By Aaron Weinman
NEW YORK, April 17 (LPC) - Banks active in Latin America have earmarked potential green loans for corporate borrowers, which seek to advance environmental, social and governance (ESG) criteria, despite some companies’ reluctance to allocate resources to environmentally-friendly operations.
To date, just two companies have raised green loans in Latin America. Spanish utility Iberdrola raised US$400m for its Mexican subsidiary in April 2018 and Peruvian conglomerate Ferreycorp in November signed a US$70m loan with BBVA.
Hurdles stifling supply include extra documentation costs involved in obtaining certification proving investments meet certain ESG guidelines, and the cumbersome research necessary to ensure company projects or investments qualify under green standards.
“There is this perception that getting green standard takes more work,” said Jaime García Alba, the head of advisory services and blended finance at IDB Invest, the private sector lending arm of the Inter-American Development Bank. “Launching any new project has an initial cost, but eventually these lead to greater investment opportunities.”
Given that green loans are still in their infancy throughout Latin America, bankers and investors have relied on the region’s best-known corporates to advance a green agenda. These companies come with deeper pockets that easily cover the costs of raising green money and are also constantly scrutinized over their compliance with ESG guidelines.
Banks are equally keen to push green financing solutions in order to advance their own sustainability agendas and broaden their overall lending suite. Lenders see an opportunity to not just lend money, but deepen business ties and pitch advisory services to Latin American corporates that are still navigating the learning curve of sustainable finance.
“(Green loans) are not a pure debt instrument, there is an opportunity to combine investment with advisory services,” said García. “There is a value-added expertise and banks know this is something they have to do to deepen their client base.”
Latin America’s first green bond, from a Peruvian wind farm operator, came in 2014 while Iberdrola’s green loan followed four years later. Despite the limited supply, interest for green deals has started to pick up, according to Jorge González-Jacob, global head of corporate loans at BBVA, who adds that additional loans are in the pipeline.
“We need to start with companies in Europe that have Latin American subsidiaries that have done sustainable financing deals (in Europe),” said González-Jacob, citing Iberdrola as an ideal bellwether.
The Spanish utility mandated BBVA to lead its green loan last year in Mexico and the bank syndicated the transaction among 10 lenders.
“Sustainable revolving credit facilities are in demand throughout the syndicated lending space,” González-Jacob added. “It started with (green) bonds but through 2019 and 2020 we will see more green lending.”
Companies in Latin America could benefit from adhering to green standards. Weather-related issues have the potential to negatively impact large-scale industries, including energy and mining, that remain core to economic development throughout the region. Well-known companies from Colombia to Brazil have seen their economic prospects, and in some cases, their reputations hindered by unforeseen natural disasters.
Colombian utility Empresas Publicas de Medellín (EPM) has delayed development of its Ituango hydroelectric project due to landslides at the site in April 2018 and the company has also had to hold off on acquisition plans in order to free up funds to pay for delays at Ituango.
Brazil’s Vale faced heavy criticism after a tailings dam collapsed in January at its Corrego do Feijão mine, which left more than 80 dead and hundreds missing. Lenders had been discussing a potential US$3bn revolving credit facility for the miner before the collapse, but have scaled back talks until Vale can better calculate the liabilities linked to the damage, loans bankers have said.
Going green could also attract investors’ attention, as they welcome the added transparency that comes with green bonds or loans. Whether it is financing a wind farm in Peru or helping Brazilian pulp companies adhere to lower carbon emissions, these transactions follow strict rules requiring borrowers to ring-fence the proceeds under ESG guidelines that are governed by principles set out by agencies such as Sustainalytics or the Green Bond Principles framework.
“Companies must get the ‘green stamp’ of approval for a corporate term loan of this type and these second party opinions are provided by recognized sustainable agencies,” said González-Jacob.
CREATING CRITICAL MASS
Investors have in recent years familiarized themselves with green securities from Latin America and portfolio managers around the world are allocating funding toward ESG-linked investments. Now it is the banks’ turn to incentivize the region’s corporates to see the value in green loans.
The sample size for corporate loans in the region remains at just two, but borrowers that want to obtain the green stamp are encouraged to implement an ESG agenda, according to González-Jacob. Companies taking green loans from banks can gain by adhering to green principles that are viewed similarly to key performance indicators, and from a banker’s point of view, this transparency and adherence to ESG only improves their future borrowing abilities.
“From a borrower’s perspective, they should be driven to show the world what they are doing and use this instrument,” said IDB Invest’s García, adding that investors want to see this level of credibility and due diligence from the region’s borrowers.
A fully developed asset class for green loans is still a while away, but the investment community is paying attention.
In the US specifically, asset managers are now considering ESG criteria across US$11.6trn in assets, up 44% from US$8.1trn at the end of 2016, according to BNP Paribas’ ESG Global Survey for 2019.
Data and technology costs in understanding ESG investment remains a barrier, but high profile funds, such as Jana Partners and Blue Harbour, are pushing companies to heighten their engagement with ESG issues, the survey found. In Latin America, green loans provide an ideal step towards meeting ESG criteria.
"(Green) bonds or loans, we look at it the same way and they are two products that are complementary,” said González-Jacob. “Corporates issuing green bonds impact their investor base and access a new liquidity pool and loans give corporates a positive reputational impact.” (Reporting by Aaron Weinman. Editing by Michelle Sierra and Lynn Adler)