Thematic bond issues in Latin America had a record year in 2021. These are green, social, and sustainable bonds (which combine environmental and social aspects), or sustainability-linked bonds (SLB). While they are also debt instruments equivalent to traditional bonds and are evaluated for the same characteristics, the difference is that the use of funds is limited to projects in the environmental or social areas.
An external agent tends to validate thematic bonds and the green or social "nature" of projects or a given issuer as a way to guarantee the latter and avoid “greenwashing," which is defined as using an environmental or social label that does not have a true impact on real variables. As with traditional bonds, they can be placed by sovereign (states) or corporate (companies) issuers. In the case of SLBs, they are not necessarily used to finance sustainable projects directly. They can also be used to repay debt, but assuming the achievement of certain social or environmental goals at the same time, which imply a coupon rate step-up if not fulfilled. This is a relatively controversial point, as one might think that it is in the investor's "interest" not to achieve its targets to receive a higher coupon rate. However, it should be noted that investors do not intervene in the company's management or in the achievement of these goals, in addition to the fact that failing to meet the committed objectives could entail reputational risks that carry other types of cost for investors. From another perspective, one feature of SLBs is that they reflect a corporate commitment, unlike green/social bonds, which target specific projects. A significant number of corporate thematic bonds in the region are of this type.
We present some relevant facts and figures on the regional thematic bond market here:
Source: Climate Bonds Iniciative, "Latin America & Caribbean State of the market 2021" and BoFA, Global Research "ESG Issues"