Green Bonds for Renewable Energy in Latin America and the Caribbean.

• Date: 01 September 2023
• Author: Gonzalez-Ruiz, Juan David

1. INTRODUCTION

   The Sustainable Development Goals (SDGs) agenda provides targets aligned with the aims of sustainability-oriented green bond issuers, promoting the joint work between countries to guarantee changes in how development permeates global economies and the planet. In the specific case of green bonds for renewable energy projects (RE), these are framed in SDG 7. However, given their importance, they are cross-conditioned and highly transversal to other SDGs, such as 8, 11, 13, and 17. In fact, these SDGs are also aligned with the aims of green bond issuers in other sectors, such as transport, sanitation, forestry, financial, and agriculture. Furthermore, the Green Bond Principles developed by the International Capital Market Association (ICMA) and the Climate Bonds Initiative (CBI) provide valuable guidelines to the market on the main characteristics and requirements for the issuance of green bonds, establishing specific sustainable criteria for different sectors.

   In this way. green bonds are progressively becoming more relevant in the design of investment portfolios (Mejia-Escobar, Gonzalez-Ruiz, and Duque-Grisales 2020). This type of financial mechanism constitutes a sustainability-oriented fixed-income security that accounts for the cost of mitigating the negative consequences of climate change. Thus, green bonds raise capital primarily to fund environmentally friendly projects that reduce greenhouse gas emissions using low-carbon financing approaches (Tu, Rasoulinezhad. and Sarker 2020). Therefore, green bonds give financial support to the 2[degrees]C temperature target of the Paris Agreement (Tolliver, Keeley, and Managi 2020a) and promote RE in order to meet the climate agendas promoted by the United Nations in the SDGs (Richter et al. 2021, Tolliver, Keeley. and Managi 2020b).

   Remarkably, there is evidence of a green premium or 'greenium', which is defined as the difference between the yields on a plain vanilla bond and a green bond with similar characteristics. Thus, according to MacAskill et al. (2021), there is consensus in the literature about the existence of a green premium in 56% of the studies on the primary market and 70% on the secondary market. In fact, different studies consider the green premium as one of the most important characteristics of green bonds (Ravina 2022, Agliardi and Agliardi 2019; Gianfrate and Peri 2019; Zerbi 2019; Hachenberg and Schiereck, 2018). especially for those issuances carried out by governments/municipals and firms with investment grade. These findings could be partly explained by credit and risk profiles that are far removed from conventional issues, which translate into effects on the relevant risk-return characteristics for investors, as noted by Kempa and Moslener (2017) and Zerbib (2019).

   At this point, it should be noted that a key characteristic of green bonds relative to plain vanilla bonds is its label, that is, the different requirements that allows the issuer to label the issuance as green. According to Li et al. (2022), labels allow bonds that meet green criteria to receive a green flag as identification. In this context. CBI and ICMA play a pivotal role as leaders in the publishing of specific guidelines for market players, which include mainly third-party assessors, issuers, investors, and regulators in order to help to reduce asymmetric information (MacAskill et al. 2021), mitigate adverse selection, and reduce the liquidity premium (Febi et al. 2018). In this regard. CBI is one of the key players in the green market, providing certification schemes designed as an easy-to-use tool for market players to prioritize and develop investments that truly address climate change issues (Climate Bonds Initiative 2022). In Europe, supported by the Technical Expert Group on Sustainable Finance, the EU Green Bond Standards provide voluntary standards that help the public and private sectors raise funds to finance large-scale investments that meet sustainability concerns (European Commission 2019). On the other hand, the ASEAN Green Bonds Standards support sustainable growth and align the interests of investors, issuers, and regulators from Southeast Asian Nations. Regarding LAC. although there are no common standards across countries, the Climate Finance Advisory Council of Mexico has developed the Green Bond Principles MX, which are intended to generate common standards to guide green bond issuers in the Mexican market, as well as provide investors with certainty about the expected environmental benefits of investments financed with the funds raised (Climate Finance Advisory Council 2018).

   Hence, the label leads issuers and investors to consider other attributes--namely, Environmental, Social, and Governance (ESG) attributes--in addition to those purely related to financial matters in making their economic decisions (Richter et al. 2021, Sartzetakis 2021). This fact explains why green bonds are increasingly positioned in the energy sector (McInerney and Bunn 2019, Sangiorgi and Schopohl 2021) and. more specifically, in the wind and solar energy sectors (Tolliver, Keeley, and Managi 2020b).

   Accordingly, the funds raised by the issuance of green bonds are used mainly in the renewable energy, transport, and building sectors to finance environmental-friendly projects (Richter et al. 2021, Gonzalez-Ruiz et al. 2019). Due to the relevance of these sectors, recognized institutions and researchers have conducted several studies. The main research topics cover the analysis of investment opportunities in green infrastructure, financing of projects in agriculture, water, transportation, green buildings, and energy efficiency in real estate (Gianfrate and Peri 2019, Gonzalez-Ruiz et al. 2019, Ng and Tao 2016, Maltais and Nykvist 2020).

   However, regardless of all the advances in the study of green bonds, we identify a gap in the analysis of the dimension and determinants of green bonds in the renewable energy sector in the Latin America and the Caribbean (LAC) region, which plays a pivotal role in the renewable energy scene worldwide. To the best of our knowledge, no study in the current literature has provided an in-depth analysis of the characteristics of green bond issuances for this type of project in LAC. To help bridge the identified knowledge gap, this study aims to analyze the overall state of the green bond market in LAC for the renewable energy sector.

   This paper contributes to the previous research in the following ways. First, we provide insight into the role of the green bond market in financing RE. In order to gain a better understanding of this topic, the most representative countries and projects in terms of volume issued are examined, allowing issuers and investors to broaden their knowledge of the opportunities available in financing RE through green bonds and benefit from the experience and advances of others. Second, this study provides essential information on the difficulties in financing the renewable energy sector in LAC, where research on this topic is scarce. Therefore, our results and conclusions can be useful for policymakers and investment managers to develop new public policies that contribute to structuring investment portfolios that include sustainable financial products, such as green bonds.

   This paper is organized as follows: Section 2 provides the theoretical background. Section 3 describes the data and methods. Section 4 analyzes the results. Finally, in Section 5, the conclusions, contributions, and further research are presented.

2. LITERATURE REVIEW

   Although research on green bonds has increased in the last years, specific analysis of sectors is scarce, especially in developing countries and regions such as LAC. Based on previous research on green bonds in the renewable energy sector, the main contributions are related to risk, energy efficiency, carbon emissions, and profitability. Figure 1 shows the most representative studies on green bonds and renewable energy, based on citations obtained from Web of Science (WoS) and Scopus. Accordingly, three well-defined research development trends are identified in the academic literature.

   A first research development trend focuses on financing issues. Thus, Ng and Tao (2016) explore the reasons for the financing gap of RE in Asia and suggest green bonds to address this matter. On the other hand, Glomsrod and Wei (2018) state that large banks and institutional investors have risen to prominence, with the potential to significantly contribute to a low-carbon transition. Byrne et al. (2017) conducted a series of simulations using multivariate analysis and Monte Carlo simulation to analyze solar city possibilities for Amsterdam, London, Munich, New York, Seoul, and Tokyo. In this work, green bonds are mentioned as a financing innovation that could help to address large-scale capital investments for green purposes. Donastorg, Renukappa, and Suresh (2021) analyze the new trends in renewables for the Dominican Republic and identify gaps in financial areas. In this context, new financial trends such as green bonds are encouraged.

   Nisha and Madhvi (2021) concluded that India needs to develop a national framework for green projects in which green bonds play a pivotal role as a financing option to meet SDGs. Accordingly, green bonds can help promote financing for a wide range of sustainable energy systems, such as large solar thermal, photovoltaic, and wind power systems, as well as investments in network infrastructure for electricity, district heating, hydrogen, charging stations for battery electric vehicles, and energy efficiency, among others (Haas et al. 2021).

   A second research development trend is related to energy transition. In this line, Hanif, Aziz, and Chaudhry (2019) explore the impact of non-renewable and renewable energy on carbon emissions in developing Asian economies. The authors conclude that renewable energy helps control carbon emissions, while the...