Financing Sustainable Development
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Sustainable financing is an increasingly important topic. As companies adopt environmental, social and governance (ESG) considerations in their decision-making and policymakers shift towards more sustainable policies, investors are integrating ESG-labelled financing products into their portfolios. International organisations such as the United Nations, multilateral development banks and private sector organisations have been key drivers of this policy development, providing specific criteria to determine which financial products are consistent with sustainability objectives.
This chapter provides an overview of current developments in sustainable financing with specific emphasis on international standards for the issuance of green and blue bonds. Furthermore, it describes recent developments and instruments advanced by five jurisdictions in Latin America, namely Argentina, Brazil, Chile, Colombia and Peru, which have been progressively incorporating these products in their financial markets and regulations.
International standards for green and blue bonds
Green and blue bonds are classified as use of proceeds bonds, meaning that their net proceeds must be exclusively applied to finance or refinance eligible projects. Green bonds must fund eligible projects with clear environmental benefits, whereas blue bonds must fund eligible projects relating to the protection or promotion of ocean-friendly and critical clean water resources.
There is no international statutory or regulatory framework that governs green bonds. This means that their terms and characteristics are determined entirely by contract. However, voluntary principles and standards have emerged in recent years with the objective of:
- establishing cross-industry standards;
- advising issuers in correctly structuring and marketing this kind of bond; and
- aiding investors in evaluating whether an issuance meets their investment objectives.
Among the generally recognised standards, the International Capital Market Association (ICMA) has published the Green Bond Principles, the Climate Bonds Initiative (CBI) has developed its Climate Bonds Standard and Certification Scheme and, more recently, certain official and market-based taxonomies have emerged to create a more comprehensive classification system for green bond labelling.
ICMA’s Green Bond Principles
The Green Bond Principles introduced the following required core components for green bonds:
- the net proceeds of the bond must be exclusively applied to finance or refinance eligible green projects;
- there should be a clear process for project evaluation and selection;
- the net proceeds, or an amount equal to the net proceeds, should be managed by the issuer appropriately; and
- the issuer should keep available up-to-date information regarding the use of proceeds.
In addition, the Green Bond Principles have two key recommendations:
- there should be an explanation of the bond’s compliance with the core components in a framework or the legal documentation available to investors; and
- the framework or the legal documentation are subject to a pre-issuance external review to assess their alignment with the core components and to verify through a post-issuance external review the tracking and the allocation of proceeds to eligible projects.
In addition, the Green Bond Principles set out a non-exhaustive list of certain types of recognised eligible projects such as renewable energy; pollution prevention and control; clean transportation; and climate adaptation.
Although external review is not mandatory for compliance with the Green Bond Principles, it is encouraged as a key recommendation. The external review mechanism includes any of the following:
- a second party opinion, which consists of a review by a recognised expert in environmental sustainability matters;
- independent verification against a designated set of criteria related to the core components;
- certifications against a recognised standard tested by an accredited third party; or
- use of a rating agency to assess certain aspects of the issuance.
Full disclosure regarding the external review mechanism adopted; scope of the review conducted; and providers selected and their credentials is recommended.
CBI’s Climate Bond Standards
In addition to compliance with the Green Bond Principles, issuers may decide to have their green bonds certified pursuant to the Climate Bonds Standard and Certification Scheme, depending on the issuers’ sector. There are sectors that are available for certification, such as agriculture, bioenergy, low carbon transport and waste management, and the CBI is currently developing criteria for certification of other sectors, such as basic chemicals, cement, fisheries and steel.
The CBI certification process encompasses a pre-issuance phase, designed to ensure that the issuer has established appropriate internal processes and controls prior to the issuance of the bond, and a post-issuance phase, which an issuer must meet if it wants to maintain its certification after the issuance of the bond. The most notable difference with the Green Bond Principles is that issuers must obtain an external review report from an approved verifier both for the pre-issuance and post-issuance phases.
Taxonomy in sustainable financing refers to a classification system identifying activities, assets, or project categories that deliver on key climate, green, social or sustainable objectives, aligning them with identified thresholds or targets. The most sophisticated taxonomy is the European Union Taxonomy adopted in Taxonomy Regulation 2020/852 in June 2020. Other taxonomy efforts promoted by governmental authorities were issued in Malaysia, Singapore and Colombia, which was the first taxonomy adopted in Latin America.
The European Union Taxonomy builds upon the Green Bond Principles and establishes more comprehensive criteria to classify green activities, assets and projects, in contrast to the project-based approach of the Green Bond Principles. It sets six environmental objectives:
- climate change mitigation;
- climate change adaptation;
- the sustainable use and protection of water and marine resources;
- the transition to a circular economy;
- pollution prevention and control; and
- the protection and restoration of biodiversity and ecosystems.
To be considered green under the European Union Taxonomy, the following four conditions must be met:
- substantial contribution to one or more environmental objectives;
- no significant harm to other environmental objectives;
- compliance with minimum safeguards; and
- compliance with technical screening criteria.
The most important innovation of the European Union taxonomy is the requirement that trade-offs between the environmental objectives are avoided or minimised.
Blue bonds are generally defined as debt instruments that are aligned with the Green Bond Principles in which the use of proceeds is fully applied to finance or refinance activities that contribute to oceans’ protection or improved water management in line with United Nations Sustainable Development Goals 6 and 14. These goals are, respectively, to ‘ensure availability and sustainable management of water and sanitation for all’ and to ‘conserve and sustainably use the oceans, seas and marine resources for sustainable development’. There are, however, no generally accepted standards for the issuance of blue bonds such as the ICMA principles that underpin use of proceeds bonds. While the ICMA’s Green Bond Principles allow the use of the ‘blue bond’ label, there is no global guidance on how to apply the ICMA principles and, particularly, the Green Bond Principles to blue bonds.
Although there are no generally accepted standards, there are certain guidelines and principles developed by international organisations that provide eligibility criteria for blue projects and a general overview to apply for blue bond issuances. These are:
- the International Finance Corporation (IFC) Guidelines for Blue Finance;
- the UN Environment Programme Finance Initiative’s (UNEP FI) Sustainable Blue Economy Finance Principles and associated Blue Finance Guidance; and
- the UN Global Compact’s Practical Guidance to Issue a Blue Bond.
The IFC Guidelines for Blue Finance identify blue project categories to support investment in the blue economy. This document provides a three-step approach to determine blue-eligible activities, namely that the relevant project:
- is consistent with the Green Bond Principles and contributes to UN Sustainable Development Goals 6 and 14;
- does not affect material risks to other Sustainable Development Goals; and
- states which internationally accepted sustainability standards it is following.
The Sustainable Blue Economy Finance Principles are 14 principles that promote the implementation of Sustainable Development Goal 14, thus focusing on the conservation of the oceans and life below water. The Blue Finance Guidance builds on the 14 principles and identifies five key ocean sectors, providing a detailed breakdown of which activities to look for, which activities to challenge and which activities to avoid on seafood, ports, maritime transportation, marine renewable energy and coastal and marine tourism. Finally, the UN Global Compact’s Practical Guidance to Issue a Blue Bond describes another three-step approach to issue a blue bond. These steps are to align with existing global standards such as the ICMA’s principles, to develop a blue framework and to secure a second party opinion.
These guidance documents provide different approaches to achieve a blue bond label, and the scope for blue activities and methodologies differs between them. For example, the IFC Guidelines for Blue Finance consider as an eligible blue project any activities that provide better management of water and sanitation, as well as the conservation of the oceans. In contrast, the Sustainable Blue Economy Finance Principles and associated Blue Finance Guidance only include projects that support the conservation of the oceans. Moreover, the UN Global Compact’s Practical Guidance to Issue a Blue Bond considers that blue bonds can also obtain the blue label, building upon the Sustainability-Linked Bond ICMA Principles. In contrast to the ICMA principles, the heterogenous criteria of these guidance documents have not provided the market with a cohesive guidance for issuing or investing in blue bonds. However, there is a recent initiative from the UNEP FI, ICMA, IFC, the Asian Development Bank and UN Global Compact to develop a global practitioner’s guide for bonds to finance the sustainable blue economy. Its objective is to provide market participants with clear criteria, practices and examples for blue bond financing.
A more recent development in sustainable finance was the creation of sustainability-linked bonds (SLBs), first issued by Enel in 2019. The key characteristic of an SLB is that its financial or structural terms (i.e., coupon, maturity, repayment amount) vary depending on whether the issuer achieves predefined ESG objectives within a specified timeline. Issuers may therefore communicate their commitment to ESG issues by setting their own targets and attaching a financial consequence to meeting or failing to meet them, while remaining free to use the net proceeds for any purpose, including paying a dividend or general corporate purposes.
Similar to use of proceeds bonds, there is no formal statutory or regulatory framework that governs SLBs; however, in 2020, the ICMA published voluntary principles applicable to them. These principles introduce the following core components that should be included in SLBs:
- key performance indicators (KPIs) material to the issuer’s overall business should be selected, measurable on a consistent methodological basis and externally verifiable;
- there should be adequate calibration of sustainability performance targets (SPTs) of each KPI;
- the bond’s financial and structural characteristics should vary depending on whether the KPIs reach the SPTs;
- the issuer should publish – and keep available and accessible – up-to-date information enabling investors to monitor, among other things, the performance of the KPIs; and
- issuers should obtain independent verification of each KPI’s performance against each SPT by a qualified external reviewer with relevant expertise.
In the case of SLBs, there are no eligible projects for funding with net proceeds described in the issuer’s framework because the use of proceeds is irrelevant. Instead, the issuer’s framework needs to describe the KPIs and SPTs, including relevant historical data to establish a baseline for their calculation, calibration and relevance to the issuer.
Instruments developed in Latin America’s capital markets for sustainable and green financing
Latin America’s issuers have increasingly used sustainable financing to market and promote their debt instruments. In most jurisdictions, the relevant stock market regulators have either followed the internationally recognised standards to provide their own guidelines, provided no relevant regulatory framework or, in the case of Colombia, published their own green taxonomy. This section addresses the status of sustainable financing in some of the most relevant jurisdictions in Latin America.
The Argentine Securities and Exchange Commission (CNV) established a legal framework to implement sustainable issuances, through General Resolution 788/2019. This Resolution provided the ‘Guidelines for the Issuance of Social, Green and Sustainable Marketable Securities in Argentina’ (the Guidelines), which contain best practices aimed at markets and exchanges in order to better channel their development through criteria standardisation.
The Guidelines were developed in accordance with internationally recognised standards such as the Green Bond Principles, the Social Bond Principles and the Sustainable Bond Guide developed by the ICMA and the Climate Bonds Standard. These should be considered by markets and stock exchanges seeking to establish trading segments or panels, or to award social, green or sustainable labels.
According to Argentine regulations, possible structures for sustainable issuances are as follows:
- green bonds: this issuance must comply with the requirements set forth by the Guidelines and also by Law No. 23,576 and the stock market Bolsas y Mercados Argentinos (BYMA) regulations. The latter consists of a regime for the listing of social, green and sustainable bonds and a guideline for green and sustainable social bonds on the BYMA panel. Social, green and sustainability bonds (SGS bonds) must comply with the listing requirements set forth in the BYMA SGS Bonds Guidelines. These rules are supplementary to the BYMA listing rules. There are certain benefits to listing sustainable bonds on BYMA, such as a bonus of 100 per cent of listing and regulatory publication fees;
- PYME bonds: this instrument is issued by small and medium-sized companies;
- simple bonds: these bonds must be guaranteed by a guarantee entity listed with the CNV;
- project bonds: this instrument is issued for the purpose of financing projects, whether public or private, and structured through companies incorporated for this purpose; and
- mutual funds and financial trusts: the CNV approved a new regime for sustainable collective investment products (the General Resolution 885/21), which incorporated mutual funds and financial trusts into public offerings that comply with the requirements set forth by the Guidelines.
The structure of social and sustainable securities does not differ from that of regular securities’, and their outstanding feature is the use of the proceeds. The proceeds of the issuance are used to finance or refinance projects or activities with green or social purposes. These projects must provide clear environmental or social benefits and be duly detailed in the offering document.
The CNV has adopted worldwide accepted tools to provide assurance to investors on the ESG credentials of the financial instruments used, including procuring:
- a second-party opinion from an independent institution;
- verification by an independent third party;
- certification of the issuer’s green security with regard to an internationally recognised and publicly available standard; and
- a rating or scoring.
There is no defined taxonomy or framework for ESG financings in Brazil, but international standards for the use of proceeds, financing activities and environmental and social benefits (i.e., ICMA principles) must be generally observed and verified by a third-party certifier for a debt instrument to qualify as green. Most common green bonds in Brazil are, in order of the number of transactions in 2021, infrastructure incentivised debentures, certificates of agribusiness receivables, agribusiness letters of credit, certificates of real estate receivables and rural product bonds. Each of these debt instruments is entitled to relevant tax benefits regardless of the bond being classified as a green bond. There are no specific benefits – tax or otherwise – attributed to green bonds in Brazil other than the potential value of the green or sustainable classification itself.
Brazilian Securities Exchange Commission (CVM) Resolution No. 160/2022 requires that prospectuses relating to the offering of green bonds provide detailed information in respect of the assumptions and methodologies by third parties to determine that such security is sustainable. Otherwise, the public offering rules enacted by the CVM applicable to thematic bonds are, in general, no different than those governing the offering of standard bonds.
A certified green bond may also be granted the specific sustainable label from B3 Stock Exchange for such instruments to be acquired by investment vehicles with sustainable investment status by the Brazilian Association of Financial and Capital Market Institutions. Other Brazilian governmental authorities are engaging in the sustainable finance markets in a movement to provide legal certainty and clarity to the transactions. One notable taskforce is the Bureau for Sustainable Rural Credit, coordinated by the Brazilian Central Bank, with the purpose of enforcing ESG principles in agribusiness financing transactions.
Brazil registered 86 offerings of green bonds in 2021, for an aggregate principal amount totalling US$4.8 billion, the most since the beginning of the sustainable debt finance track record in 2015. The energy (52 per cent) and corporate (23 per cent) sectors received the majority of these resources, but given the increasing demand for carbon credits and green bonds, new and sophisticated debt instruments and the Brazilian market financing expertise, the agribusiness and forestry sectors are expected to be consolidated as key players in sustainable financing in the coming years. A key discussion in connection with public offerings of green instruments has been the remedy for an event of default due to breach of any ESG-related covenant. On this issue, market precedents show that remedies such as the removal of the sustainable label or a step-up of the interest rates are preferred over the acceleration of the debt.
Finally, the Brazilian market has developed the voluntary carbon credit market as an important alternative source of sustainable financing in Brazil in connection with decarbonisation activities and projects. Receivables arising from the commercialisation of certified carbon reductions and decarbonisation activities, notably forestry activities (REDD+), biofuels (RenovaBio) and waste-to-energy, are being used as collateral in debt and equity financing transactions.
There are different mechanisms in the Chilean capital markets that promote sustainable financing: green, social and sustainable bonds issued by the Republic of Chile and the private sector, as well as crowdfunding platforms linked to impact investing, and the regulation of ESG principles as guiding criteria for financial vehicles and investment decisions.
In recent years, Chile has positioned itself as the leading issuer of green, social, sustainable and sustainability-linked bonds in Latin America. Green bonds, issued by the Republic of Chile since 2019, finance public projects favouring the environment and, particularly, the fight against climate change. These sovereign bonds have contributed to strengthening decarbonisation and energy transition projects, an area in which Chile has stood out as a significant issuer, according to Janus Henderson’s Latin America-oriented emerging markets decarbonisation report. Green bonds are supplemented by social and sustainable sovereign bonds to finance or refinance eligible social projects or a mix of social and green projects. In March 2022, Chile was the first sovereign in the world to issue SLBs.
The private sector has also been involved in the issuance of green and social bonds. Since 2018, the Santiago Stock Exchange has had a special segment of sustainable debt instruments with 12 issuances of green, social or SLBs for a total of approximately US$700 million. The Santiago Stock Exchange expressly recognised the Green Bond Principles, the Social Bond Principles and Sustainability-Linked Bond Principles (all from ICMA), and the Climate Bonds Standard from the CBI as acceptable international standards to qualify for this segment. To be admitted to the special segment of sustainable debt instruments of the Santiago Stock Exchange, in addition to the standard prospectus or disclosure information, a report issued by an independent third-party verifier engaged by the issuer needs to be delivered to the Stock Exchange and remain available to potential investors. Other than this report with third-party verification, these bonds have no special requirement or benefit in their registration with the Chilean securities and banking authority (CMF) and the Santiago Stock Exchange, nor in the trading rules applicable to these bonds.
There are also crowdfunding platforms specialised in sustainable projects. One example is Doble Impacto, which, together with Quest, launched the first public investment fund dedicated to impact investing, mostly through debt financing. Doble Impacto is committed to becoming the first purpose-driven bank in Chile (for which purpose it is in the process of applying for the corresponding banking licence from the CMF), inspired by the model of Triodos Bank in Europe with the support of Fundación Dinero y Conciencia.
The Ministry of Economy, together with the Social Development and Justice Ministries, are working on the development of a regulation on Social Impact Contracts or ‘CIS’ (equivalent to the social impact bond) as an instrument of state investment. This is a model of public-private financing and articulation, where private funds are used to finance projects aimed at solving social problems.
Colombia has made several efforts to develop sustainable financing instruments and enact regulations and guidelines to create them in compliance with international standards. For example, the Financial Superintendency issued External Circular 020 of 2022, establishing that green bonds issued by private entities and the information in their offering memoranda must follow the international standards set by the ICMA. In addition, the Financial Superintendency issued the Good Practice Guide for Green Bond Issuances based on the ICMA’s Green Bond Principles.
Although Colombia’s framework does not indicate a closed list of specific-purpose bonds, there are two main categories:
- green bonds: those in which the funds will be used exclusively for financing or refinancing projects, new or existing investment plans, research and development activities, or use of funds that may relate to actions to:
- mitigate negative impacts on the environment and climate change or to adapt to their effects; or
- generate positive effects on the environment; and
- blue bonds: like the green bonds, but aimed at financing projects that seek the conservation of maritime ecosystems and the protection of river and coastal communities.
Moreover, by means of Law No. 2073 of 2020, Congress authorised the Ministry of Finance to issue sovereign thematic bonds. This resulted in the adoption by Colombia of its Green Bonds Framework in September 2021, making Colombia the second country in Latin America to issue green sovereign bonds. The proceeds from these issuances may only be used for government investments that align with the ICMA’s Green Bond Principles.
In April 2022, Colombia was the first country in Latin America to publish a green taxonomy. The taxonomy seeks to facilitate the identification of projects with environmental objectives, develop green capital markets and promote the effective mobilisation of private and public resources for investments that allow the country’s commitments prioritised in the National Development Plan, the Paris Agreement, the Framework Convention on Biological Diversity and the Sustainable Development Goals, among others, to be met.
In a concerted effort to contribute to decarbonisation and carbon neutrality initiatives and projects, Colombia has ratified multiple international instruments such as the United Nations Framework Convention on Climate Change, the Kyoto Protocol, the Paris Agreement and the 2030 Agenda for Sustainable Development. By enacting internal legislation, such as a climate change law (Law No. 1931 of 2018) and a climate action law (Law No. 2169 of 2021), as well as the publication of a green taxonomy, Colombia has actively worked to commit to the international efforts and standards regarding decarbonisation and carbon neutrality initiatives.
Some of the most relevant regulations in this respect are a set of decrees and resolutions that created a carbon tax and regulated the possibility for companies to avoid paying the tax by evidencing carbon neutrality through the acquisition of carbon bonds.
Currently, most of the carbon bonds are part of REDD+ initiatives and sold by communities that have tasked themselves with the protection of forests (green carbon bonds) or the mangroves (blue carbon bonds). Each bond represents the capture of one ton of greenhouse gases (GHG). To issue these bonds, the carbon capture projects must be verified by verification companies authorised by the Ministry of Environment and Sustainable Development according to international technical standards. They must also be registered in the National Greenhouse Gas Emission Reduction Registry created in 2019, that serves as a consolidated database in which all ongoing projects designed to reduce GHG, as well as their respective results, are registered.
Finally, equipment and machinery that generate a GHG reduction benefit are exempt from value added tax. Currently, other policies are being developed, including a national emissions quota programme, introduced by Law No. 1931 and whose specifics are being designed by the Ministry of Environment.
In Peru, the market for green and other thematic bonds has been growing steadily over the past few years. Since 2014, there have been seven green, three social, and five sustainable bond issuances involving Peruvian issuers, both in the local and international markets.
Currently, there is no specific regulation for the issuance of thematic debt instruments in Peru. They are issued as common corporate bonds under the regulations and supervision of the Superintendence of the Securities Market (SMV) and the rules of the Lima Stock Exchange (BVL).
Market practice dictates the requirements that issuers must comply with for a bond to be qualified as green, social or sustainable. Initially, a bond’s documentation alone was sufficient to classify it as green, but more recently investors have required higher standards. For example, proceeds must be applied to finance or refinance green and sustainable projects, and issuers must file periodic reports supporting such objectives. Recent issuances follow the ICMA principles, which are considered best market practice. To confirm that a green, social or sustainable bond complies with ICMA principles, the issuer is required to obtain a certification from an internationally recognised entity, such as the CBI or Sustainalytics.
Reacting to market demands, the BVL joined the Sustainable Stock Exchange Initiative in 2014 and, in collaboration with the United Kingdom, issued a non-binding Green Bonds Guide for Peru in 2018. Likewise, in 2021, the Ministry of Economy published the Peru Sustainable Bond Framework based on ICMA principles to guide Peru’s issuances of green, social and sustainable sovereign bonds. Furthermore, since 2016, issuers of securities registered with the Securities Market Public Registry must include in their annual reports a corporate sustainability report that includes the sustainability standards and actions implemented by them. The SMV also publishes an annual corporate sustainability report with the consolidated information from such reports.
Relevant green bond issuances in Peru include the issuance by Energía Eólica SA in 2014, which was the first green bond in Latin America. Although no external review was conducted on that issuance, it opened the door for green bond issuances in Peru. The most recent green bond issuances were by Consorcio Transmantaro SA, certified by S&P Global, and Bosques Amazónicos SAC, certified by the CBI. Similarly, San Miguel Industrias PET SA (SMI) was the first company to issue an SLB out of Peru in 2021. This bond was issued under SMI’s SLB framework, which sets out certain sustainability targets, including increasing the percentage of recycled PET content in preforms and thermoforming products and the tons of post-consumer waste managed by SMI in its operation.
The green bond market is also driven by institutional investors, such as pension fund administrators and banks, which seek to invest in green projects and include sustainable and corporate governance policies in their internal investment guidelines, although this is not mandatory. Additionally, financial institutions are implementing green factoring and providing green mortgage loans for sustainable and energy-efficient homes. It is expected that sustainable bonds will appeal to new investors and the offering of green bonds in the local stock exchange market and financial system will increase.
The financial markets have been adapting to the shift in policymaking towards a more sustainable, zero-emission economy. To that effect, international organisations such as the ICMA, the UN and the CBI have created voluntary frameworks to advance the homogenisation of sustainable financing products. In certain jurisdictions such as the EU, these efforts have been complemented with the creation of a more comprehensive classification system in the EU taxonomy. These regulatory frameworks are aimed at providing market participants with predictable and uniform criteria to determine if an investment or financing product is sustainable, thus avoiding greenwashing.
The markets in Latin America have also moved in the same direction. Market regulators have created guidelines to promote ESG objectives in countries like Peru and Chile. Argentina’s securities market regulator issued Guidelines following the standards of ICMA principles to provide issuers in that jurisdiction with a predictable framework for sustainable products. In Brazil, private institutions increasingly rely on ICMA principles and international standards, showing consistent growth in their sustainable bond issuances. Finally, Colombia was the first country in Latin America to create its own green taxonomy and to promote decarbonisation projects.
In conclusion, as the world switches to a more sustainable economy, financial markets and their participants are following suit and progressively using more sustainable financing products.
 Alejandro Gordano is a counsel and Manuel José Eyzaguirre and Mario Lercari are foreign attorneys at Linklaters LLP. The authors would like to acknowledge contributions to this chapter from the following authors and firms: Alejandro Perelsztein, Jose María Bazan and Pablo Andrés Crimer from Bruchou & Funes de Rioja (Argentina), Guilherme Forbes, Henrique Filizzola and Raphael Fonseca Niemeyer from Stocche Forbes Advogados (Brazil), Cristian Eyzaguirre and Sebastian Melero from Carey Abogados (Chile), Diego Muñoz, Silvia María Mendez and Felipe Trias from Muñoz Tamayo y Asociados (Colombia) and Eduardo Vega and Vanessa Chávarry from Payet, Rey, Cauvi, Pérez Abogados (Peru).