatAm last year, we saw continuing strong demand at the start of 2022, until global volatility temporarily dampened some interest,” recounts Daniel Gracian, Director, Sustainable Finance, at Scotiabank. “The uncertain rate environment led some potential bond issuers to opt for sustainability-linked loans, waiting for greater clarity in bond pricing.”
Scotiabank specifically observed that more LatAm-based corporates across a variety of industries inquired about sustainable-linked debt instruments. This heightened interest by corporates is matched by investor-side demand, including among a growing pool of ESG-oriented investment funds.
Gracian also notes that interest in sustainable finance is strongest in some of the region’s most developed markets, including Chile, Mexico and Brazil, where a number of corporate and state issuers have been a force in green, social and ESG-linked debt. He also points out that activity is growing in other countries that recognize the relevance of sustainable finance to their heavy industry and natural resource-dependent economies. Colombia, for example, recently became the first LatAm country to introduce a country-specific green taxonomy, which will help direct sustainable finance to the country’s ambitious green energy transition projects.
Another positive regional trend in the sustainable finance market is the recent wave of LatAm sovereigns that are taking big steps into sustainable debt markets. In January 2022, Scotiabank served as Joint Bookrunner in the Republic of Chile’s US$4.0 billion US-dollar sustainable notes which further adds to the Republic’s strong ESG profile year-to-date, 29% of Chile’s total debt is either green, sustainable, social or sustainability-linked. Scotiabank was also selected as Sole Structuring Agent and Joint Bookrunner by Mexico’s Secretaría de Hacienda y Crédito Público when United Mexican States issued its inaugural local currency Sustainable Sovereign Bond equivalent of US$980 million. This transaction supported national sustainable development projects and international ESG commitments. Such high-profile actions by sovereigns will influence ever-greater ESG attention by private and public sector issuers.
“This wave of ESG debt issuance and engagement from both sovereigns and corporates debunks any misconception that LatAm is a latecomer to sustainable finance,” says Gracian. “In fact, with a number of Latin American countries setting ambitious National Determined Contributions objectives in support of the Paris Agreement’s central aim to strengthen the global response to the threat of climate change, the region is way ahead in meeting bold sustainability goals.”
Gracian and Scotiabank’s Sustainable Finance Group have been at the epicentre of this activity, collaborating with Scotiabank’s network of corporate and investment bankers located across the Americas, alongside global specialists in debt capital, lending, commodities and currencies. Together Scotiabank teams advise clients on optimal sustainable financing solutions and ESG financing frameworks, develop capital raising strategies, and execute these programs in local and hard currencies across major markets.
In fact, Scotiabank has risen sharply in the region’s league tables, demonstrating its prominence as an advisor and provider of sustainable capital, especially in the Pacific Alliance trading bloc nations of Chile, Colombia, Mexico and Peru. As of 1H of 2022, Scotiabank was recognized as the Top Bookrunner of LatAm ESG Bonds1 as per Bloomberg League Tables, with 14.91% of the volume (YTD 2022).
Strong growth anticipated
With such momentum, Gracian expects sustainable finance volumes to continue to grow over the remainder of 2022, despite some political and market volatility in the region. Currently, Scotiabank estimates global sustainable finance debt be in-line or slightly above 2021 in light of current market conditions, but a remarkable increase from a market of under $830 billion in 2020. Year-to-date issuance of ESG debt in both EUR and USD is higher as a portion of total issuance vis-a-vis 2021, showing investor commitment to sustainable financing solutions.
Scotiabank expects sustainable financing solutions will continue to be propelled by a number of trends, most notably the growing commitment of LatAm companies to establish and operationalize concrete ESG goals. “Efforts by companies to develop comprehensive ESG strategies and embed meaningful and measurable environmental and social targets will make it possible for them to access sustainability-linked loans or bonds while integrating ESG into their capital structure,” says Gracian. He goes on to note that the global pandemic and worldwide attention to issues of social and economic inequality have prompted a vast array of Latin American organizations to better link their business and financial activities with ESG outcomes.
Another recent pattern, which strongly suggests that sustainable finance is gaining traction, is the fact that more corporates are aligning their environmental targets with scientific decarbonization pathways and working with respected third parties to develop, execute and evaluate their efforts. This includes defining and promoting best practices in emissions reduction and net-zero targets based on climate science.
In light of these forces, Scotiabank’s Sustainable Finance Group advises clients across the Americas to take a highly strategic, carefully measured approach to pursuing future sustainable finance opportunities. “To satisfy discerning investors, it will be important to set ambitious ESG targets that are based on a strong and long-sighted ESG strategy. Scotiabank’s team is well positioned to guide clients in building a sound strategy, targets and credible plans to accomplish their ESG goals.”
Gracian emphasizes that companies who are considering accessing the sustainable financing market need to understand that sustainable finance must encompass in-depth alignment of an organization’s ‘finance’ and ‘sustainability’ teams. Before considering ways to shift its capital structure to reflect sustainability efforts, companies must establish clear sustainability business goals that are mapped to industry-specific, international standards, and have the suitable infrastructure in place to execute the strategy.
Commit to transparency
Such coordination of a company’s activities among its business, sustainability and finance teams, is invaluable to satisfy the level of transparency now expected by investors, analysts and regulators. “Communication is one area for improvement among many current sustainable finance issuers”, suggests Gracian. “Companies may have excellent sustainability programs in place, but they often under-communicate with stakeholders. It is more important than ever for companies to share their story with the investor community and their clients, report adequate and pertinent details on their progress, and also pro-actively address unfolding challenges or shortcomings in their performance.”
Noting that it’s natural that newer market participants require time to mature along their sustainability journey – especially as international best practices and standards evolve – Gracian expresses optimism for corporate and state issuers looking to enhance engagement in ESG: “This field has gained solid traction from just two years ago and more organizations and their teams are committed to making a positive impact. Our team can help them align capital with important efforts to transform the development, health, wealth and resiliency of this region.”
Stephen Guthrie, Senior Vice President, International Corporate and Commercial Banking at Scotiabank, concludes: “In light of this growing and deep interest in ESG in Latin America, Scotiabank has the opportunity to demonstrate our unmatched commitment to both sustainable finance and to this dynamic region, and help our clients achieve sustainable success across the Americas.”
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