Team Europe: a new Green Bond fund for Latin America

The European Union’s Latin America Investment Facility (LAIF), the German Cooperation Ministry (BMZ) and the German Development Bank (KfW) have signed an agreement on a €15 million EU contribution to the Latin American Green Bond Fund, known as LAGREEN. The signing coincides with a fruitful virtual meeting of foreign ministers from the EU, Latin America and the Caribbean, hosted by Germany, on 14 December.

LAGREEN is the first green bonds fund in Latin America. Its main purpose is twofold: to finance climate- and resource-friendly investments and to mobilise local and international private capital towards the issuance of more green bonds in Latin America.

European Commissioner for International Partnerships, Jutta Urpilainen, said, “The European Union’s sustainable development initiatives with its partners in Latin America and the Caribbean are known for being ground-breaking, and LAGREEN is no exception. Our common objective should be to reap the potential of new digital technologies for sustainable and inclusive growth, bridging the digital divide and leaving no-one behind.”

All in all, about €450 million will be invested in green bonds. The EU’s contribution is made up of €13 million in junior shares in LAGREEN as a first-loss cushion, plus €2 million for technical assistance to bonds issuers and to expand the market. BMZ, the founding donor, has put in €73.5 million. Other public and private investors may join soon.

LAGREEN will particularly support first-time issuers and those committed to transparency and the environmental quality of underlying assets. All sectors defined in the Green Bond Principles that meet the goals of reducing greenhouse gas emissions, adapting to climate change and conserving biodiversity will be eligible investment targets. To comply with the highest sustainability-related requirements, on a best effort basis LAGREEN will aim at aligning with EU taxonomy and the future EU Green Bond Standard.

The fund's first operations will be carried out in countries where issuing green bonds has the greatest potential. A feasibility study commissioned by KfW, one of the world’s largest issuers of green bonds, picked out Mexico, Colombia, Peru and Brazil as having that potential.

Taking Latin America’s green bond market to the next level

The green bond market in Latin America and the Caribbean market has grown considerably of late; it now has an overall volume of $4.6 billion, as against just $1.5 billion in 2018. This volume is tiny in comparison with others, despite the region being among the most vulnerable to the effects of climate change.

In response, LAGREEN will help increase the scope and size of green bond markets in Latin America by attracting private financing in green investments. Through leverage and revolving use of investor contributions, LAGREEN will encourage, wherever local currency risk hedges and/or diversification are possible, primary issuances in local currencies among the relevant target countries. It will carry out anchor investments to encourage local and international institutional investors to follow suit and enter into a green bond investments themselves, In doing so, they will mobilising extra private funding to implement nationally determined contributions and stimulate local capital markets in the region.