Latin America's debt markets are heating up and going green.
Issuances of environmental, social, and governance (ESG) related bonds in Latin America and the Caribbean totaled $16.55 billion from January to April 2021, an absolute record according to the United Nations Economic Commission for Latin America and the Caribbean.
While rising volumes in these notes was a constituent part of a macro trend of record bond issuance in the region hitting $52 billion, ESG-related bonds have taken a disproportionally large share of the total. For Q1, these thematic bonds accounted for 22.8% of total debt issuance in the region, more than double the 9.3% recorded in all of 2020 and more than five times the average of 4.3% recorded between 2015–2020.
ESG-related notes are debt titles issued either by governments or companies for the express purpose of financing ESG projects. They attract investors that seek yields while promoting sustainable growth.
The Latin American and Caribbean ESG-related bond market is currently led by Chile (38% of total ESGs in Q1) and Brazil (35% of total ESGs in Q1), although the profile of title issuers in each country differs drastically. While 91% of Chile's ESG notes came from the sovereign sector, Brazilian ESG-related issuers are exclusively from the corporate sector. Mexico claims the third spot in the region, its issuances coming from the private sector alone. Together, these three countries issued 86% of Latin American and Caribbean ESG bonds in Q1. Argentina and Guatemala combined for another 11%, as supra-national issuances amounted to the final 3% of the market.
Data indicates that sustainability-linked notes propelled the overall bond market's record-breaking peak. These assets differ from green and sustainability bonds as they aim to guarantee the achievement of environmental metrics set by the issuer rather than finance specific projects. They are issued mainly by the private sector, which—despite the growing presence of Chile’s government in the market—still accounted for 62% of total ESGs in the region.
Q1 also saw the largest ever single sustainability-linked bond in the region, issued by the Brazilian cosmetic giant Natura & Co, valued at $1 billion. “This represents a true milestone for us. With this issuance, 40% of our debt is now tied to sustainability-related goals. This result confirms that ESG practices are growingly relevant for our investors and that they trust the sustainable agenda that we have been building throughout our businesses,” noted Viviane Behar, Director of Investor Relations of Natura & Co.
Although Latin America and the Caribbean are still largely lagging both Europe and North America in total world issuance of these types of assets, analysts see Q1 numbers as a sign of further expansion in the region. “Sustainability-linked notes gained traction in the Latin American cross-border issuer market since 2020. Fitch expects green, social, sustainability and sustainability-linked markets to continue to increase in the region,” according to Fitch Ratings analyst Fernanda Rezende.