When Brazil’s state development bank BNDES returned to international capital markets after a three year gap in May 2017, it wanted to make a statement.
“We have a long and strong tradition of supporting green investments; the decision to be the first Brazilian bank to issue green bonds was important,” says Andre Luiz Carvalhal da Silva, head of market funding at the bank in Rio de Janeiro.
The $1bn seven year bond, to fund wind and solar energy projects, attracted more than $5bn of orders and was priced just 60bp wide of Brazil’s sovereign curve. One bond banker away from the deal called this a “ridiculously tight” result.
Although general market conditions were undoubtedly friendly, Carvalhal da Silva puts at least some of the success down to the green aspect, estimating that 20%-25% of the orders came from green investors. “I believe that we were able to attract more investors to this deal than we would have for a traditional bond issue,” he says. “We estimate that the green investors did lower the cost of the bond.”
This green price advantage is difficult to measure, but if treasurers believe it is true, it will only encourage green bond issuance in Latin America.
There should be plenty of green projects for such deals to fund. Moody’s estimates that power generation from alternative renewables will experience “remarkable growth” in Latin America. Installed renewable capacity could almost double by 2025.
“Ambitious carbon reduction commitments,” compelling fundamentals and long term contracts would drive renewables growth, said the rating agency.
“Our conclusion is that Brazil is well positioned, with 84% of the electricity output already renewable,” says Cristiane Spercel, vice-president at Moody’s and one of the authors of the report. “We believe Mexico and Argentina will undergo the biggest transformations in the next five to 10 years.”
BNDES buoys Brazil
There were already signs before this year that Latin America was starting to realise its potential for green financing. Mexico’s Nacional Financiera and Costa Rica’s BNCR had opened issuance by the region’s development banks long before BNDES arrived.
But the Brazilian institution’s deal was just a small part of its efforts to promote green bonds. It is also fostering the development of a local market in Brazil, including setting up a R$500m ($159m) sustainable energy fund, to invest solely in domestic green debentures.
The fund, managed by Brazilian asset manager Vinci Partners, is a “game-changer”, says Justine Leigh-Bell, director of market development at the Climate Bonds Initiative in London.
“One part of the development of the market in Brazil is changing the role of BNDES,” says Leigh-Bell. “BNDES holds the largest pipeline of projects, and the fund has been instrumental in building confidence and encouraging issuers.”
In some ways, a domestic green bond market has extra benefits, compared with the international one. Local investors will buy smaller bonds than international players, and also offer local currency funding.
“If local markets grow, Lat Am becomes a powerful regional story,” says Leigh-Bell. “It is not only good for national development policy, but it attracts the right form of capital into each country.”
Transparency popular
Nacional Financiera issued the first domestic green bond in Latin America in August 2016, and Mexico City followed in December. But, largely thanks to BNDES, Brazil is now leading the way.
October 2016 brought the country’s first domestic green bond from electricity company CPFL, and two peers from the sector have followed — Omega Geração and Rio Energy — as well as pulp and paper company Suzano Papel e Celulose.
Leigh-Bell believes there is “already evidence for price differential” for green bonds in Brazil.
“We believe this is because, after all the corruption issues in Brazil, the buyers — family offices, private wealth managers — like the transparency of the use of proceeds,” says Leigh-Bell.
When Suzano issued its domestic green securitization, known locally as a CRA, the company’s CFO Marcelo Bacci told GlobalCapital it was the tightest priced CRA ever issued.
All four domestic deals so far in Brazil have had an external review from Sitawi, a Brazilian civil society organisation focused on mobilising capital for social and environmental impact.
Sitawi’s managing director, Gustavo Pimentel, has high praise for BNDES’s role in encouraging the development of the market.
“BNDES has been heavily promoting companies to issue green and to get proper external reviews,” says Pimentel. “It no longer wants to be the sole financier of these projects, so it is offering incentives to those that issue green bonds.
“Furthermore, the participation of the BNDES fund guarantees a minimum demand and provides a seal of approval to the market.”
Aligning incentives
This seal of approval may prove important, as there remain obstacles to getting large amounts of local capital into green deals.
Investor interest is not necessarily the problem. In June this year, two groups of institutional investors, in Brazil (with assets under management totalling $574bn) and Mexico (combined AUM of $225bn), signed “investor statements” stating their desire for each country’s green bond market to grow.
As part of its work with the Brazilian Financial Innovation Lab, Sitawi is helping to work out how this can happen, discussing ideas such as fiscal incentives for institutional investors.
Yet it has emerged that, in Brazil, funds have been inadvertently discouraged from buying green bonds.
This is because the bonds so far have been either CRAs or infrastructure debentures, two instruments that offer tax incentives to retail investors as part of government initiatives to ramp up infrastructure funding.
“Institutional investors are interested and becoming educated,” says Pimentel. “But these incentives mean that issuers price the deals below what is acceptable to institutional investors, so the bonds end up going to private banks. There is a lot of discussion about this, and I think regulators should level the playing field.”
Market forces may yet push the agenda in Brazil. Interest rates are falling rapidly as the central bank brings inflation under control, and pension funds and insurance companies that have been comfortably buying sovereign bonds may have to diversify to more corporate and bank paper.
If Brazil’s tax situation is specific, incentivising investors is a general issue. “In most emerging markets, most local money goes into government bonds,” says Leigh-Bell. “You really have to look what you need to do to incentivise buyers.”
Bancóldex breakthrough
Yet when Leigh-Bell describes Latin America as the “largest green investment landscape in the world”, she is not only talking about renewables.
BNDES also finances pulp and paper companies, sanitation and sewage projects, and urban transport — all potential uses of proceeds for green bonds.
Certain large companies — including pulp and paper producers Suzano, Fibria and Klabin, but perhaps most notably Mexico City Airport Trust — have tapped international markets with green bonds. The next stage may be to bring these more diverse issuers to the domestic markets, so far dominated by renewables issuers.
In the effort to allow a wider range of companies and projects access to green financing, arguably the most significant piece of green bond news from Latin America this year came not from headline-grabbing Nafin or BNDES, but from a smaller state-owned lender in Colombia.
Business development bank Bancóldex’s Ps200bn ($68m) green bond issue in August was the third from a Colombian institution, but the first in the local market. Bancolombia and Davivienda had previously issued green bonds bought wholly by the International Finance Corp.
Most importantly, according to Isabelle Braly-Cartillier of the Inter-American Development Bank’s green and sustainable finance team, Bancóldex was the first Latin bank to issue a domestic green bond using a “multi-sector portfolio”.
Getting granular
Its example could open up green bonds to a swathe of Latin American banks.
“Across the region there is a size issue,” says Braly-Cartillier. “Except for a couple of banks in Mexico and Brazil, very few lenders have a green portfolio big enough to issue internationally.”
Recognising these issues, the IADB is offering technical support to help Latin American banks issue, both nationally and internationally. It supported Nafin in its issue, and led Bancóldex through its process.
“Banks are starting to understand that if they can carry out a better assessment of their environmental impact — in other words, classify what is green — they may be able to gain the competitive advantage of a green bond,” says María Netto, financial institutions lead specialist at the IADB in Washington.
Sitawi, which is already helping Brazilian banks identify the green parts of their portfolios in the hope that one of them will follow BNDES’s lead, played a similar role with Bancóldex.
“The IADB’s scheme allowed us to prepare Bancóldex,” says Pimentel at Sitawi. “Public development banks can face challenges in hiring consultants, because of public bidding laws, so the support from the IADB for this aspect is instrumental.”
Braly-Cartillier adds that reaching banks with “varied portfolios of lower sizes” is “more complicated, but also more interesting”.
The process has also highlighted some of the more idiosyncratic challenges that green bond markets face in Latin America. For instance, one project Bancóldex is financing will replace diesel buses with new hybrid vehicles.
This should be environmentally beneficial for the blackened air of downtown Bogotá, but Netto recalls that one second opinion provider questioned the projects.
“The issue was whether the project was valid, because the new buses were partially diesel,” says Netto. “Sometimes, if you’re used to a more sophisticated market, you may not understand that the local baseline is pretty low. I think it’s important to keep the methodology flexible and ensure we can promote good projects.”
The IADB is working with develop-ment banks across Latin America, and hopes that Bancóldex’s success — Braly-Cartillier reckons the 2.5 times oversubscription was higher than it would have been for a traditional bond — can be replicated.
Netto says: “This is still a pretty underdeveloped market, but we think that once the market starts moving, it can move quickly.”