Is Sustainable Finance Closing Gaps in Latin America & the Caribbean?
There are multiple funds seeking that their investments have a certain sustainability component. These are what we call “impact investors,” and the question of how they can be persuaded to allocate resources to Latin America & the Caribbean (LAC) is key to the region’s future.
Impact investors are financial stakeholders that seek to make an impact when it comes to issues related to the climate challenge or social development in areas such as gender, diversity, and inclusion (GDI). An underlying principle for impact investors is the application of sound environmental, social and governance (ESG) principles. Investment funds such as Brookfield’s Energy Transition Fund, which raised $15 billion for energy for decarbonization purposes and is raising the second fund for the same purposes, are truly remarkable examples, of the impact financing available in the market.
Although there has been a very significant surge of these platforms and funding vehicles, impact investments are making less of a splash in LAC due to, among other reasons, less specific knowledge of the market and higher perceived risk in the jurisdictions, considering the reasonable returns currently obtained especially in the US.
At this moment, LAC is receiving less than 4% of global impact investments. That’s a clear misallocation of resources, given LAC’s social inequalities and natural characteristics, with the world’s largest tropical forests, significant freshwater reserves, exquisite biodiversity, and other natural capital. These are comparative advantages when it comes to achieving the objectives of impact investing.
We believe there is an important gap to be filled by multilateral actors like IDB Invest, in bringing sustainable/impact investors to the region and leveraging on our seal of sustainability or financial anchoring to raise more liquidity for important infrastructure projects.
In that regard, the current infrastructure pipeline and thematic bonds are particularly promising to attract investors to the region. According to United Nations Sustainable Finance Hub, thematic bonds are traditional fixed income instruments which allow investors to finance specific investment themes such as climate change, health, food, education, access to financial services and target specific Sustainable Development Goals (SDGs) through investing.
IDB Invest’s participation in impact financings have provided a key catalytic effect to drive investors towards such bonds. This has been done in many forms, for example by providing a fixed amount to cover, say, a portion of the bond issuance, with the possibility of reducing the contribution if more liquidity is raised from other investors in the market. That is a tried-and-tested system that has allowed to raise funding from existing pockets of local liquidity and new accounts abroad. IDB Invest strong ESG practices and its in depth knowledge of the region are also part of our value proposition to investors that seek robust opportunities in LAC
Last year, for example, IDB Invest’s involvement helped secure local currency financing for the Rumichaca-Pasto toll-road, through the second social bond (thematic bond in which social benefits such as access to services, higher productivity, improved life conditions or gender measures are accounted as a benefit in the financing structure) issued in Colombia’s infrastructure sector and the largest ever in local currency, for an amount of 260 million in US dollars equivalent in Colombian pesos. IDB Invest anchored half of the issuance, and the rest of the bond was subscribed by local institutional investors, and also by a few new impact investors for the region, mainly from Europe and the US.
Another valuable example of an impact financing, also in Colombia, is the work done in Puerto Antioquia, mobilizing $390 million to close the financing of an entirely new port in Antioquia – a region that has been in need of commercial access by sea for three decades.
In this case, the design of a tailored integrity and reputational framework, partnering with a local expert as Financiera de Desarrollo Nacional (FDN), as well as the enforcement of the highest environmental and social standards was fundamental to secure impact investment in a critical, fragile environment such as Uraba. The innovative work performed in those areas allowed for investors to enter the transaction not only from the equity side (with well-known equity fund players and institutional investors) but also from the debt side, with local lenders in the senior tranche, and a global private equity firm in the mezzanine tranche, adding value and liquidity to the full financial plan.
Puerto Antioquia is expected to indirectly generate 17,000 jobs, while contributing to the region’s sustainable economic growth. An adequate management of integrity and environmental and social risks helped bring liquidity to this strategic project; and definitely opened the door to its refinancing through a capital markets solution in a near future, once construction is completed.
There’s been some debate on whether these projects are benefiting from a price perspective: market data is inconclusive about direct price incentives these projects might receive due to its developmental characteristics. Although there seems to be consensus that there is no direct impact in pricing, there is an undisputable additional liquidity, related to the increasing appetite towards sustainable projects. That liquidity might represent a benefit in itself, and supports the key objective of breaching the infrastructure gap, especially at a time when there are plenty of investment opportunities in a region rich in resources as well as human and natural diversity, like LAC.
In conclusion, there is a clear need for investment in the region, and at this moment there is a huge surge of sustainable/impact funds with appetite to invest in sustainable infrastructure. One important way to attract that investment to LAC is to structure sound deals with enhanced environmental, social and integrity frameworks, structured in a flexible and creative manner at the speed needed in the market. We believe that IDB Invest has a key catalytic role to play there, providing our sustainability seal to transactions, innovative financial structures and creating new partnerships to invest in our region. Stay tuned for more.
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