Rebeca Vidal
Ejecutiva Principal de la Dirección de Análisis Técnico y Sectorial de CAF -banco de desarrollo de América Latina y el Caribe-
This article was written by Rebeca Vidal and Camille Endo.
The world of financing is constantly evolving in response to market needs and trends. In recent years this evolution has been demonstrated not only by a greater emergence of technology-supported financial solutions, but also in the important advances that have sought to align financing mechanisms with the Sustainable Development Goals (SDGs) promoted by the United Nations and the Paris Agreement. These guidelines have been adopted by public and private entities in a growing global dynamic.
This growing wave of financial resources oriented toward sustainability includes “green” credits that have been progressively promoted by institutional financing ecosystems, and which are being offered by an increasing number of institutions in Latin America.
Indeed, the growth of sustainable approaches in financing has grown remarkably during the last five years. During the first half of 2021, investment in environmental, social and governance bonds (which are linked to sustainability and the transition to sustainable models) reached USD 496.1 billion, showing an increase of 59% over the same period of the previous year, according to the Climate Bonds Initiative (CBI), a global organization that promotes green financing. However, the approaches for allocating this kind of resource tend to focus on large projects aimed at renewable energy generation and climate change mitigation, for example.
In this context, SMEs seem to have difficulty accessing this kind of financial resources, because the scale of their green projects is much smaller than that usually served by the bond market. In this regard, various institutions in Latin America have begun to offer products specifically designed to incorporate this important productive segment into the wave of green financing.
According to the most recent Sustainable Banking Network Global Progress Report, promoted by the International Finance Corporation (IFC), the Latin American countries that have shown the best performance in terms of the development of green financing are Brazil, Colombia and Mexico. In the case of Brazil, the methodologies implemented for monitoring the progress of banks and for calculating exposure to climate-related risks stand out. Colombia is exhibiting an important capacity for innovation by implementing a sustainable construction financing market, while a couple of years ago Mexico launched the Green Bond Principles through the Climate Finance Advisory Council.
Among the examples of efforts undertaken by banks in the region to promote green financing strategies for the SME segment we find cases such as the Green SME Program promoted by the Ministry of Productive Development of Argentina, which allocates approximately USD 38 million to promote the sustainable creation of SMEs, including seven instruments with favorable terms and rates compared to the market. Among the recipient programs of these resources (which are placed through Banco Nación), the implementation of environmental management systems and the reduction of carbon footprint stand out.
In the case of Chile, its Production Development Corporation (CORFO) runs a refinancing program for the development and execution of sustainable projects (focused on renewable energy, energy efficiency and circular economy). Under this program, green credit is provided to private companies with sales of up to approximately USD 20 million, with long-term conditions and financing of up to 70% of the investment per project.
Meanwhile, Agrobanco seeks to promote and facilitate the granting of credits to small agricultural producers in Peru, including technical assistance. This green credit is aimed at financing crops, livestock and forestry and aquaculture systems that take into account green or sustainable practices in their processes.
Important green finance initiatives have also emerged from the private sector, aimed in large part at the SME segment. In Ecuador, between 2019 and 2021, six banks (Banco Pichincha, Banco Guayaquil, ProCredit, Banco Internacional, Produbanco and Banco Bolivariano) were able to raise a total of USD 720 million from several international and multilateral sources to allocate to sustainable agriculture, housing, and transport business projects, as well as energy efficiency and waste management.
Additionally, BBVA issued the first sustainable bond in the Uruguayan market for a term of 10 years in the amount of up to USD 15 million. This bond will focus on financing projects in energy efficiency, clean transportation, sustainable agriculture and construction, as well as the promotion of micro, small and medium-sized enterprises (MSMEs) segment and is expected to be in high demand.
CAF Development Bank of Latin America promotes the development of green financing for SMEs as a second-tier bank. In this regard, the credit lines with local banks include a sustainable approach, gender equity and a focus on SMEs as prioritized destinations for the placement of resources in the region’s business matrices.
Although financing for SMEs has been boosted and opportunities to attract resources for these companies are now growing, the region still faces the challenge of extending practices such as the adoption of methodologies that allow financial institutions to respond to their needs in a timely manner. All this while valuing the impact from this kind of financing and strengthening the business culture related to sustainable business models, so that a growing demand for this type of financing can be achieved, all to the benefit of the planet’s sustainability.
