ESG-linked debt markets come of age in Latin America

Despite a decline in overall bond and loan issuance in the Latin American region, ESG-linked debt issuance thrived in 2021—and looks set to continue in the months ahead

Latin America’s environmental, social and governance (ESG) debt markets stepped up in 2021 as issuers noted the strong appetite in the lender community to back credits linked to good sustainability practices.

According to data from Debtwire Par, borrowers across the region tapped loan and bond markets for ESG and sustainability-linked debt facilities at an unprecedented rate in 2021. Issuance rose to US$47.6 billion last year—an exponential increase from the US$10.8 billion issued in 2020—and that momentum has carried into 2022, with US$11.9 billion of issuance already recorded this year.

Issuers in Latin America have noted the rapid growth in demand from global investors and institutions for investment opportunities linked to ESG and sustainability criteria. According to BloombergNEF, global sustainable debt issuances (including green bonds and ESG-linked lending) exceeded 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 are pivoting to companies and funds that can demonstrate positive ESG practices. Issuer shareholders have also been supportive of companies linking their debt requirements to sustainability performance.

A wide range of issuers

The emergence of sustainability-linked bonds in particular—which, unlike green bonds, do not need to be tied to specific eligible projects like wind or solar farms—opened opportunities for a wider pool of issuers in the region.

Sustainability-linked bonds are connected to the delivery of agreed ESG key performance indicators (KPIs) rather than specific green assets or projects. Borrowers that meet or exceed their KPIs, such as carbon emissions reductions or workplace diversity targets, continue to pay the initial interest rate on the loan or bond. If KPIs are missed by a certain deadline, interest rate margins ratchet higher.

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

Brazilian personal care and cosmetics group Natura Cosméticos, for example, raised a US$1 billion ESG-linked bond in May 2021 believed to be the largest single sustainability-linked bond issue in Latin America to date. The notes mature in 2028 and will carry a 4.125% interest coupon to be paid on a half-yearly basis. 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 reduce its greenhouse gas emissions by an additional 13% and achieve 25% of post-consumer recycled plastic in its plastic packaging. The targets must be met by the end of 2026. If missed, the interest rate on the bonds will increase by 65 basis points from November 2027.

Other Latin American blue chips that issued sustainability-linked bonds in 2021 include Brazilian paper producer Klabin, which secured a US$500 million 10-year sustainability bond priced at 3.2% and linked to natural resource consumption, recycling and biodiversity metrics. Argentine online marketplace Mercado Libre raised US$400 million in sustainability notes, priced at 2.375% and maturing in 2026. The proceeds will be used to finance or refinance projects with positive social and environmental impacts.

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

More recently, in April 2022, AEGEA Saneamento e Participações S.A., the largest privately-owned Brazilian water and sanitation company, priced a sustainability-linked notes offering with KPIs tied to the reduction of energy consumption and increases in leadership positions filled by women and Black employees.

Sovereigns step up

Governments in Latin America have also taken advantage of the growing demand for green and sustainability-linked debt products and positioned their sovereign capital raisings to secure financing from ESG-focused sources.

For example, Colombia has issued US$1.3 billion of green, social and sustainability (GSS) bonds since the middle of 2021, with most of this debt taken up by local funds eager to back the development of the sustainable debt market in the country. In January 2022, Chile secured US$4 billion from a three-tranche sustainability bond issuance. Chile will use the proceeds for all projects that qualify as eligible green expenditures and eligible social expenditures under its Sustainable Bond Framework.

Latin American sovereigns have also been active in the ESG and green loan space. In February, for example, Ecuador secured a US$700 million loan from the World Bank to support the country’s initiatives to build climate resilience, reduce poverty and rebound from COVID-19 disruption. This is the first of three loans that have been lined up by the World Bank to back Ecuador’s climate change and social development objectives.

Mexico, meanwhile, has been a leader for sustainability-linked debt issuance in Latin America. In 2020, Mexico became the first country in the world to issue a sovereign bond connected to the UN’s Sustainability Development Goals (SDGs), securing a seven-year €890 million bond that was more than six times oversubscribed. The country is considering further ESG-linked issuance on Japan’s bond market as a foreign issuer.

Are the existing standards and regulations rigorous enough to ensure that sustainability-linked issuance in Latin America remains a viable option in the region? Only time will tell, but the enthusiastic rise of ESG-linked debt has the potential to provide a long-term pool of capital for qualifying corporate and sovereign borrowers in Latin America and focus these borrowers on meeting important ESG targets in the foreseeable future.

Receive Debt Explorer quarterly email updates when new data is available.