ESG Debt Markets Are Maturing in Latin America | White & Case srl


Despite a decline in overall bond and loan issuance in the Latin America region, ESG-related debt issuance flourished in 2021 and is expected to continue in the coming months

Latin American environmental, social and governance (ESG) debt markets intensified in 2021 as issuers noted the strong appetite of the lending community to support credits linked to good sustainability practices.

According to data from By debtsborrowers across the region tapped the loan and bond markets for ESG and sustainability-related debt facilities at an unprecedented pace in 2021. carried over to 2022, with $11.9 billion in issuance already recorded This year.

Latin American issuers have noted the rapid growth in demand from global investors and institutions for ESG and sustainability related investment opportunities. According to BloombergNEF, global issuance of sustainable debt (including green bonds and ESG-related loans) topped US$1.6 trillion in 2021, more than double the previous year’s total.

The pandemic, the growing impact of climate change, and social justice movements like Black Lives Matter and #MeToo have put corporate ESG conduct under a microscope around the world. Institutional and retail investors look to companies and funds that can demonstrate positive ESG practices. Issuing shareholders also supported companies that link their debt requirements to sustainability performance.

A wide range of transmitters

The emergence of sustainability-linked bonds in particular – which, unlike green bonds, do not need to be linked to specific eligible projects such as wind or solar farms – has opened up opportunities for a greater number of transmitters in the region.

Sustainability bonds are tied to the delivery of agreed ESG Key Performance Indicators (KPIs) rather than specific green assets or projects. Borrowers who meet or exceed their KPIs, such as carbon reduction or workplace diversity targets, continue to pay the original interest rate on the loan or bond. If key performance indicators are not met within a certain timeframe, interest rate margins increase.

The emergence of these ESG KPI ratchet structures has enabled a wider range of companies operating across multiple sectors to align their capital raising requirements with ESG performance. Latin American borrowers who have been able to articulate forward-looking, performance-based ESG goals have found a pool of investors and lenders willing to support their bonds and loans.

Brazilian personal care and cosmetics group Natura Cosméticos, for example, raised a $1 billion ESG-related bond in May 2021, considered the largest sustainability-related bond issuance in Latin America to date. . The bonds mature in 2028 and will bear an interest coupon of 4.125% payable semi-annually. The proceeds will be used to refinance existing debt and strengthen the group’s capital structures.

The bond commits Natura, which has been carbon neutral since 2007, to reducing its greenhouse gas emissions by an additional 13% and reaching 25% post-consumer recycled plastic in its plastic packaging. The targets must be met by the end of 2026. If they are not met, the bond interest rate will increase by 65 basis points from November 2027.

Other Latin American blue chips that issued sustainability bonds in 2021 include Brazilian paper producer Klabin, which secured a 10-year US$500 million sustainability bond at a price of 3, 2% and linked to measures for the consumption of natural resources, recycling and biodiversity. Argentinian online marketplace Mercado Libre has raised US$400 million in sustainability notes, priced at 2.375% and maturing in 2026. Proceeds will be used to fund or refinance projects with social and environmental impacts positive.

In January 2022, Mexican cement and concrete company GCC announced that it had completed the issuance of a US$500 million sustainability bond with an interest coupon of 3.614% and a maturity in April 2032. The emission is linked to a 22% reduction in CO2 emissions by 2030 – failure to meet this target would cause the bond’s interest rate to rise by 75 basis points.

Most recently, in April 2022, AEGEA Saneamento e Participações SA, Brazil’s largest private water and sanitation company, priced a sustainability-related ticket offering with KPIs related to reducing water pollution. energy consumption and the increase in leadership positions held by women and blacks. employees.

The sovereigns are mobilizing

Latin American governments have also taken advantage of the growing demand for green and sustainability-related debt products and have positioned their sovereign capital raisings to secure funding from ESG-focused sources.

For example, Colombia has issued $1.3 billion in green, social and sustainability (GSS) bonds since mid-2021, with most of this debt being taken on by local funds eager to support the development of the sustainable debt market in the country. In January 2022, Chile raised US$4 billion through a three-tranche sustainability bond issue. Chile will use the proceeds for all projects that qualify as green expenditures and qualifying social expenditures under its sustainability bond framework.

Latin American sovereigns have also been active in the area of ​​ESG and green lending. In February, for example, Ecuador secured a $700 million loan from the World Bank to support the country’s initiatives to build climate resilience, reduce poverty and rebound from COVID-19-related disruptions. . This is the first of three loans provided by the World Bank to support Ecuador’s climate change and social development goals.

Mexico, meanwhile, has been a leader in the issuance of sustainability-related debt in Latin America. In 2020, Mexico became the first country in the world to issue a sovereign bond linked to the UN’s Sustainable Development Goals (SDGs), securing an €890 million seven-year bond that was over six times oversubscribed. The country is considering new ESG-related issues in the Japanese bond market as a foreign issuer.

Are existing standards and regulations stringent enough to ensure that sustainability-related emissions in Latin America remain a viable option in the region? Only time will tell, but the enthusiastic rise in ESG-related debt has the potential to provide a pool of long-term capital for eligible corporate and sovereign borrowers in Latin America and focus those borrowers on achieving important ESG objectives for the foreseeable future.

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