Mexico’s Leadership in Sustainable Bond Issuance: A Beacon for Latin America
In 2023, Mexico has emerged as a frontrunner in sustainable bond issuance within Latin America, propelled by a series of recent sovereign deals. This progress, however, is accompanied by challenges that hinder broader participation from various issuers seeking to leverage the advancements in the market for funding environmental and social projects.
A Strong Start in ESG Bonds
As of June 6, 2023, Mexico had issued approximately $3.9 billion in Environmental, Social, and Governance (ESG) bonds, surpassing its regional counterparts, including Brazil, Chile, and Colombia. Following this, the Mexican government successfully raised an additional $2.2 billion through sustainable development bonds in both Japan and the domestic market. This momentum highlights Mexico’s commitment to sustainable finance and its role as a catalyst for the broader Latin American market.
Andrés Felipe Sánchez, head of Latin America and Caribbean programs at the Climate Bonds Initiative (CBI), remarked, “To see Mexico ahead is really remarkable. The sovereign has a huge responsibility on the numbers, because it acts as a huge catalyst for the sustainable debt market. Once the sovereign starts issuing, the market follows.” This statement underscores the pivotal role that government actions play in shaping market dynamics.
Growth of the ESG Market
Since the issuance of its first ESG bond in 2020, Mexico’s sustainable finance landscape has witnessed significant growth. According to a recent CBI report, ESG bond volumes surged by 25% in 2023, reaching $14.7 billion, a stark contrast to the $5.5 billion and $2.7 billion recorded in 2021 and 2020, respectively. Notably, between 2019 and 2023, ESG bonds accounted for around 8% of the total debt issued in Mexico, double the global average of 4%. This growth trajectory positions Mexico as a leader in sustainable finance within the region.
The Role of Sustainable Taxonomy
In March 2023, the Mexican finance ministry published the country’s sustainable taxonomy, aimed at encouraging investments in initiatives that address social and gender disparities while protecting the environment. This framework aligns with the United Nations’ 17 Sustainable Development Goals (SDGs), enabling the government to identify eligible projects and expenditures that contribute to these global objectives.
Sánchez noted, “Mexico has the first and only sustainable taxonomy in the world because it is the only one that includes a social aspect, and that is a good example for other countries in the region.” However, he emphasized the need for the taxonomy to be more integrated into the economy, highlighting the importance of implementation as a priority for financing environmental and social causes.
Challenges in Implementation
Despite the promising developments, the implementation of the sustainable taxonomy faces several hurdles. A lack of knowledge among certain sectors about how to utilize the taxonomy poses a significant barrier. Sánchez pointed out that creating implementation steps, including publishing guides, is essential for overcoming this challenge.
Moreover, Carlos del Razo, partner and head of the sustainability and environment practice at ECIJA Mexico, highlighted the need for more specialists in the financial sector to effectively apply and interpret the guidelines. He also stressed the importance of establishing indicators to measure the environmental and social impacts of projects to mitigate the risks of greenwashing. The coordination of over 300 financial institutions, as estimated by the Mexican government, adds another layer of complexity to the implementation process.
Policy Goals and Political Support
The roots of Mexico’s ESG bond market can be traced back to the country’s 2012 climate change legislation, which aimed to regulate climate change mitigation and adaptation efforts. The recent election of Claudia Sheinbaum, described as “the most scientifically engaged climate premier in history,” has raised hopes for enhanced support for sustainable finance from the highest levels of government. Sheinbaum’s appointment of Alicia Bárcena, a former secretary of the UN’s Economic Commission for Latin America and the Caribbean, as head of the environment ministry further reinforces this commitment.
Del Razo expressed optimism, stating, “I believe that this should be somehow well perceived by markets and potential investors in the field, as [Bárcena] will be more than supportive of various environmental, social, and sustainable initiatives.”
The Role of International Development Banks
The strength of Mexico’s domestic ESG financing market can also be attributed to the increased focus on sustainable issuance by international development banks. These institutions provide funding to local financial entities, contingent upon adherence to ESG guidelines. Lorenzo Thomas, executive director of corporate banking at Banco Multiva in Mexico City, noted that Mexico’s economic potential, particularly in light of nearshoring trends due to its proximity to the U.S., makes it an attractive market for multilateral lenders.
The Importance of Local Currency Issuance
According to the CBI report, the Mexican peso dominated the currency landscape for issuances in 2023, accounting for nearly two-thirds of the total. Sánchez highlighted this as a positive indicator of investor confidence in the local currency. The ability for companies to issue bonds in their local currency allows small and medium-sized enterprises to participate in capital markets, fostering greater diversification among issuers, including corporates, commercial lenders, and development banks.
Conclusion: A Path Forward
While Mexico’s leadership in sustainable bond issuance in Latin America is commendable, the journey is far from complete. The country faces challenges in implementing its sustainable taxonomy and ensuring broader participation in the ESG bond market. However, with strong political support, a commitment to sustainable finance, and the backing of international development banks, Mexico is well-positioned to continue its trajectory as a leader in sustainable finance. As the market evolves, the lessons learned from Mexico’s experience may serve as a valuable blueprint for other countries in the region seeking to enhance their sustainable finance initiatives.