Sustainable financial decisions

In a recent episode of the radio show “La Telaraña” (The Spider Web), prominent engineer from NASA, Sandra Cauffman noted: “Earth is our ship in space, in which we are floating in vastness. This planet gives us air, it gives us life, and yet we are not taking care of it.” This phrase reminds us that Earth is our home and that we must act in the face of climate change, the loss of biodiversity and the excessive growth of inequalities, among other challenges of our time.

These issues have become a priority for key players in the financial sector. This was confirmed during Sustainability Week, organized by the Inter-American Development Bank (IDB), and held last June, after a necessary pandemic pause. The conference brought together more than 500 participants from Latin America and addressed relevant issues of sustainable finance for industry and financial institutions.

The conclusions of that event are encouraging. According to Climate Bonds Market Intelligence, the global thematic bond market tripled from 2019 to 2021 and reached about $1160 trillion. This confirms to us that the market’s appetite towards thematic bonds has grown significantly over the past three years, despite the COVID-19 pandemic.  In addition, preliminary data for 2022 indicate that the war in Ukraine has not affected the level of investment, which will be similar to that of 2021.

Thematic bonds and requirements

The family of debt instruments we know as thematic bonds is growing. In addition to green, social, sustainable, blue and gender bonds, sustainability-linked bonds, known as SLBs, appeared in 2019.  In 2021, the issuance of SLBs in Latin America was almost as frequent as that of the other thematic bonds. It is estimated that their emission will increase in the coming years.

There is a growing need for multilateral development banks, and other international funds, to invest in sustainable projects in our region. Given this context, some questions arise.  What requirements must issuers of thematic bonds meet?  What opportunities are in sight for companies and financial institutions in Costa Rica?

First, it is imperative that the issuer contributes to the Sustainable Development Goals; for example, people’s health and well-being, poverty reduction or climate action. Therefore, it is necessary to start with a diagnosis to determine what type of thematic bond or bonds the issuer adjusts to, according to its growth plans, activities and assets.

It is also necessary to avoid the so-called greenwashing, which occurs when something is promoted as “green” or “sustainable”, but in reality, is far from that. The phenomenon occurs despite the existing process defined by the the International Capital Markets Association (ICMA), which requires a bond framework, external verification and the issuance of reports that attest to the results obtained.

To avoid greenwashing, several institutions and countries have worked on taxonomies that help pinpoint labels such as “green”, “sustainable” or “social”.  In addition, many investors require other endorsements to opt for a thematic bond, such as certification from the Climate Bond Initiative. This certification helps to obtain measurable, reportable and verifiable results during the term of the bond.

Opportunities in Costa Rica

A local company can issue a thematic bond in both the local and international markets. In the first case, from 2021, our country has a law that aims to enhance financing and investment, through the use of thematic securities of public offerings. This law establishes that two percent of the portfolio of institutional investors, such as pension operators and investment funds, must be allocated to thematic stocks of public offerings, which represents a significant contribution of funds.

On the other hand, despite the fact that there is a favorable investment context in the international market, less than five bonds have been issued in these markets.  In 2021, the Costa Rican Electricity Institute (ICE, for its acronym in Spanish) issued an SLB that, according to the weekly newspaper El Financiero, in its edition of September 30, 2021, was announced to place $300 million and, at the closure of the issue of the bond, final amounts offered by investors exceeded $900 million.

This is a key moment to act. Unfortunately, there is a significant degree of misinformation about the true potential of these instruments among institutional investors, stockbrokers and potential bond issuers. The possibilities of financing projects or ventures, even small or medium-sized ones, through thematic bonds, have never been so close-at-hand.

The Paris Agreement and the Sustainable Development Goals have defined the rules of the game. In the very short term, it will be necessary to place trillions of dollars for sustainable investments in the Latin American market. Only informed investors and developers will jump on boat of twenty-first century finance, which means understanding that access to funds will increasingly be conditional on the sustainable use of money.  Only then will we have projects in which to invest and a healthy planet to live on. That will happen if we make sustainable financial decisions.