As a region rich in natural capital and sources of clean energy, Latin America has the potential to become a global leader in the transition to a sustainable economy. But for this potential to become a reality, countries in Latin America must address structural challenges to attract investment, close financing gaps and safeguard the region’s future.
This was the impetus behind the Americas transition finance summit, organised in Mexico City by OMFIF and Bolsa Institucional de Valores, Mexico’s institutional stock exchange. The two-day event brought together investors, banks, ratings agencies, corporates, multilateral development institutions and policy-makers to discuss how to unlock investment opportunities within the region and the policy and market architecture needed to build credibility and attract capital.
Why Latin America?
In her welcoming remarks, Maria Ariza, chief executive officer of BIVA, explained why the transition was so critical for the region: ‘The transition touches every part of Latin American economies,’ highlighting energy, water, food and the resilience of supply chains as considerable challenges.
Latin America is extremely vulnerable to the effects of climate change. Rising temperatures and sea levels, changes in rain patterns, hurricanes and wildfires are causing significant economic losses and putting strains on governments, banks, insurers, investors and businesses alike. This has the potential to transmit major shocks through to the region’s financial system.
Countries within Latin America are reliant on fossil fuels for around two-thirds of its energy supply. The past few years have exposed the urgent need to transition away from a reliance on oil for reasons of sovereignty and energy security, as well as environment, and it is imperative that Latin America invests to transform its infrastructure.
Ariza said: ‘At a time of geopolitical instability, global investors are reassessing where they allocate capital and are looking for new sources of growth. This is an important opportunity for Latin America.’
Structural challenges
According to the International Finance Corporation, by 2030, Latin American and Caribbean countries need to invest between 10% to 16% of their annual gross domestic product in infrastructure to meet the goals of the Paris agreement. But financing barriers remain significant, with high costs and currency risks constraining the flow of capital.
One of the defining messages of the summit was that there is a persistent lack of certainty in the region. Bankers and investors repeatedly identified the need for more information, clarity and communication between countries, sectors and projects to improve this. ‘Investors are in a crisis,’ said one panellist. ‘They don’t understand where they should be investing and under what conditions.’
Investors are looking for policy frameworks that will help close the gap between the opportunities they are looking for and the level of risk they are willing to hold. One investor said: ‘The public needs to partner with private investors to provide security and comfort that, by walking with them, investors will not fall at regulatory and administrative hurdles.’
Novelty of transition finance
A further complicating factor is the relative newness of transition finance in the region. It was clear from the summit that investor appetite is there, but the pipeline of bankable transition projects is small. While ‘green’ and ‘sustainable’ labels have existed for a number of years, ‘transition’ is only just starting to come to a market, meaning relevant projects are still quite hard to come by.
Investors are alert to the opportunities in the region, however. A European investor said that the region has a strategic relevance due to the presence of minerals that have become critical to energy independence, electrification and artificial intelligence. It also offers relative geographical distancing from active conflict in the world, meaning it is a potential source of diversification for investors.
Another investor said: ‘Energy is a fascinating starting point, and there are growing opportunities in natural gas as a transition energy.’ Energy was also listed as a low-hanging fruit by a representative from a multilateral development bank, alongside transport, housing and infrastructure.
Several panellists throughout the summit highlighted the importance of water as both an investment opportunity and risk, particularly due to the rising prevalence of data centres in many regions. Water is also central to the preservation of natural ecosystems and biodiversity, and the financial sector is beginning to understand the importance of these factors in maintaining a stable and resilient financial sector.
Building on a strong foundation
While Latin America has so far trailed Europe and Asia Pacific on the transition, efforts are being made to change this. Colombia launched the region’s first sustainable taxonomy in 2022, with Mexico following in 2023 and Costa Rica and Panama in 2024. These taxonomies are closely aligned with the European Union’s green taxonomy, allowing for greater interoperability globally.
Latin America is forging ahead with sustainable bond issuance. In 2019, Chile issued the region’s first sovereign green bond, raising more than $1.4bn to finance clean transport and solar energy projects. A year later, Mexico became the first sovereign to issue bonds linked to the United Nations’ sustainable development goals.
Since then, the issuance of green, social, sustainability and sustainability-linked bonds has soared in Latin America. By March 2021, Chile had issued around $7.7bn in GSSS bonds. The Organisation for Economic Co-operation and Development reported that GSSS bonds made up almost 35% of the region’s total issuance in 2023, up from 9.3% in 2020, and the share of GSSS in sovereign bonds reached 50% in the same year, up from 36% in 2022.
The innovation being seen in Latin American capital markets is one of the clearest sources of opportunity for investors. At the summit, investors were asked about what needs to change to increase investment in Latin America over the next five years. One said the region must build its credibility to reassure investors that the rules of the game will hold and their rights will be enforced. Another urged integration and harmonisation across the region.
But the most striking response to this question came from an investor who said: ‘We shouldn’t just be thinking about the next five years, but the next 100 years. We need to stop getting distracted by the next election and focus on the bigger challenge.’ In a time of global political, economic and environmental fragility, this seems like sage advice for a region looking to build resilience.
Sarah Moloney is Editorial Director at OMFIF.
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