Deloitte specialists analyze the origin and impact of sustainable finance in Latin America, emphasizing its current and future consequences

Finance increasingly supports the growth of industry, countries and the global economy in a sustainable manner, allowing investors to deepen their risk analysis and investment thesis without sacrificing financial return, their primary fiduciary responsibility. This is how the emerging financial market, in a way, returns to the essence of the economy: fill a gap between supply and demand.

Sustainable finance has become the way to evaluate investment projects of any kind (infrastructure, ventures, fixed income, variable income), and arises as the logical result of applying a social and environmental lens to solutions that are already financially feasible. . It is also an investment “philosophy” that, on many occasions, prioritizes social and environmental problems based on three attributes: intention, measurement and financial performance.

Sustainable finance, in the search for profitability and purpose — without generating negative externalities — and hand in hand with innovation, methodologies are used that allow economic growth and, at the same time, promote improvements in human well-being, true proposals for value.

These investments that seek a positive impact have become more relevant in recent years, as a result of the deterioration of the environment that has generated forced displacement of populations, a drop in agricultural production in certain places, and heat waves that have led to multiple fires, death and destruction, and exacerbated by the social and health crisis of COVID-19.

Key data on the growth of Sustainable Finance

According to BNEF (BloombergNEF) as of December 16, 2021, the green, social and sustainable bond market reached US$952 billion, nearly one trillion dollars annually. Green bonds account for most of the volume, with US$504 billion issued, followed by social and sustainability bonds, with US$188 billion and US$174 billion, respectively. Sustainability-linked bonds represent just under 10% of total issuance, at US$86 billion, but with high growth potential.

The CBI (Climate Bonds Initiative) for its part reports the issuance of 1.2 trillion in 2021 in labeled bonds, 43% of them in green bonds, and projects 1 trillion of only green issuances by 2022.

When reviewing different sources, the common denominator is that growth has been continuous, even in a pandemic the issuance of this type of instrument has increased; a signal that is reiterated when seeing that organizations such as the PRI (Principles responsible investment) report the growth in signatories in our region (excluding Brazil), reaching 100 the previous week (February 16).

It should be noted that the Latin American market has differences between countries when issuing bonds. Mexico is characterized by development banking issues, other countries such as Brazil are dominated by non-financial companies, Argentina mainly by the government sector and countries such as Ecuador, Mexico, Uruguay, Colombia, Peru and Chile, we have seen sovereign thematic bond issues.

Financial regulators in Latin America in recent years have begun to actively push green finance initiatives, including joining global initiatives such as the Network to Green the Financial System (NGFS), and The International Network of Financial Centers for Sustainability (fc4s) to empower the main financial centers to cite a few examples. This interest and participation has made some countries leaders in sustainable finance, such as Mexico, Brazil and Chile.

On the other hand, several stock exchanges have joined the United Nations Sustainable Stock Exchanges (SSE) initiative and offer segments of labeled bonds. Some specific actions include launching separate listings for themed bonuses, publication of guides to issue labels and training offers at reduced rates for bond issuers.

Finally, innovative alternatives such as mixed finance, payment for results, fibers, hybrids between debt and shares such as mezzanines, among others, offer incredible possibilities to mobilize investments in clear and measurable development themes, with multi-stakeholder participation.

What was concluded at COP26?

At COP26, held in Glasgow, important agreements were reached with the world’s main CO2 emitters. Some of these included increased commitment to reducing methane emissions, transitioning to clean energy, supporting renewable energy, and taking action to address climate change. More than 100 countries – with 85% of the world’s forests – have committed to halting deforestation by 2030.

For the world of sustainable finance, it is clear that the most important development of COP was the launch of the Glasgow Financing Alliance for Net-Zero (GFAN), an initiative representing 450 organizations with some $130 billion AuM. 40% of global assets are now committed to the transition.

COVID-19 effect

Despite COVID-19, there was an increase in the sustainable debt market in Latin America and the Caribbean (LAC) during 2020-2021.

The total issuance of Green, Social and Sustainable Bonds (VSS) for 2021 amounted to US$48.6 billion as of June 2021

Green and sustainable recoveries of economies are being implemented throughout LAC, where there are multiple opportunities for sustainable finance to grow.

Claudia Restrepo Múnera, Lead Partner of Sustainable Finance at Deloitte Spanish Latin America.

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