The Accountant learns from Daniela Luz Clara, Sustainability Manager and specialist in Sustainable Finances at SMS Latinoamérica, about sustainable finance in Latin America and the work SMS carries out in this area.
What is sustainable finance?
Sustainable finance, unlike traditional finance, considers environmental, social and governance aspects when evaluating and making investment decisions. In addition to the economic and financial criteria commonly used to evaluate investment alternatives, those related to the environmental and social impact of the projects are added. In this way, it is intended to take into consideration not only the economic benefits for the investor, but also for the community and the environment in which it is developed.
Why is it important?
Sustainable finance is important because it promotes sustainable development by directing financing towards projects with a positive impact on the environment and society. Sustainable investments help reduce poverty, improve health and well-being and promote gender equality. In addition, they reduce financial risks and improve long-term profitability, while contributing to the achievement of the Sustainable Development Goals of the United Nations (SDG). Companies that adopt sustainable practices obtain better financial results and lower economic, social and environmental risks.
What is the difference between green, social and sustainable bonds?
On one hand, according to the Social Bond Principles (SBP) of the International Capital Market Association (ICMA), Social Bonds refer to any type of bond or debt instrument whose use of proceeds is applied exclusively to finance or refinance, in part or in whole, eligible social projects, and that are aligned with the four components of the SBP. That is, these are debt instruments whose funds are committed to be applied (pre-issuance) to projects with a positive impact on society, specifically for a certain vulnerable population.
On the other hand, the Green Bond Principles (GBP), issued by the same body, define Green Bonds as any type of bond whose use of proceeds is applied exclusively to finance, or refinance, either in part or in whole, eligible green projects, and that are aligned with the four components of the GBP. In this case, the funds obtained from the issuance finance projects with positive environmental impact according to the established categorisation.
ICMA’s Sustainability Bond Guidelines (SBG) define Sustainable Bonds as those whose use of proceeds is applied exclusively to finance or refinance, in whole or in part, a combination of green and social projects that are aligned with the four components of the GBP and SBP. It means, these bonds sum up the characteristics of Social Bonds and Green Bonds.
What should a company take into account to qualify as an issuer of this type of bond?
Organisations and entities that wish to issue a bond of this type may take as reference the Principles of the International Capital Market Association (ICMA) (known as “The Principles”). These guidelines constitute a voluntary procedure guide that recommends transparency and information disclosure, and promotes integrity in the development of the Green, Social and Sustainable Bonds market, clarifying the approach applicable to issuances. The Principles put forward suggested conditions for four areas or components: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting.
Which Latin American countries are most advanced in these types of investments?
Chile, Brazil, Mexico and Colombia lead the promotion of sustainable investments in Latin America with the largest issuance of green, social and sustainable bonds (in quantity and volume issued). However, sustainable finance is taking more relevance throughout the region.
Although its development is still in an incipient stage compared to other parts of the world, most countries in the region can still benefit from the growing interest in the topic, if they manage to develop and implement solid regulations and public policies that incorporate sustainable financing concepts.
In the green bond market, Brazil leads this type of issuance coming mostly from the non-financial sector, while Chile is the second issuing country in the region with the sovereign government as the main issuer, followed by Mexico with a more diversified issuing group.
On the other hand, Chile maintains the podium of social bond issuances with the sovereign government as the largest issuer of this type of bond, while Mexico and Colombia occupy second and third place in terms of issued volumes. In recent years, other Latin American countries with less developed markets have explored this path, such as Argentina, with more than 10 operations of this type, and Costa Rica
In the field of sustainable bonds, supranational issues lead the market, followed by Mexico as the largest issuing country, with a third of the issues in the region.
Which industries require the most sustainable financing?
According to a study carried out by the Climate Bond Initiative (CBI) regarding the issuance of green, social and sustainable bonds in Latin America in 2022, the use of proceeds of sustainable investments were focused on the following sectors, which represent the largest amount issued: renewable energy, transportation and land use, with the building and industry sectors also playing a relevant role.
On the other hand, considering sustainable financing that is not channelled through the capital market, and in the light of an analysis carried out in Argentina, it is noticed that the results are not too far from what was studied by CBI for the region. At SMS Sustainability, we carried out the project “Sustainable Finance in Argentina” in a large part of the national territory, together with British cooperation (UK PACT) and the promotion of five banks and three non-banking financial institutions. The valuable aim of this project was to generate greater financing opportunities for green and inclusive activities through the development of sustainable credit products. As a result, there were identified real opportunities for sustainable financing mainly in the renewable energy, agricultural, building and industrial sectors.
How does SMS Latinoamérica support the development of sustainable finance?
From SMS Sustainability, we support the development of Sustainable Finance in the following matters:
- We advise on the issuance of green, social and sustainable bonds. Together with other financial and legal advisors, we accompany the entity in the development and issuance of this type of instrument.
- We carry out second-party opinion reports on the issuance of green, social and sustainable bonds and the verification of their reports. As a network of independent audit firms, with a strong unit in sustainability, we are fully qualified to provide assurance to the issuance of this type of bond throughout Latin America and to evaluate their alignment with the international principles of ICMA, the Climate Bonds Initiative and local guidelines.
- Feasibility analysis and identification of financing opportunities for entities. We identify the key aspects of current or potential business that could be financed with this type of tools of sustainable finance.
- Development of sustainable credit lines for Banks. We identify the key aspects of current or potential business that could be financed with this type of sustainable finance tool.
- We advise on the development of sustainable taxonomies. We work together with local governments and international organisations in the classification of eligible activities to channel sustainable financing and develop reporting systems involving the actors of the financial system.
- We analyse the climate impact of investment portfolios. We assist investors, such as insurance companies or asset managers, in measuring the climate impact of their portfolios. This analysis includes the study of the most and least polluting sectors in which investments are concentrated, and the contribution to the carbon footprint of the invested companies, as well as measuring the temperature of that investment portfolio.