Colombia issues first Latin American green sovereign bond in local currency

Colombia this week became the first Latin American nation to issue a sovereign green bond in its local currency, which observers say illustrates the growing hunger for the energy transition-focused investment class.

The 10-year Colombian Peso 750 billion ($196 million) sovereign bond was issued 29 September. Demand from investors was so high that the size of the bond was increased by 50% from the Peso 500 billion originally sought.

Investors displayed an appetite that came in at 4.6 times as much as Colombia made available with the bond, IHS Markit Latin American Sustainable Finance Director Soffia Alarcon-Diaz told Net-Zero Business Daily.

The cover ratio—demand compared with the available investment opportunity—was comparable with debt issued by regional neighbors Chile and Mexico in Dollars and Euros, she said, making the appetite even more impressive.

The debut of local currency bond had been widely signaled, but beyond its denomination, another factor was also considered innovative.

Some 40% of the funds raised will go to water projects, 27% to transportation, and 14% to energy projects, according to Carlos Arcila Barrera, adjunct professor at the Universidad de los Andes' Center for Sustainable Finance. He said that energy projects seeing less than a fifth of the total was novel.

The eligible areas for use of the funds being raised comprise water management, ecosystem services and biodiversity, waste and circular economy, clean transportation, non-conventional energy, energy efficiency, and sustainable agriculture.

Green bonds typically are issued to fund large-scale, capital-intensive green infrastructure projects such as energy efficiency, transit, or renewable power projects that result in positive environmental outcomes, including climate benefits.

Speaking during an International Capital Market Association (ICMA) briefing on sustainable bond markets in Latin America 20 September, Barrera said the latest Colombian sovereign green bond in some ways changes the picture when it comes to the type of projects receiving investors' money.

But investors were following a path laid out by the Colombian government's National Development Plan in 2019, said Alarcon-Diaz, and each was "part of the commitment to the acceleration to a low-carbon economy."

Issuing the bond is part of a wider push into the energy transition from the Colombian government.

Colombia has 1 GW of non-conventional renewable generation and expects to reach 2.5 GW by 2022, President Ivan Duque Márquez told CERAWeek by IHS Markit conference attendees in March. The country will hold auctions to build 4.8 GW of renewable generation capacity, which will be installed in the next five years, he added.

The foundations for acting on the signals sent to investors grew stronger in July when Colombia adopted a Sovereign Green Bond Framework. The bonds will finance eligible expenditures that will contribute to achieving the country´s environmental goals and international commitments, the Ministry of Finance said 27 July when launching the framework.

Minister of Finance and Public Credit José Manuel Restrepo said in July that the framework was "an important step in the right way to the future. We are laying the foundations of a new alternative to finance investment projects that contribute to achieve the goal of reducing our carbon footprint in the world."

Vigeo Eiris, part of Moody's ESG Solutions, said the framework is aligned with the four main components of ICMA's Green Bond Principles. The four components are: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting.

Emerging markets growth

The Colombian bond is also part of a wider growth in Latin American and global sustainable debt in 2021, sources say. In 2020, emerging markets accounted for 8% of global sustainable bond issuance, but in 2021 that share is up to 14%, ICMA Head of Sustainable Finance Nicolas Pfaff told attendees of the 20 September briefing.

Activity in the Latin American and Caribbean sustainable and green bond markets soared during the pandemic, confounding expectations, Vivek Pathak, global head of the climate business at the International Finance Corporation, said during the same event. Many observers had expected the focus would be on health requirements, he said.

"The growth of sustainable finance in [Latin America and the Caribbean] has continued on a triumphant path," said Pathak.

Chile has been seen as the leader in the region when it comes to issuing green, sustainability-linked and social (GSS) bonds, followed By Brazil and Mexico, he said.

Chile's GSS debt is equal to 23% of its overall outstanding government debt, according to Patricio Sepulveda, head of the Chilean Ministry of Finance's Debt Management Office. So far, he said during the ICMA briefing, the country has issued $14.6 billion in social bonds, $7.6 billion in green bonds, and $1.5 billion in sustainability-linked bonds.

The country is going to continue down this path, Sepulveda said. Chile plans to issue just sustainability-linked and social bonds in 2021, because it doesn't have the green projects to spend the money on, he added.

Diversifying

In addition to providing an alternative when sovereign or corporate issuers run out of green projects on which to specifically use the proceeds, sustainability-linked bonds allow corporate issuers from industries that cannot fit into the green bond market to tap capital markets, said Tom Eveson, director of sustainable finance solutions and ESG for the Americas at research group Sustainalytics.

Running out of renewable or green projects doesn't always encourage issuers to shy away from issuing green bonds though, Amundi Asset Management Co-head of Emerging Markets Sergei Strigo said during the same ICMA panel discussion. Strigo recalled the case of one green bond issuer who invested in a greenfield coal mine with the proceeds, which he said "broke the spirit of the exercise."

So, once an investor decides to take a piece of a GSS bond, said Strigo, it isn't the end of their work. "Far from it," he said, warning that institutional investors and their counterparts elsewhere in the capital markets should "continuously" follow the environmental, social, and corporate governance profile of the issuer through the life of the bond.

Investors need to maintain a close watch on the use of the proceeds of a green bond and the key performance indicators, known colloquially as KPIs, of a sustainability-linked bond.

Yet another area to keep a close eye on is innovative products, including in Latin America, added Eveson. "This is new to everybody. What was a bond or acceptable as sustainable today didn't exist two years ago, and what will be here as sustainable and acceptable in market practice two years from now does not exist today, so I encourage everyone to be very innovative," he said.

While the volume in Latin American GSS markets is nowhere near that of more developed capital markets, their sophistication is no different, said Eveson, citing the three sustainability-linked KPIs of a $500-million bond issued by Brazilian paper maker Klabin in January. The KPIs were linked to biodiversity, waste reduction, and cutting Klabin's consumption of natural resources.

Posted 01 October 2021 by Keiron Greenhalgh, Senior Editor