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Impact Investing and the Development of the Sustainable Securities Market In Panama

Sustainable securities made headlines in our country in 2019. In August 2019, the private placement of Banistmo’s first gender social bond in Latin America for 50 million dollars, and the Corporación Interamericana para el Financiamiento de Infraestructura (CIFI)issued the first green bond in the Panamanian market for 200 million dollars.

Subsequently, in October 2019, the Panama Stock Exchange, as part of its commitment to the development of sustainable finance for the Panamanian capital market, launched the Guidelines for the issuance of  Social, Green and Sustainable Securities, with the aim of offering the market good practice guidelines and parameters for sustainable issuances and reinforcing in its stakeholders the importance of making successful impact investments.

What are impact investments?

Impact Investments are defined as those investments made with the intention of generating a positive, measurable, social and environmental impact, in addition to a financial return.

The term was coined just over a decade ago at a conference hosted by the Rockefeller Foundation by a group of pioneering investors in community development investments, microfinance, and environmental sustainability.

Since then other ideas similar to impact investing have evolved, such as conscious capitalism, sustainable investing, ethical investing and socially responsible investing (SRI), which represents a well-defined framework for choosing investments based on environmental, social criteria and governance (ESG).

The growth of impact investments has rapidly reached both developed and emerging markets, driven mainly by the signing of the Paris Agreement on Climate Change and the adoption of the Sustainable Development Goals by member states of the United Nations.

This growing market provides capital to address the most pressing global challenges in sectors such as sustainable agriculture, renewable energy, climate change adaptation, waste management, microfinance, and affordable and accessible basic services including housing, health and education.

Why is it important to talk about Impact Investing?

Impact investments connect financial markets with the real economy and this is relevant for investors seeking to make an impact in their environment, for fund managers and investment advisers who need to be able to offer sustainable financial instruments to their clients and to any company that seeks to raise capital for social, green or sustainable projects.

The market has great potential: Connecting those who have capital with those who need it, to help society and the economy prosper.

The International Finance Corporation (lFC) published a report in 2019 entitled “Creating Impact. The Promise of Impact Investment” where it estimates that investors’ appetite for impact investing reaches $ 26 trillion: they estimate that $ 21 trillion would go to publicly traded stocks and bonds, and $ 5 trillion will be invested in private markets involving private capital, non-sovereign private debt and venture capital.

In turn, Global Impact Investing Network (GIIN), a non-profit organization dedicated to increasing the scale and effectiveness of impact investing, has mentioned that according to reports from its annual surveys, 86% of fund managers have carried out impact investments due to customer demand. According to their 2018 survey, $ 228 trillion in impact investment assets were reported, roughly double that of the previous year. The growth has been exponential if we consider that in 2014 the impact investment market represented only US $ 40 trillion. 

Another reality that promotes impact investments is that younger generations increasingly favor investment strategies aimed at significantly impacting social and environmental well-being, due to the development of environmental and social awareness that has been experienced in last decades. This demand is expected to increase since in the coming years, considerable amount of assets will be transferred from the generation of “Baby Boomers” to “Generation X” and “Millennials”.

Turning this appetite into real investments will depend on creating investment opportunities, vehicles and instruments that allow investors to seek that impact, together with financial performance in a sustainable way.

In order to attract impact investing to our local market, we need to know what is happening in other markets and what international standards are being developed.

Private sector companies are required to play a more active leadership role to develop the potential of this market. Corporate Social Responsibility goes far beyond philanthropy, as it is key to the long-term sustainability of our companies and the sustainable development of the environment in which they operate.

A recent Global Impact Investing Network (GIIN) survey revealed that 42% of impact investors have used the United Nations Sustainable Development Goals as indicators in their measurement and management of impact. The Sustainable Development Goals have laid the foundations for a common scenario in which we can measure and value the contribution of any organization to sustainable development.

Panama is no exception; our country faces important challenges in its agenda to be more sustainable and inclusive. On the other hand, the Panama Canal Authority also faces important challenges in the search for new sources of water to maintain the required water level in Lake Gatun and ensure the transit of ships through the Panama Canal in times of drought.

All these challenges are opportunities for the development of green, social and sustainable projects that can be financed through the capital market.

How are green, social or sustainable securities structured?

Impact investing presents a very broad scenario of financial instruments that can be structured, with the bond market being the most developed market to date. However, marketable securities exist in different varieties and any of them can be labeled as green, social or sustainable: Investment funds, Bonds, Commercial Paper, Treasury Bills, Treasury Notes, Treasury Bonds.

A bond is classified as green, social or sustainable, according to the type of project to which the placement’s resources are destined, with green bonds being those whose resources are destined to green or environmental projects, social bonds those whose resources are destined to social projects and sustainable bonds those whose resources go to projects that combine social and environmental components that contribute to achieving the UN Sustainable Development Goals.

The registration process for green, social and sustainable securities is the same as for traditional securities, and must comply with current securities market regulations. Additionally, these securities must meet certain international criteria and standards in order to be recognized as green, social or sustainable. 

The most widely used international principles or criteria are those developed by the International Capital Market Association (ICMA), which published the Green Bond Principles in 2014, and subsequently published the Social Bond Principles in 2017 and the Sustainability Bond Guidelines in 2018. These principles basically promote the transparency and disclosure of information on the use and management of funds and establish categories of projects eligible for financing.

The ICMA Green, Social and Sustainable Bond Principles have four fundamental pillars:

  • Use of proceeds: identification of projects eligible to be financed through green, social or sustainable bonds.
  • Process for Project Evaluation and Selection: environmental sustainability objectives, the process by which the issuer determines how the projects fit within the categories of projects eligible for the type of bond and related eligibility criteria and any other process applied to identify and manage potentially material environmental and social risks associated with the projects.
  • Management of proceeds: maintain proper control of bond proceeds, the process for linking funds to eligible projects and disclosing to investors what will be done with funds that are not immediately allocated to eligible projects.
  • Reporting: Maintain readily available updated information on the use of the funds, which will be renewed annually until their total allocation, and from time to time as necessary in the event of a relevant event.

Another international standard for green bonds is the Climate Bonds Standard administered by the Climate Bonds Initiative (CBI), an international non-profit organization focused on investors that seeks to mobilize the bond market towards solutions to climate change. CBI’s mission focuses on helping to reduce the cost of capital for large-scale infrastructure and climate projects and supporting governments seeking greater capital market investments to achieve their climate goals.

The International Climate Bonds Standard is aligned with ICMA’s Green Bond Principles, however, it adds a certification system based on scientific criteria that ensures that the impact caused by projects financed through green bonds labeled under the International Standard for Climate Bonds are consistent with the global warming limit of 2 ° Celsius in the objectives of the Paris Agreement on Climate Change.

The International Standard for Climate Bonds is considered the strongest approach worldwide and is comprised of two parts:

  • The International Standard for Climate Bonds that details the information management and disclosure processes.
  • The Climate Bond Taxonomy and Sector Eligibility Criteria detailing the climate credentials and technical thresholds that assets must meet.

In addition to these bond market standards, there is a growing number of impact measurement tools and methodologies available to companies. Among the most prominent methodologies and indicators are the Impact Reporting and Investment Standard (IRIS) initiative of the Global Impact Investing Network (GIIN), the London Benchmarking Group (LBG) model and the Social Return on Investment (SROI). These tools guide and assist impact investors to understand the social, environmental and financial impact of an organization.

The International Finance Corporation (IFC) in collaboration with other market players launched the Operating Principles for Impact Management in April 2019 with the aim of offering investors clarity and consistency on what constitutes an impact investment. They are complementary to other industry initiatives, such as IRIS and other aforementioned impact measurement systems, and the principles of green, social and sustainable bonds, which seek convergence towards common approaches to impact measurement and reporting.

Who buys sustainable marketable securities?

  • Traditional investors seeking coherence between the financial instruments in which they invest and their values or way of thinking.
  • Institutional investors adhering to the United Nations Principles for Responsible Investment.
  • Pension funds and fund managers with ecological or social mandates that also seek that balance between risk and return provided by investments related to sustainability.
  • Insurers aware that they have significant climate risks and want to increase their participation in investments related to projects that help reduce carbon emissions as part of their long-term risk mitigation strategy.

What benefits are obtained with the issuance of sustainable securities?

For issuers:

  • The process of issuing sustainable securities helps the financial function and senior management to consider more actively how sustainability relates to their business and operations.
  • Diversification: Access to new investors with ecological or social mandates and to younger investors.
  • Provides additional source of sustainable financing.
  • Reputation and credibility improvement, positively impacting long-term business sustainability.
  • Benefits in registration fees in the Panama Stock Exchange.

For investors:

  • Financial returns comparable to conventional instruments, adding social and / or environmental benefits.
  • Access to green assets / projects without project risk.
  • Strong performance of the secondary market due to limited offers.
  • It allows direct investment to green highly polluting sectors since it is the instrument and not the issuer to which the green, social or sustainable certification is given.
  • Greater transparency in accountability on the use and management of funds.
  • Satisfy environmental, social and governance (ESG) aspects of their sustainable investment mandates.
  • Strengthens a strategic positioning in the market in which it operates.

In Panama we still have work to do to attract large impact investors to our market. The process has started with the issuance of the first social bond and the first green bond in 2019 and it is expected that more issuers will join this year.

FABREGA MOLINO has a multidisciplinary team available to support clients who wish to evaluate these financing options and contribute to the development of the sustainable securities market, so that all the social and environmental benefits that this represents are a reality in Panama.

Author(s)

Tatiana Abadia

Partner

Alejandro Vásquez V

Associate

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