Lack of capital market financing instruments stunting decarbonisation in Latin America – new report from Janus Henderson

• The scale of climate bond issuance in Latin America - $45 billion in absolute terms from 11 countries - is small for the region relative to the overall size of the global climate bond market, which now stands at over $1 trillion.

• Individual countries have divergent climate bond policies and frameworks, causing market fragmentation and creating obstacles to international investor participation in climate bond issuances.

• Coordination of policy frameworks and common use proceeds at a regional level is key to accelerating green bond issuance and progress towards decarbonisation in Latin America.

Limited policy ambitions and lack of private sector financing have curtailed faster progress on decarbonisation in Latin America, according to new research launched today from Janus Henderson Investors. The Janus Henderson Latin America Decarbonisation Report analyses decarbonisation efforts across Mexico, Central America and the Caribbean, and South America against three metrics: renewable energy as a percentage of total energy mix, climate bond issuance as a percentage of total bond issuance, and net zero target dates.

Net zero commitments not translating into use of green capital market financing instruments

Adherence, at least in principle, to the net zero 2050 goal is consistent across most of the region’s largest countries and, in several instances across the region, the natural resource endowments of countries have been already tapped to generate renewable power. Further investment in renewable energy capacity generation is also underway in the region, building on legacy projects and expanding into new capacity.

Some of the smaller countries in the region – such as Haiti, Guatemala and Uruguay – produce a significant amount of their energy from renewables, as the result either of significant multilateral assistance, or long-term strategic plans meant to improve economic resilience. Eight out of 43 countries included in the analysis have not made commitments to net zero by 2050 including Mexico and Venezuela.

However, broad net zero commitments have not yet translated into significant use of climate-related capital market financing instruments, such as green bonds. To date, net zero frameworks are a necessary signal of policy intent, but not yet a sufficient condition for at-scale financing from financial markets for decarbonisation initiatives. Only 12 countries out of the 43 included in the analysis have to date issued carbon bonds. Chile ranks first ($9bn), followed by Brazil ($8.7bn) and Mexico $3.8bn).

Climate Bond issuance is low relative to the size of the region

The scale of cumulative climate bond issuance in Latin America currently stands at $45 billion in absolute terms across 11 countries as of the end of 2021. This is small for the region relative to the overall size of the global climate bond market, which now stands at over $1 trillion.

Limited issuance in Latin America has been driven by a lack of leadership issuance from the sovereign borrowers in the region, which hinders broader adoption of the climate bonds from corporate issuers. Only Chile stands out as a consistent sovereign green bond issuer to date (although countries like Mexico and Ecuador have issued related, sovereign sustainability bonds.) Equally, although several large-scale projects are now underway in countries like Chile and Colombia, and more are coming online, the investable project pool remains limited relative to other regions of the world, particularly in Asia.

Conflicting policies leads to market fragmentation

Better financing mechanisms could be available if more climate-related bond issuance enabled countries in Latin America to use the capital markets and help bridge the financing gap. Policy action is required as a supporting and enabling mechanism but, currently individual markets have divergent climate bond policies and frameworks. This results in market fragmentation, liquidity constraints, and creates obstacles to international investor participation in climate bond issuances. Governments across Latin America have a clear role to play in the energy transition and should create a unified framework and strategy to attract investment into green projects.

Janus Henderson calls for coordinated green policy framework across governments in Latin America

Janus Henderson Investors is advocating for a coordinated response. Convergent and consistent rules and regulations set by governments, on issues from technical standards to regulations of carbon intensive activities, would act as a catalyst for more rapid decarbonisation at a pan-regional level. It would also increase success of 2050 net zero commitments and accelerate the issuance of green bonds, tapping into the growing pool of dedicated assets with an explicit mandate to investment in a manner consistent with sustainability principles and climate focused investments.

Paul LaCoursiere, Global Head of ESG Investments at Janus Henderson, said: “A coordinated response to green financing at a pan-regional level would be a truly transformational solution to attracting green finance to Latin America. While some markets have clear and ambitious policy frameworks and substantial use of capital markets financing to accelerate the transition to renewable energy generation, there is still a long way to go towards meeting net zero ambitions across the region. A collection of countries committing to issue green bonds – both sovereign and corporate – under common use of proceeds protocols, for example, would result in deeper liquidity pools and attract a wider international investment base. Coordinated, consistent frameworks would be more likely, in our view, to encourage domestic capital formation and attract foreign investment supporting decarbonisation across the region.”

Jennifer James, Emerging Market Debt Portfolio Manager, said: As countries seek to migrate to more sustainable infrastructures, issuing green bonds is a natural source of funding. For their part, investors have whole-heartedly embraced labelled bonds, owing to structural shifts in how ESG plays a role in investing. This combination, where supply and demand meet effortlessly, should be a strong tailwind for further growth in green bond issuance. In 2022, Chile was the first Latin American country to issue sustainable bonds and did so against a backdrop of strong investor demand. We thought the bonds were competitively priced and served a good purpose, and we would expect other countries to follow on the back of this success. Latin American countries have a lot of potential for sustainability-linked endeavours, which is an exciting trend for the growth of the green bond market.”

ENDS

Data Sources

The report analysed data from 43 countries across Mexico, Central America and the Caribbean, and South America. Countries where data is not available were not included in the analysis.

Top 5 countries with highest renewable as percentage of Total Energy Final Consumption

Renewable energy as a percentage of total energy mix (TECF) source: IRENA, https://www.irena.org/Statistics/Statistical-Profiles

Climate Bond issuance, unweighted

Climate Bond Issuance Source: *Climate Bond Initiative, https://www.climatebonds.net/market/data/#country-map

About Janus Henderson

Janus Henderson Group is a leading global active asset manager dedicated to helping investors achieve long-term financial goals through a broad range of investment solutions, including equities, fixed income, quantitative equities, multi-asset and alternative asset class strategies.

At 31 December 2021, Janus Henderson had approximately US$432 billion in assets under management, more than 2,000 employees, and offices in 25 cities worldwide. Headquartered in London, the company is listed on the New York Stock Exchange (NYSE) and the Australian Securities Exchange (ASX).

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