Central and Southern America are ahead of the US in issuing hard-currency labelled bonds – green, social, sustainability and sustainability-linked bonds – at least in percentage terms. The Chilean government is a leader in this funding.

Green, social and sustainability bonds fund environmental and social projects. In contrast, sustainability-linked bonds don’t fund projects but penalise issuers if they fail to meet environmental or social goals, thus focusing on outcomes rather than inputs.

Labelled bonds make up 4.0 per cent of hard-currency bonds in the region compared with just 1.8 per cent in the US. That puts it ahead of the Middle East too, though Europe still leads, with labelled bonds making up 8.2 per cent of euro corporate bonds.

However, they comprise 20.5 per cent of Chile’s hard-currency bond totals – more than USD20 billion, of which the government accounts for USD16 billion, spread across a mix of green, social and sustainability bonds denominated in US dollars and euros. The figure for Guatemala is 14.6 per cent, though that is a very small market, but Mexico’s issues total USD12 billion, with Brazil close behind.

Most issues are in US dollars and issues in Mexican, Chilean and Brazilian currencies are exceeded by euro-denominated bonds, which appeal to European investors. The Southern America local-currency market is much less developed – labelled bonds accounting for only 0.3 per cent of local-currency debt – but again, Chile is the leader: labelled bonds comprise 4.9 per cent of local-currency bonds, with the government responsible for USD4.1 billion of the USD4.2 billion total.

Non-financials have the highest share of hard-currency labelled bonds at 5.5 per cent, followed by sovereigns and sub-sovereigns at 3.5 per cent, with financials at just 1.5 per cent. Supranationals, such as the Inter-American Development Bank, add a further USD5.8 billion.

Issuance of labelled bonds has been especially strong in 2021. The USD28.5 billion of issues in the first seven months was more than double the 2020 total, itself a record year – and seven-times for sustainability-linked bond issues.

Supranationals are important in emerging markets, especially in this region. Some 22 per cent of the proceeds of green bonds and 23 per cent of sustainability bonds issued by the IBRD, the World Bank’s lending arm, are applied to Latin America and the Caribbean.

Emerging-market bond funds that can hold Latin American instruments have more than USD500 billion of assets. Sustainable-bond funds now make up 3.4 per cent of this and have seen consistently higher inflows relative to assets than non-sustainable bond funds over the past two years.

Investors increasingly want to apply ESG strategies – environmental, social and governance – to emerging markets but face two challenges. First, disclosure and the data needed for ESG analysis are more limited in these markets, which could deter European investors. Second, measures of ESG are strongly correlated with wealth so applying them could penalise poor countries simply for being poor.

Labelled bonds offer a possible solution. They are a well-established, well-understood product whose global market exceeds USD1 trillion. Investors like them because they offer an easy way to demonstrate positive ESG impact with good disclosure and can be issued by any kind of issuer in any region. And issuers like them because they demonstrate their ESG credentials, access new investors, and potentially reduce the cost of funding.

Labelled bonds are thus well suited to Latin America.

First published 3rd August 2021.

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