Just a year ago we analyzed how green, social and sustainable bonds (“ESG bonds”) were making steady progress in a very complicated scenario marked by the COVID-19 health crisis. Indeed, during the second half of 2020 and the first six months of 2021, the issuance of these bonds continues to set new records and is expanding its relevance in the global fixed income market in virtually all markets, with Europe and the Latin American region standing out in particular.
ESG bond issuance closed 2020 with an issued volume of more than $450 billion, representing growth of close to 50% over the previous year. This growth was largely supported by the issuance of social and sustainable bonds (46% of the ESG bond market), which grew almost fourfold, as issuers sought to support the health and economic recovery needed in the aftermath of the pandemic.
In the first half of 2021, ESG bonds have taken on even greater relevance in the fixed income market, exceeding $1.5 trillion on the market and a volume issued to date that already exceeds the total volume issued at the end of 2020. In a year in which sustainable development must undoubtedly be part of political and economic decisions (COP26 and global economic recovery), issuers of green, social and sustainable bonds have not remained behind, and through these issuances, have contributed to the fight against climate change, whilst also committing to inclusive and sustainable growth.
We must therefore highlight the significant evolution and growth that sustainable finance is experiencing in the Latin American region during 2021. Undoubtedly, all market players are aware of the challenges and opportunities in the region in terms of sustainable development. In this sense, it seems already evident that ESG bonds can and should play a relevant role in the region to mobilize funds for initiatives, projects and programs that contribute to social and environmental development in Latin America.
The emergence of sustainability-linked bonds
Since September 2020, and throughout these months of 2021, the ESG bond market has incorporated a new type of sustainable bonds known as sustainability-linked bonds (SLBs), which, although they have been widely accepted worldwide, are particularly relevant in Latin America.
Undoubtedly, the urgency of responding to the crisis has made it easier for social bonds and sustainability-linked bonds to gain relevance insofar as they make it possible to identify measurable impacts at the institution or project level. Thus, in Latin America we have seen how in the first six months of the year the volume issued in ESG bonds during 2020 has tripled (USD 4.1 billion in 2020 vs. USD 12 billion as of June 2021) with the sustainability-linked bond format being the most used (approximately 80% of the cases).
It is worth remembering that the ESG bond market in the region was initially supported by sovereign issuers, followed by financial institutions. This very important surge of SLBs in countries such as Mexico or Brazil, however, is explained by the interest of private sector corporate issuers to better explain how ESG issues, such as climate change, social justice, transparency and human welfare, are key concerns that are considered in defining their corporate strategy. Through this type of bonds, continuous improvement is sought in key aspects that affect the way in which companies act and through environmental or social indicators, investors can annually monitor compliance with the ESG objectives set by each issuer in the short, medium and long term.
Today, most ESG bonds in the region are issued in dollars or euros, thus providing access to international institutional investors who have been showing a considerable interest in this type of sustainable investment for several years now. However, we should be positive on the evolution of sustainable finance in the local bond market in the region. Despite its difficulties, this local market is stronger than it was a few years ago and several regions are already defining local regulatory frameworks on sustainable finance to facilitate transparency and standardization of this type of instruments, seeking to follow best practices and thus enhance the access of local investors to this ESG market.
It is encouraging that the monitoring and observance of international standards when issuing ESG bonds is being promoted in the local markets. This is a great opportunity to attract capital geared towards inclusive social and environmental development in the region, and relying on international best market practices will undoubtedly help maintain the integrity and growth of this ESG bond market, which in turn will generate interest from international and domestic investors.