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

Photo by Leon Overweel on Unsplash.
  • 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.

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