On December 14, 2020 Bloomberg reported that the “sustainable bond industry’s push into developing nations is sparking concerns about how sure investors can be that the money is being used for good, with Mexico’s sale the latest to raise eyebrows among skeptics.
The issue has come to the fore as Latin America becomes the new frontier for investors looking to do good at the same time they make money. Mexico issued 750 million euros ($910 million) of sovereign sustainable bonds in September, and the notes have since made their way into funds and indexes focused on securities that are supposed to help make the world a better place
In reality, there’s no actual guarantee the money raised will be used with environmental, social and governance considerations in mind — so-called ESG factors that underlie a global market for $2.1 trillion of bonds, mostly from established players such as the U.S., France and Germany. As issuance increases from developing nations with less robust controls, skeptics see a growing potential for “greenwashing,” or using vague goals of improving the planet to raise money cheaply.
Mexican officials outlined lofty goals for the proceeds, including spending on social services in underserved regions that was endorsed by the United Nations. But there’s no enforcement mechanism. The prospectus is clear: Even if the nation doesn’t use the money for social development or if the actual impact of the spending is zilch, investors have no recourse. Mexico’s Finance Ministry acknowledges that the programs meant to be financed with the bonds would have gone ahead in any case.
But by raising the money with ESG credentials, Mexico likely reduced its borrowing costs. Calculating the exact savings is difficult because of the complex variables that go into any issuance, but the interest rate was Mexico’s second-lowest ever in the euro market. The sale was more than five times oversubscribed and attracted about 80 investors that weren’t regular participants in Mexican debt sales, according to Natixis, which structured the notes.”
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