October 16, 2020Beyond green
Juan Fullaondo explains how rising capital markets demand for green, social and sustainable bonds can support Latam development challenges.
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Growing demand for ESG and sustainable bonds in Latam region
With demand for green and sustainable bonds in global markets growing, it’s little wonder that interest in ESG is also rising among debt capital issuers and investors in Latin America, as the region tackles significant infrastructure, environmental and social challenges.
Juan Fullaondo, Managing Director and Head, Debt Capital Markets, Latin America and Caribbean at Scotiabank, describes how sustainable investing momentum is spreading across the region. Along with his Global Banking and Markets division colleagues, they’re helping clients prepare for, and access, the opportunities in this segment.
Latin America’s green roots
Although the sustainable investment movement first surfaced in European markets, Fullaondo explains that green bonds began to appear more than five years ago in Latin America, particularly through international issuances for high profile infrastructure projects.
“While the Europeans may be ahead of other markets in terms of market interest, regulation and product variety, we definitely saw early movers in green bonds among Latin American sovereign debt issuers, based on the political cycle and ambitions to drive local development with foreign capital,” says Fullaondo, looking back on his 25-year career in the region.
He points out many pioneering transactions that occurred in the region include the first green bond by a Latam issuer in 2014 (Energia Eolica, Peru), the first social bond in 2017 (Banco del Estado de Chile), the first sovereign sustainability issuer in 2020 (Mexico), and the first sovereign social issuer in 2020 (Ecuador).
“The difference is that the first green bonds in the region were viewed as a ‘nice to have,’ and the issuer could feel proud for doing the right thing,” recounts Fullaondo. “Now, the concept has evolved, and more issuers are conscious of the need to be greener. More companies see the benefits of incorporating ESG in their strategies and they are ready to go through the process to bring forward these bonds.”
Fullaondo also notes that issuers are recognizing the economic versus reputational benefits of these transactions: “Whenever you do an issuance in this way, it helps increase your investor base and the amount of potential capital, since there is a large community of ESG-minded investors focused on Latin American debt. While this is a relatively new market, issuers are also seeing better pricing in secondary markets, with green bonds often trading above regular bonds.”
Unwavering interest in ESG
Despite ever-volatile markets, Fullaondo highlights the increasing diversification among participants in the ESG space: “On the issuer side, activity is rising in both foreign- and local-currencies. The level of government entity interest is rising, and we see a wider variety of corporates from many industries, beyond the expected power and mining sectors.” He adds that, whereas previous offshore investors hailed mainly from Europe, there is significant Asian interest in Latam ESG debt, as global investors seek attractive yields.
Demand has also held up since the pandemic, with Fullaondo estimating that more than a third of clients calling in recently have discussed the possibility of a future ESG-friendly transaction. Specific interest in ‘social bonds,’ which raise capital to support projects with social benefits for communities, have also spiked, particularly among sovereign or sub-sovereign issuers of COVID-19 bonds.
Seeking specialist advice
Fullaondo explains that the challenge is helping clients work through the issuance process, in light of constantly evolving criteria, rules and product categories: “We help address client concerns about cost, timing and the filing requirements with the ratings agencies. It’s an ongoing learning experience, so we take them through each step.” For example, noting that prospective clients may be unsure if their current green assets or projects will satisfy qualifying thresholds, he adds that: “We help identify opportunities, based on credits from past or future transactions, or explain how evolving rules increase their options.”
Scotiabank’s profile in the segment has grown with our recent actions to serve customers, decarbonize our own operations, and promote sustainable economic growth. In 2019, the Bank committed to mobilize $100 billion by 2025 to reduce the impacts of Climate Change, through lending, investing, financing and advisory activities. Subsequently, in June 2020, Scotiabank launched a Sustainable Finance Group within Global Banking and Markets to support clients’ evolving requirements for sustainable financing and ESG-related investments.
“These commitments are attracting attention, since clients look closely at each bank’s ESG credentials, experience and calibre of advice,” notes Fullaondo. “While our debt capital markets group was already deeply committed to ESG, as a team and as individuals, we can now share very impressive, focused insights from our Sustainable Finance colleagues.”
Recent sustainability solutions include Scotiabank’s May 2020 role as Joint Bookrunner for the Republic of Chile on a US$1.5 billion dual-currency issuance (Euro and US dollar tranches). Issued to support the Republic’s ambitious sustainability funding strategy, the five and 10-year notes attracted a strong order book and oversubscription levels. This landmark issuance supported both Chile’s Climate Change remediation strategies and its recent COVID-19 relief and recovery efforts.
Most recently, in September 2020, Scotiabank acted as Global Coordinator and Joint Bookrunner when Suzano Austria GmbH, a Brazilian forestry and paper products company, issued a US$750 million, sustainability linked bond series. The transaction was extremely well received, and 9.4x oversubscribed, with strong support from North American and European-based ESG investors who were who were attracted to the company’s sustainability strategy and framework linked to reductions in GHG emissions intensity.
This transaction follows Scotiabank’s role assisting another forestry industry leader, Chilean-based Arauco (Celulosa Arauco y Constitucion SA), price the first international sustainable bond deal by a corporate issuer in Latin America. With Scotiabank acting as Global Coordinator and Joint Bookrunner, the October 2019, sustainable dual-tranche transaction (US$500 million in notes due 2030 and US$500 million notes due 2050) attracted strong demand from green and conventional investors. As the largest corporate sustainable transaction in Latam, it has enabled Arauco to allocate the proceeds to numerous projects, including sustainable land and water management, affordable housing and socio-economic development for local entrepreneurs.
Fullaondo is optimistic in the market’s future growth, observing that, “With the rising commitment to ESG among governments, companies and investors, and so many infrastructure projects on the horizon to boost regional economies, we will see much higher participation. We still have a way to go, but we are getting there, by helping clients efficiently access these opportunities.”
For more information on Scotiabank’s Latin American debt capital markets solutions, please contact:
Managing Director and Head, Debt Capital Markets, Latin America and Caribbean