October 29, 2019 / 6:12 PM / 22 days ago

Latin American issuers face steep learning curve on ESG loans

NEW YORK, Oct 29 (LPC) - Latin American banks and corporations are facing a steep learning curve as they turn to sustainable lending as a viable financing tool.

As tackling climate change becomes a vital priority in the region, so does aligning environmental, social and governance (ESG) strategies with borrowing needs. Issuers are seeking advice from banks on green and sustainable financings as lenders also educate themselves on the opportunities and challenges ahead.

Green and ESG lending remains in its infancy in Latin America. Just US$18bn in green or sustainable loans has been issued across the region since March 2018, according to data from Refinitiv LPC. More exposure to these products could set off rapid growth in a region that is positioned to keep growing while ESG norms become more prominent.

“There needs to be more education around it. Sustainable finance is still very new to a lot of people,” said Tess Virmani, associate general counsel and senior vice president of the Loan Syndications and Trading Association (LSTA). “There could be a lot of opportunities. Lenders are in the best position to let their clients know that this loan product is available.”

Solutions seem to be as varied as the corporations and the banks that fund their operations.

Some banks are strategically offering sustainable loans to close clients that already have an ESG strategy in place and have a specific goal in mind, such as getting access to a new investor and client base. Japanese bank MUFG was engaged by Chilean paper and pulp company CMPC to lead a five-year US$100m green Shogun loan, raised in dollars and granted by Japanese banks.

The company, which had already done an international green bond, was confident it would apply the green standard to the loan.

Other investment grade borrowers in the region, whose revenues depend on tapping natural resources—particularly those within the paper, utilities, energy and mining sectors—are under pressure to implement increasingly sustainable practices, presenting both a challenge and an opportunity for ESG financiers.

Mining companies recognize the need to align their financing to more sustainable practices. The January 25 collapse of a tailings dam at Brazilian miner Vale’s Corrego do Feijão iron ore mine in Brumadinho amped up the pressure to provide safer conditions for employees and nearby communities.

ESG or key performance indicator-linked loans may provide a means for mining companies to implement more sustainable practices and to be held accountable on a financial level, by linking the interest rate of the loan to the benchmarks set by a third-party expert agency.

DIALING UP

As interest buds toward sustainable financing in the region, the dialogue between banks and issuers has heightened.

“We have had dozens of conversations with interested borrowers over the past few months, and so far much of it is still about educating the market,” said Charlotte Peyraud, Vice President of Sustainable Banking at Crédit Agricole CIB. “We are seeing a lot of interest in Latin America in the early stages of this product.”

European banks or companies leading the charge on sustainable finance which have subsidiaries in the region can export their knowledge to Latin America, leading to a cascade of sustainable lending transactions.

Spanish utility Iberdrola signed the first green loan in Latin America led by Spanish Bank BBVA, a US$400m financing for Iberdrola Mexico in April 2018. US subsidiary of Iberdrola Avangrid signed a US$2.5bn sustainable credit facility in June 2018. In March 2019, BBVA coordinated Iberdrola’s €$1.5bn sustainable credit facility.

“When the parent company goes green, they have subsidiaries that are doing the same,” said Jorge Gonzalez Jacob, global head of corporate loans at BBVA.

Still, some banks are tip-toeing around the asset class, asking questions and observing how competitors are executing the loans before diving in.

One banker said more regulation and standardization on sustainable loans would be crucial before the practice is adopted on a wide scale. It is a matter of time, as lenders are increasingly prioritizing the topic of sustainable finance for their own bottom line.

“The financial industry is waking up at a rapid pace to the risk and opportunities from the changing climate and the transition to a lower-carbon economy,” said Joseph Lake, COO of The Climate Service, a climate change risk-assessment technology firm.

“We've moved from this information being a ‘nice to have’ to a ‘need to have’,” Lake said. (Reporting by Daniela Guzmán. Editing by Michelle Sierra.)

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