Introduction
The European Union is fully committed to promoting sustainable finance at a global scale and has defined a European Green Bond Standard (‘taxonomy’). The European Commission will fund up to 30% of the NextGenerationEU by issuing Green Bonds, becoming the largest issuer in the world. It has already issued the world's largest green bond transaction to date.
Through initiatives like LAGreen, the European Union will promote the development of the green bond market in Latin America and Caribbean, working together with local actors to promote high impact standards in sustainable finance from an early stage.
Background
The Latin American and Caribbean region has an untapped potential, being home to more than 30% of the earth's freshwater and half of the world tropical forests. The region has one of the cleanest energy matrixes in the world, doubling the global average of primary energy from renewables. Yet, it is also extremely vulnerable to natural phenomena and to the effects of climate change.
The region needs to invest between 7% to 19% of its annual GDP by 2030 to build resilient economies and meet the climate goals of the Paris Agreement, but neither government nor multilateral development bank funding is sufficient to close this finance gap. Capital markets have a pivotal role to play in unlocking finance, and one of the instruments to do so is through Green and Blue Bonds, allowing to crowd-in private investors. Even though the Latin American green bond market has shown a substantial growth in the last years, from USD 35 billion in 2022 to 54 billion in 2023, the region only represents 5% of the global thematic bonds market and has plenty of room to continue expanding.
LAGreen's work in Colombia is a great example of how innovative financial instruments can be used to catalyse the transition to a more sustainable, resilient and just economy, as shown by its investment in the first subordinated bond issuance of a Colombian bank, Banco de Bogotá. The issuance of the USD 230 million subordinated bond subscribed by LAGreen (USD 10 million), IDB Invest and other financiers will allow Banco de Bogotá to finance green buildings, renewable energy, energy efficiency, circular economy, and sustainable agriculture projects, among others.
LAGreen is Latin America's first dedicated Green Bond Fund. It is funded by the EU through LACIF and the German government, who have jointly invested EUR 90 M as a first loss cushion to attract private investors. LAGreen emphasises new, locally-traded issuances targeted at sectors such as renewable energy, energy efficiency, climate change adaptation, sustainable transportation, sustainable use of natural resources and land use, circular economy, biodiversity, water conservation, sustainability bonds and social bonds.
The Fund had participated in eleven bonds in Colombia, Peru, Costa Rica, Ecuador, Panama, Guatemala, and Mexico, having reached an investment portfolio of EUR 190 million by 2024. Those bonds supported by LAGreen mobilised financing of EUR 866 million on the local private capital market in addition to its anchor investments.
An essential feature of LAGreen is that all new investments are combined with a technical assistance facility, funded by LACIF to support all stages of the preparation of the bonds. It provides training, product development, green bond framework development, external review and post-issuance reporting support, thus promoting best practices and the highest standards, helping consolidate this instrument in Latin America and the Caribbean. Technical assistance helps to generate awareness, enhance technical skills, transfer new technologies and techniques, as well as to promote best impact practices and standards. These dual role as technical assistance provider and investor unlocks the potential to issue high quality green bonds thanks to their high impact standards and reputation.
Moreover, LAGreen collaborates with a series of partners including the IDB, IFC, UNEPFI, local stock exchanges, regulators and industry associations among others, to improve the overall sustainable framework and analyses the application of the EU taxonomy. The Fund contributes to dialogue and knowledge sharing and catalyses new partnerships for an enabling Green Bond ecosystem, scaling the Green Bond market in Latin America and the Caribbean. LAGreen also spearheads the promotion of Green Bonds in the region, which is a regional priority in the EU Global Gateway Investment Agenda.
Expected results:
- The LAGreen Fund is expected to reach a total size of EUR 450 million by 2028.
- LAGreen is committed to reach a threshold of 350 tCO2e avoided per million EUR invested per year.
- All investments have innovative features (for instance LAGreen has supported the issuance of the first thematic bond by a Mexican non-bank financial institution, focused on supporting sustainable agriculture or the first blue bond issued by an Ecuador-based financial institution).
- Activities financed with the issuance of the bonds include sustainable agriculture, green buildings, shrimp farms, renewable energy (mostly photovoltaic in distributed generation), energy efficiency, recycling under a circular economy approach, sustainable transport (including public and private electric vehicles), and water treatment and drinking water systems.
- The LAGreen technical assistance had undertaken 31 projects in 14 countries, having trained 1 557 people as of January 2024.