The ESG (Environmental, Social, and Governance) concept has become very relevant in recent years throughout the world. In the case of Latin America, most of its countries have implemented public policies in order to comply with certain ESG standards.
In terms of numbers, we can already see a global trend in the issuance of green and social bonds in international markets. Last year 452 billion dollars were placed in instruments of this type, with a growth of 52% with respect to 2020, and this year more than $250 billion has been issued.
In line with this global tendency, Chile leads the ranking in Latin America, being the first country to issue green sovereign bonds in 2019, a issuance in 2020 and a new international issuance in 2021 of US$9 billion with the aim of achieving carbon neutrality by the year 2050 which were structured in accordance with Chile’s Green Bond Framework, a document that was prepared by the Ministry of Finance in coordination with other ministries and the support of the Inter-American Development Bank.
From a local point of view, as a measure to encourage this type of financing, in April 2018 the Santiago Stock Exchange (BCS) launched its green bond market putting into operation the guidelines for the Green and Social Bonds Market, with the purpose of developing the sustainability of the local fixed income securities market, taking as a basis the principles determined by the International Capital Markets Association (ICMA), an alliance composed of more than 530 institutions of issuers and investors in 60 countries and that promotes the proper functioning of debt markets, and in April 2022 have agreed with the Climate Bonds Initiative (CBI) a strategic alliance for climate change solutions that seeks to contribute to the promotion and development of green bond standards to move towards a low-carbon economy.
What are these bonds?
As their name indicates, green bonds are those whose proceeds are used to finance projects that have environmental benefits and proceeds are used exclusively to finance social projects that are aligned with the four components established in the "Social Bonds Principles", regardless of whether such projects are developed in Chile or abroad.
Therefore, green bonds are mostly used to finance projects associated with renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, sustainable water management, among other activities; and social bonds are used for basic infrastructure projects (drinking water, sewage, sanitation, transportation), access to essential services (education, healthcare, financial services), affordable housing, employment generation, and socioeconomic strengthening and advancement, among others.
It should be noted that, from a regulatory point of view, green and social bonds do not have any difference with corporate, banking and government bonds issued under the Securities Market Law, and their registration must be subject to Section IV of General Rule 30 of the Financial Market Commission or according to the Updated Compilation of Rules (RAN) of the same Commission, as the case may be.
Also, from a tax point of view, green bonds have no special benefits, neither for issuers nor for investors, and their price are very similar to those of common bonds, being determined in relation to market conditions at the time of issuance and to the issuer's risk.
Thus, the only difference they present with what we could call a common bond is in the use of proceeds, which must be used for the purposes described above and be supervised by a third party verifier who will check that the project complies with the requirements established by the principles and that the funds are actually used for such purpose. ¿So, what is the incentive for an issuer to make a green or social bond and bear the additional costs and processes associated with them if it can be financed with common bonds? ICMA has pointed out that green bonds are a way for issuers to demonstrate their commitment to addressing ecological, environmental and social issues, as well as to achieve greater diversification in their investor base, which would translate into potentially greater demand and other associated benefits, such as enhancing the corporate image and reputation of the issuer.
It has also been shown that green bonds attract investors from the growing segment focused on sustainable and responsible investments and investors that incorporate environmental, social and governance criteria as part of their investment analysis, as well as being an effective way to raise awareness and open an intense dialogue with investors about projects that address climate change and other environmental and social issues.
But are these incentives enough for the green bond market in Chile to grow and become an attractive market for both issuers and investors?
If we review what is happening in other markets, we can observe that in countries where the largest number of green bonds are issued, there are tax benefits associated with them, either for the issuers or for investors. For example, since 2009, the United States has been offering tax incentives for bonds that finance green buildings and renewable energy. Brazil allows wind developers and certain infrastructure and construction investments to issue tax-free bonds. China's central bank, the main promoter of the transition to green finance in China, is considering the option of providing preferential rates for green investments.
Among the different types of incentives observed in other countries are, for example, tax credit bonds, whereby investors receive tax credits instead of interest payments, which means an incentive for the issuer not to pay interest on the bond, an incentive generally used for bonds issued by government entities.
Another type of incentive is direct subsidies, in which the issuer receives funds from the government to pay the associated interest, and tax exemptions for income tax on the interest, which translates into a better interest rate for the issuer.
The green and social bond market is here to stay, but for it to have the impulse it is having worldwide and avoid being just a fad of the moment, we believe that the role played by the public sector is fundamental, which should create and adopt policies that promote the local market for green and social bonds, not only by establishing tax incentives, but also by publishing official guidelines for green and social bonds, issuing these types of bonds and investing in them, thus promoting the development of a favorable political and regulatory framework that fosters the necessary growth of green and social emissions and investments.