July 23, 2024

 

If Latin America prepares correctly, there is a real possibility of creating a market for new financial products or services that aim to sustain a zero-emissions economy, opening a new niche for both local banking and multilateral institutions. But this green portfolio must first be organized around a taxonomy that allows avoiding the feared “greenwashing.”

On May 23, Chile entered a deficit. But it was not an overdraft in its finances or its ability to pay loans, but rather it was the first Latin American country to enter what is called “ecological overdraft.” That is, the moment when that nation has consumed all the resources and services of nature that it can regenerate in a year.

Others followed: Argentina on June 20 and Paraguay on June 23. Bolivia did so on July 13.

Developed countries and oil-producing nations had already easily reached that ceiling in February, on what is known as Earth Overshoot Day, a count that has been carried out for several years by the NGO Global Footprint Network.

“Six of the nine ‘planetary limits’ that exist are already overexploited,” Chilean environmental economist Raúl O’Ryan, an academic at the Adolfo Ibañez University (UAI) who has worked on environmental economics and energy issues, told AméricaEconomía.

These limits were established in 2009, as a conceptual framework that evaluates the state of nine fundamental processes for the stability of the Earth and suggests a series of thresholds – climate crisis, deforestation, loss of biodiversity, ocean acidification or the hole in the ozone layer, among others – that, if exceeded, could endanger the habitability of the planet.

Each of these could be reversed or, at least, controlled if there is sufficient science and monetary resources.

And that’s where sustainable finance comes in: loans for companies or governments that will be used exclusively for environmental or ESG purposes and, often, under special, more advantageous conditions than regular loans.

“There are extremely important needs for the future to come (…) but significant resources are needed. That is the first point. The second point is that there is little financing. [What exists] is more than insufficient. It has been increasing, but it is in a ratio of one fifth of what is needed,” O’Ryan explains.

The figures regarding how much money is required for these goals vary, but they all exceed trillions of dollars, making conservative calculations. For example, O’Ryan estimates that the European Union alone requires about US$ 500 billion per year between now and 2030 to achieve its greenhouse gas reduction goals, which is one of several more points to cover if we really want to ensure a future for survival on earth.

As if that were not enough, O’Ryan also explains that these investments are riskier

“Sustainable or green financing allows us to cover the gap between what is needed and what is there,” summarizes the academic from the Faculty of Engineering and Sciences of the UAI.

A good example is green hydrogen in Chile. If one wants to develop it first, someone has to make the investments in generation plants, produce the hydrogen and have a market to sell it. “And the idea of ​​green financing, in general, is to provide more resources than those that are reaching this type of initiatives, which are risky, in the sense that they may work, they may not,” he warns.

40% OF GREEN FINANCING

A global institution that is entering strongly into sustainable financing in the Latin American region is the CAF-development bank of Latin America and the Caribbean, with different instruments, but also with different approaches.

“We are working on many financial innovations, such as Green Bonds, Blue Bonds, and also in alliance with other institutions,” says Alicia Montalvo, manager of Climate Action and Positive Biodiversity at CAF.

What we are looking for is that countries in the region, which have a very high level of debt, can have funds to invest in the projects and transformations they need to increase their sustainability, but without that ending up being an added problem for their economy.

“What we do not want is for the energy transition, or the agroecological transition or the conservation of biodiversity to be another factor of debt that overwhelms them, but rather we are looking for spaces where we can replace traditional debt with green debt, or generate other types of tools,” Montalvo explains.

With new energy and new direction, since the pandemic, CAF has made an important commitment to sustainable or green financing, in a broad sense, which incorporates both climate and biodiversity.

“For us, the commitment is that 40% of our financing -which last year was around US$ 16 billion – it will be classified as green in 2026. Now we are around 30% of our portfolio, and in 2020, when we started, it was 20%, so I think we are on the right track,” says the executive of Spanish origin.

All of this has nuances and precisions, for Montalvo.

For example, what is linked to climate change is making quite a bit of progress, according to international methodologies, but in terms of biodiversity there are still no common principles as elaborated.

On the other hand, not every project is apparently green, but it can become so. “For example, in the adaptation part. If an infrastructure project incorporates resilience components, then we have a whole work team that can make a project ‘greener’,” adds Montalvo.

“For this we have technical cooperation resources, funds for technical advice and all the non-reimbursable financing in our portfolio,” she adds.

This has resulted, for example, in projects in Colombia, which will replace firewood with small-scale photovoltaic plants, or a loan to the Mexican Government, if certain climate and environmental objectives that the Government itself has set are met. They also work on all the issues of land use, livestock and agroecological agriculture, which are relevant due to the type of economy in Latin America.

PRIVATE BANKING IN ACTION

Just before the pandemic, BCP Peru created its sustainability department, with the goal of designing a long-term sustainable strategy for the group and aligned with the core business.

“We started the sustainability strategy very strongly by betting on financial inclusion, on the S side, in ESG,” says Gerardo Moreno, tribe leader of credit products for banks, corporations and companies at BCP.

But it was clear that the environmental issue was also important.

“So, what we decided was that the environmental issue would start with the corporate and business world. “There was the quick win between where we can help with sustainable finance and where we can learn from companies as well,” Moreno continues.

With that, BCP did three things: a credit policy with sustainability as a pillar. The creation of an environmental taxonomy to define in each economic area, what is truly green or sustainable. And they also started an internal training program for their teams.

Then, they chose a few sectors to try to strongly impact them.

One of their first clients was a firm in the textile sector that wanted to treat its liquid waste.

“With this project we both learned. We understood what the logic of the project was, who the suppliers were, what we had to do to finance it, what we could take as collateral. And we moved forward. [We took] that experience as an example of how a bank can really generate a positive impact,” the tribe leader highlights.

Today they focus mainly on financing agricultural and real estate projects, “which are sectors where you have a powerful leadership role in the bank and sustainable potential. In this way, the client sets the project and we basically accompany them and advise them in sharing knowledge,” Moreno explains.

In the case of Scotiabank, this journey began in 2020, providing services to corporate, commercial, financial, public sector and institutional clients around the world.

In these four years, they have supported structuring in countries such as Mexico, Chile, Peru, Colombia, Brazil, as well as Central America and the Caribbean, according to Bloomberg’s ESG League Tables. For example, in Mexico Scotiabank acted as joint bookrunner in the inaugural issue of the resilience bond by FEFA, which is the first climate resilience bond issued in Latin America, focused on preventing the extreme impacts of climate change.

“Sustainable financing has evolved as an important tool in Latin America to offer capital that can contribute to the transition to a low-carbon economy,” Daniel Gracian, director of Sustainable Finance for Latin America at Scotiabank, explains to AméricaEconomía.

Through this type of sustainable financing, the entity provides an important opportunity to highlight corporate ESG initiatives, among several other associated advantages. In addition, an additional potential advantage of sustainable financing is that it can improve the cost of debt. “For example, in bank loans linked to sustainability, there are possibilities that the interest rate will be reduced, depending on whether the company meets pre-established sustainable objectives,” says Gracian.

Thus, Scotiabank estimates a potential increase of between 5% and 10% of the volumes of ESG-labeled bonds in 2024 globally, supported by broader market growth, sovereign issuers and Latin America is one of the regions with the greatest growth in sustainable finance issues. Evidence of this is the growth experienced by the sustainable market in the region in 2023, an increase of over 20% compared to 2022 (…) We are also seeing a lot of innovation, something that we do not see in all regions. For example, in the issuance of sovereign bonds linked to sustainability by Chile and Uruguay, or Mexico as the first country to develop a Sustainable Taxonomy including social criteria, or the Debt for Nature Swaps, such as the one carried out in Ecuador,” says the executive.

SUSTAINABLE DESTINATION

Global eyes are on Latin America, as a region with unique factors that favor sustainable finance.

“The most important are its energy infrastructure, its natural resources, its demographics and its increasingly globalized business communities. “Opportunities arise from the wealth of hydroelectric energy and the widespread adoption of wind and solar power generation,” says a study from March this year by KPMG LLP prepared by Martin Chrisney and Maria Eugenia Buosi, partner at KPMG Brazil

Likewise, at the last COP 28 in Dubai, the Secretary General of ECLAC, José Manuel Salazar-Xirinachs, presented a report highlighting the climate financing needs of Latin America and the Caribbean in their fight against global warming.

According to the study, meeting climate action commitments requires an investment of between 3.7% and 4.9% of regional GDP per year, until 2030. By way of comparison, climate financing in Latin America and the Caribbean in 2020 amounted to only 0.5% of regional GDP. Therefore, closing the climate financing gap requires increasing the mobilization of national and international resources between 7 and 10 times, said Salazar-Xirinachs.

But it is not so easy to move forward, because there are previous requirements and one of them is the green taxonomy.

This is basically a standard and validated classification that allows identifying environmentally sustainable activities and promoting investment in them.

Developing such taxonomies – Mexico is the first country in the world to have one – requires work and involves a large group of actors from the private sector, academia, other entities in the public sector and civil society organizations, within a clear governance, with well-defined roles and responsibilities.

“A bank needs to have a procedure, definitions and clear indicators to evaluate sustainable projects, because there is also a large risk factor, because it is already difficult when there is a lot of financing behind and little risk, because in these cases you have to go beyond the laws: you have to worry about sustainability (…) and thus you also avoid what is known as greenwashing, that is, that the promised sustainability factor is not such,” emphasizes Raúl O’Ryan, from the UAI.

This can help avoid problems such as the one reported in mid-June by the NGOs Stand.earth and the Coordinator of Indigenous Organizations of the Amazon Basin (COICA) that issued the report “Greenwashing in the Amazon.” This reveals that an average of 71% of the Amazon is not effectively protected by the environmental and social risk management frameworks of the five main Amazonian oil and gas financiers: Citibank, JPMorgan Chase, Itaú Unibanco, Santander and Bank of America.

The group highlighted that only HSBC, another of the major Amazonian oil and gas financiers, presented a positive example of policy, by excluding, in December 2022, any financing of oil and gas in the Amazon.

By having a clear taxonomy and ordering the objectives, it will be possible to know what is being sought to finance and what are the instruments institutions such as CAF foresee a kind of green financing boom in Latin America.

“We are now in a kind of centrifuge, where institutions, not only CAF, public and private institutions, commercial banks, we are all contributing ideas, putting the pieces of the puzzle on the table, one that will have to be completed sooner rather than later. We cannot waste time,” concludes Alicia Montalvo.