Green bonds are a financial instrument that has great potential for Latin America and the Caribbean as the region faces enormous financing needs to adapt to climate change, which makes it essential to improve transparency to attract investors, the Inter-American Development Bank (IDB) said Tuesday.
The bank and its private-sector arm, IDB Invest, launched the Green Bond Transparency Platform to promote the harmonization and standardization of green bonds by providing information on their performance, impact and methodologies in the region.
"Investors need to know if these bonds are having an impact on the fight against climate change," Juan Antonio Ketterer, Head of the IDB's Connectivity, Markets and Finance Division, said during the online presentation of the new digital tool.
Latin America and the Caribbean made up only 2 percent of last year's record $1.1 trillion issuance of green bonds worldwide.
Yet the region has seen a total issuance of $24 billion and nearly half of that, $10 billion, has come since 2019.
"What transparency creates is a space to build confidence," Sean Kidney, CEO at Climate Bonds Initiative, a partner organization, said.
Kidney said that green bonds are "a very simple idea, a debt instrument where you are promising that the proceeds will be used in a certain way," making initiatives such as the IDB platform important for giving investors peace of mind.
The IDB Group has provided strong support to the region's green capital market over the last five years, backing more than 30 percent of issuances by volume, notably for Ecuador, Chile and Mexico.
The crisis caused by the Covid-19 pandemic and the growing threat of climate change have increased investor appetite for this type of financial tool, which likewise offer an alternative to the difficult situation in public finance.
The region's "governments are facing extraordinary fiscal headwinds and they can't possibly finance this transition on their own," IDB President Mauricio Claver-Carone said.
Recent estimates suggest that emerging markets will need $20 trillion in investment by 2030 to address climate change challenges, of which governments will only be able to contribute 25 percent.
Claver-Carone said that large global investment funds with ample capital are "eager" to participate.
"In the next five years, governments will have a historic opportunity to attract these investments if they provide the right incentives and clear rules. Trillions of dollars of private capital could flow into their countries to create jobs," the IDB president said.