By Adrian Ortega-Andrade and Isabelle Braly-Cartillier*
Since the first green bond was issued in 2007, the green bond market has grown exponentially, surpassing the US$1 trillion milestone in cumulative issuance (CBI, 2021). This rapid growth is due in part to the commitment reached in Paris in 2015 to limit the rise in average global temperature to below 1.5 degrees C, and to the increase in the demand of investing instruments with positive environmental impacts from investors who are increasingly taking on a commitment to sustainability.
To date, the supply of green paper has come primarily from sectors that already have access to debt markets and that can easily demonstrate their green qualities, such as energy and transport. But there is much more to do in other sectors.
One way to continue supporting the growth of green bond markets is to take advantage of new sectors that have assets with a positive environmental impact but do not necessarily have access to capital markets. This is an area that the Inter-American Development Bank (IDB) is promoting in Latin America and the Caribbean.
A clear opportunity where we are focusing our efforts is in the water and sanitation sector, where investment can benefit sustainability and resilience to climate change, and whose financing through debt markets remains the exception rather than the rule.
Green bonds for the water and sanitation sector
In Latin America and the Caribbean (LAC), very few water and sanitation companies have experience in accessing capital markets, and even fewer companies have successfully taken advantage of the greenium of their investments.
According to the latest publication on the state of the sustainable debt market in LAC issued by the international organization Climate Bond Initiative (CBI), the water and sanitation sector represents only 7 percent of the green bonds issued, and only a few water and sanitation companies such as Aguas Adinas, Attend Ambiental, Iguá, Corsan, and BBK Ambientan have managed to issue corporate green bonds reaching an approximate volume of more than 1.4 billion dollars.
In this context, the Connectivity, Markets, and Finance (CMF) Division in coordination with the IDB’s water and sanitation division (WSA), and together with IDB Invest have been working proactively to develop—from the supply side—fixed-income green financing opportunities. In a recent pilot in Colombia with the Water and Sanitation Division, the IDB has supported two water and sanitation public companies to develop a Green Bonds Framework and obtain a Second Party Opinion (SPO).
The result is significant: for these two companies, a combined portfolio of more than 170 eligible projects was identified, with an estimated value of approximately US$288 million. It was aligned with the taxonomy of the Climate Bond Initiative, as well as with the Colombian taxonomy on green bonds that is still under development. More interestingly, the portfolios were aligned with the Climate Resilience Principles recently published by the CBI.
Creating opportunities from the supply side: The role of multilateral banking
In order for these sectors to grow in the sustainable debt market, more holistic support is needed. The opportunities for placement of green bonds are diverse, and, depending on their regulatory environment, the quality of the assets, and the market appetite, public water and sanitation companies can opt for public or private issuances, either in the local or the international markets.
In Colombia, for public service enterprises to issue bonds in their domestic market, they must meet certain criteria, such as: the requirement to prove that the company is creditworthy and can make payments; compliance with obligatory accounting rules according to the legal nature of the company; specific authorizations from their territorial entity, and the Ministry of Finance; and compliance with the stock exchange rules and regulations. A private issuance may be a less onerous option, but this would require a more focused preparation, promotion, and negotiation with accredited specialized investors who are seeking to diversify their investments into new green sectors.
The role of multilateral banks in the development of green investment opportunities should focus on supporting new issuers to enter the debt markets or helping to overcome the challenges of placing a green bond in favorable conditions. The technical assistance offered by the IDB goes beyond the traditional support for the design of a framework or to obtain an SPO, since it also offers legal and financial support that helps maximize the opportunities for success and the participation of private investment. The IDB is also working on the development of appropriate financial vehicles and instruments, such as anchor investments and guarantees, to allow for smaller, local currency issuances.
It is this technical and detailed work that helps unlock access to this debt market for sectors crucial to combating climate change and is one of the key pillars of action within the IDB’s Vision 2025 strategy.
That is why at the IDB we are committed to developing the green bond markets towards new sectors. These not only benefit investors looking for high environmental impact instruments it will also strengthen issuing companies externally by improving their profile toward investors and civil society and internally by promoting internal integration among their finance, operations, and environmental teams around the corporate sustainability strategy. This is how we leverage public and private investments to promote sustainable and equitable development in our region.
This pilot was developed thanks to a technical assistance project financed by the Swiss Economic Corporation and Development (SECO).
*Isabelle Braly-Cartillier is a senior specialist at the Capital markets and financial institutions Division at the IDB. Adrian Ortega-Andrade is a consultant at the same Division