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Sovereign Sustainable Bonds as Core Financing Instruments for Sustainable Development

September 29, 2022 por Gianleo Frisari - Micaela Carlino - Anabella Palacios Leave a Comment


Despite their short history, Sovereign Thematic Bonds have emerged as an interesting opportunity for Latin America and Caribbean (LAC) countries to efficiently channel domestic and international capital markets towards sustainable investments. While countries are trying to finance their recovery efforts and also take advantage of the increased interest for responsible and sustainable investments, treasurers of the region have increasingly looked at sustainable bonds as an opportunity to access domestic and international markets and to channel capital towards the estimated investment opportunity of more than $1 trillion in a green recovery. Green bond issuance in the LAC region more than doubled in less than two years, from US $13.6 bn in September 2019 to US $30.2 bn at the end of June 2021. For social and sustainability bonds, the growth is even more remarkable with US $18.3 bn in cumulative issuance since the inception of this market segment in 2016. Despite the impact of the COVID-19 pandemic, the LAC sustainable debt market continued to soar throughout 2020 and 2021 across all main themes.

IDB’s unconditional support

The IDB has been a pioneer in its support of this market since its first bonds in 2016. It has developed a program that includes technical assistance to prospective public sector issuers, with a total of 46 thematic bonds supported so far, capacity building and knowledge dissemination. In addition to this,  the Green Bond Transparency Platform, aims to make available to investors and the market impact indicators for all the green bonds issued in the region. Since 2018, through the NDC Accelerator Multidonor Trust Fund, the IDB has helped sovereign issuers to identify green and social expenditures in their budgets, create governance mechanisms to develop and manage sovereign sustainable programs and then supporting treasurers in the preparation of framework documents, in obtaining second party opinions and certifications, and in issuing the bonds on international and domestic markers. These efforts have resulted in more than US$30 billion issued across green, social and sustainability bonds.

As well as this, IDB’s Green Bond Transparency Platform, is a key tool for issuers and investors to support the harmonization and standardization of green bond reporting and to analyze the proceeds and environmental performance.

The Case of the Region, Examples of Latin American Countries

The successful issuance of sovereign thematic bonds in the LAC region is driven by the important benefits this instrument brings to the countries. Amongst them: diversification of the investors’ base, the direct mobilization of investment capitals towards green and sustainable activities, and the support for the creation of sustainable capital markets. Public sector issuers together account for about 30% of the total green bond issuance, with a dominant role for sovereign issuers in both green and social categories. A total of six countries have successfully issued thematic bonds in the region. We must highlight two examples of sovereign issuances that allow us to shed some light on the value-added these bonds can bring to LAC public debt managers and treasurers. Mostly due to their complementarity to conventional bonds and innovation to attract foreign investors in domestic markets.

One of them is the case of Chile. Since its inaugural issuance in 2019, this country quickly became the largest issuer of sustainable bonds in the region with a cumulative volume of around US $36 billion in green, social, sustainable, and sustainability-linked bonds. More importantly, now Chile’s sustainable bonds represent a quarter of the total outstanding bonds for the country – highlighting how thematic bonds are a core financing instrument for this issuer. Furthermore, with the issuance of the first (globally) Sovereign Sustainability Linked Bond (SLB) in March 2022, Chile showed that sustainable bonds could monetize not just sustainable public expenditure and infrastructure but can also be instrumental in monetizing sustainable policies and national commitments –such as the Nationally Determined Contribution (NDC) set by the country under the Paris Agreement.

Another key example is Colombia, that issued their first sovereign green bond in September 2021, with a repeated issuance in October 2021 and another in June 2022. Differently from many emerging countries, Colombia did issue its sovereign green bonds in the domestic market (called Green TES) through a modality called twin issuance with conventional bonds (TES). This mechanism was chosen to promote both the growth of the nascent sustainable investment industry in the country, as well as to increase the presence of foreign investors in the country. The first issuance saw indeed the participation of foreign investors (by raising US $200 million) in the green issuance approximately more than two times compared to the conventional bond. Colombia also a received special international recognition for this instrument and received the Green Bond of the Year Award by Environmental Finance.

Thanks to the favorable market conditions and the low-interest rates, sustainable markets have grown in size and relevance, going from niche to the mainstream. Now questions arise on how they will perform in a more volatile environment like the one seen in the last few months. On the issuance side, the evidence so far has been mixed, with transaction volumes from emerging market issuers still trending higher despite those in developed economies decreasing slightly. Interestingly, market volatility could provide unprecedented insights into green bonds’ resilience to market shocks. For LAC, Colombia Green TES seems to indicate that the greenium (the rate differential over a comparable conventional bond) has been rising from an average of 9.8 basis points over the last 10 months to the 33 basis points observed in the more volatile markets of May 2022.

Understanding the Determinants of Sustainable Bonds: A Call for Proposals

More research is needed to understand the determinants of sustainable bonds’ greenium in emerging markets and the investors’ preferences that drive its evolution. In this sense, the IDB launched a call for proposals the summer of 2022 to gather evidence and create academic knowledge on the variables driving sustainable bond markets, especially on pricing and issuance volume, that will be presented in a workshop at the end of the year – please check this link for more information.


Filed Under: Cambio Climático Tagged With: bonds, capital markets, climate change, climate finance, decarbonization, green bonds, social bonds, sustainability bonds, sustainable recovery

Gianleo Frisari

Gianleo is a climate change economist at the InterAmerican Development Bank (IADB) where he focuses on climate finance and sustainable investments research to identify solutions for the mobilization of private capital. He works on financial instruments for the public sector, such as sovereign green bonds, sustainable solutions for Public-Private Partnerships, and the integration of climate change considerations in financial regulation and supervision. Before joining IDB, Gianleo was a senior analyst at the Climate Policy Initiative, working on risk mitigation and blended finance instruments low carbon investments. Before focusing on climate finance issues, Gianleo was a portfolio manager of investment programs dedicated to hedge funds and alternative assets. Gianleo holds a Ph.D. in “Science and Management of Climate Change” from Ca’ Foscari University of Venice and graduated in Economics from Bocconi University in Milan.

Micaela Carlino

Holds a Master Degree in Economics from Torcuato Di Tella University, as well as an Economics undergraduate degree from the same institution. She has been selected to participate in the Virtual Lab on Sustainable Finance and Impact Investment organized by AECID and UNED Micaela has 18 years of experience in economic and financial analysis and regulatory and consulting activities in most Latin American countries, focusing on energy, infrastructure, and climate change projects. Her professional training in economics, later completed with postgraduate studies, allowed her, together with an intensive professional practice, to have a solid knowledge of the subject. Since 2005 she has been involved in research and consultancy work at the Torcuato Di Tella Foundation and Institute on Economics of Climate Change, including carbon pricing projects, green and carbon finance platforms, training for decision makers and promotion of a regional environmental agenda. Since 2003 she has been a university lecturer and professor at undergraduate and graduate levels in several Argentinean universities. She is the author of publications on economic, energy and climate change issues.

Anabella Palacios

Anabella is an urban planner with more than ten years of experience in climate finance, local and national policy development, and sustainable infrastructure. She has extensive experience working with public and private actors, leading the design and implementation of projects especially on sustainable cities and climate-smart agriculture. She previously worked at the World Bank and The Nature Conservancy implementing and coordinating green development and blended financing strategies with governments in the Middle East and Latin America. Currently, she works as coordinator of the project “Strengthening Governance Capacities in LAC to Comply with National Commitments under the Paris Agreement: A Perspective from Costa Rica, Uruguay and Jamaica” in collaboration with the Organization of American States (OAS), and also manages the NDC Accelerator fund (ACL) and NDF-ProAdapt, and contributes technically to other funds such as the Green Climate Fund (GCF) and Climate Investment Fund (CIF). In 2018 she was chosen to participate in the world's largest female expedition to Antarctica, as a representative of Argentina along with 80 other experts on climate and science issues from 26 countries. Anabella has a master's degree in urban and regional planning from the University of North Carolina at Chapel Hill (UNC-Ch), and a degree in International Relations from the Catholic University of Córdoba, Argentina (UCC).

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Sustainability

This blog is a space to reflect about the challenges, opportunities and the progress made by Latin American and Caribbean countries on the path towards the region’s sustainable development.

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