Durability and [or/ Greening of] Caribbean Capital Markets
Warning: the opinions presented are those of the author and do not necessarily represent those of the organizations with which he is associated. Comments and reactions that move the regional dialogue forward are welcome at [email protected]
The new ESG (Environment, Social, Governance) reporting standards represent a major challenge for all players in the Caribbean financial markets. The immediate objectives may be to more precisely define the purpose with profit; to diversify; to grow; to be efficient. However, the ultimate goal is the urgent climate change directive originally formulated by Caribbean scientists for small island developing states: keep global warming to below 1.5°C for the chance to stay alive. One of the biggest challenges will be to attract big investments in projects involving many small players.
While the rise in ESG-themed investing is the global trend, the acceleration and total amount of funds has been highest in Europe. The sustainable finance community has rapidly increased in volume and product diversity since the European Investment Bank issued a green bond in 2007 and the World Bank issued the first such bond in 2008. Only the market sustainable bonds (this includes green, social and sustainability-linked bonds) is expected to grow by 59% in 2021 to reach $850 billion, which represents 8-10% of global debt issuance according to Moody’s.
Latin America and the Caribbean
In Latin America and the Caribbean (LAC), the green bond market is poised for rapid growth and expansion. According to the IDB and IDB Invest, the global green bond market reached a record issuance of $1.1 trillion in 2020. The LAC region accounted for a nascent 2% of this market. Currently, Williams Caribbean Capital of Barbados is listed as the only CARICOM-based company to have issued $18.8 million through seven bonds published on the IDB’s Green Bond Transparency Platform covering the LAC region. The total for the LAC region listed on the platform is currently $21.7 billion. The IFC estimates that, given the threat posed by climate change and global warming to the region, this number will increase exponentially over the next eight years and could reach $23 trillion by 2030.
In June 2021, the Jamaica Stock Exchange launched its Green Bond Project titled “Facilitating and Fostering an Environment for a Caribbean Green Bond Listing on the Jamaica Stock Exchange”. The 24-month project is funded by a grant from the South Korea-based Green Climate Fund (GCF) and is a collaboration between the Climate Change Division, Ministry of Housing, Urban Renewal, Environment and Climate Change and the JSE. The objective of the project is to strengthen Jamaica’s commitment to climate action, as outlined in its Nationally Determined Contributions (NDCs). It has received strong endorsements from project partners, the Government of Jamaica, the Government of Dominica and private sector stakeholders.
Green economy, green bonds, Sustainable Development Goals (SDGs) and public-private partnerships will be important themes of this year’s Regional Conference on Investments and Capital Markets, from January 25-27, organized by the Jamaica Stock Exchange.
Scale with many small projects
It is now clear that all countries in the region will experience massive transformations in the coming years and this will require huge investments from all sectors. Whenever we are dealing with the well-being of people, the health of nature and sustainability in general, collaboration is the basis for success. Collaboration requires trust, transparency and accountability.
To achieve this, we must have a common terminology, be able to define what we are trying to achieve, and our goals must be sufficiently ambitious and yet realistic. Our goals must be science-based so that we are verifiably moving towards sustainability, because all types of movement, even if they are in the right direction but not at the required pace, do not constitute real progress and we we don’t have time, money or lives to waste.
All regions, indeed the entire world, face a central two-pronged challenge: can we mobilize enough investment in the right projects? Regarding the amount of money, we can say that the money is starting to increase rapidly, but we still need a lot more and we need all the local financial institutions, incumbents and challengers, as well as crowdfunding initiatives to innovate. and play their part. When it comes to the issue of good projects, the challenge is even greater.
Consider the following two problems: institutional investors, who make up the bulk of capital markets, already have huge portfolios and face a growing dilemma: they must grow while becoming increasingly responsible, ensuring generate truly lasting income impact. They need to make sure that they are not fooled by greenwashing, and that they in turn are not fooling their customers – who increase the pressure. Sustainability-related projects come in many different forms; some, like infrastructure, require huge investments. Investors love this because the relative transaction costs are low. But many social and biodiversity projects require a much larger amount of smaller investments and these are associated with significant transaction costs – investors have to invest a lot of time and effort in many small projects .
Technology for transaction costs
The relatively low liquidity of the Caribbean markets means that many large investors stay away from this market because it is too small for them. Anthony Miller, head of the United Nations Sustainable Stock Exchanges Initiative, points out that relatively small investments require the same due diligence work as large investments, which increases transaction costs for large institutional investors. Additionally, what may be a “small” investment for a large investor may amount to a large segment of a small business or market. Thus, for large investors, they might end up with too large a market segment and the associated risks would be too high.
A countermeasure the Caribbean can take is to reduce transaction costs through facilitation (e.g., Caribbean Climate-Smart Accelerator), innovation, collaboration, and pooled joint investment vehicles and indices that are listed in other markets. Anthony Miller points out that a more fundamental transformation in this direction would be to either join the MILA (Mercado Integrado Latinoamericano) or use it as a model to integrate the Caribbean markets. MILA took a set of relatively small markets (Colombia, Peru, Chile and Mexico) and integrated them to create what is today the largest market in Latin America.
Technology and transparency are also part of the answer, for example through distributed ledger technology and the Green Bond Transparency Platform. We need to be able to link and insure the impacts of huge sums of money back to the source records of many small individual projects – particularly inevitable in small island developing states.
Assured standards to stay alive
A second, equally necessary element of the approach must be to not shy away from setting sufficiently high standards for the impact that should be generated and the way in which it should be delivered. Currently, the Caribbean stock exchanges are brainstorming, designing and drafting ESG-specific listing requirements. Caribbean issuers are not yet accustomed to reporting on these dimensions.
At the same time, issuers in other markets have become accustomed to “ordinary” ESG reporting, and governments, regulators and investors are beginning to implement a different class of standards – one that distinguishes between common ESG and real. sustainability, where context, ecological thresholds and actual sustainability goals are taken into account.
All discussions on the ISSB and what will or will not be included in these standards, EU Taxonomy, Sustainable Finance Disclosure Regulation, Green Banking Ratio, UNDP SDG Impact Standard, etc lead to our Caribbean future. This is a major challenge for all players in the Caribbean financial markets. The dangers are present and real, the opportunities are clear, the learning curve is steep but urgent. We cannot afford to ignore any requirement to keep global warming below 1.5C to have a chance of surviving.
Dr. Axel Kravatzky is Managing Partner of Syntegra-ESG Inc., Vice-Chair of ISO/TC309 Governance of organizations, and co-organizer and editor of ISO 37000 Governance of organizations — Guidance.