The Inter-American Development Bank is to focus on Latin American pension funds regulation and social bonds in 2021, says IDB Invest’s chief investment officer.

Gema Sacristan portrait

Gema Sacristan

The private sector arm of the Inter-American Development Bank, IDB Invest, is ramping up its efforts to create investment opportunities that will lead to economic growth through the region, says its chief investment officer, Gema Sacristan. This work, she says, is now more important than ever as governments’ finances are under unprecedented pressure to deal with the fallout of Covid-19, as well as the devastation brought by natural disasters and social inequity. 

Q: From a development finance point of view, where are the biggest development opportunities in Latin America?

A: Where I see the future in Latin America is in private debt. There is a great opportunity in sustainable infrastructure for institutional investors, for example pension funds, because they have long-term commitments and infrastructure is financed on a long-term basis. How do you bring money from those institutional investors to sustainable infrastructure?

There are challenges for pension funds and insurance companies because local regulation hasn’t really taken into consideration sustainability yet. One of the most advanced markets is Mexico — pension funds can invest in real estate, in private equity. But the rest of the countries tend to be very conservative. It is interesting that regulation hasn’t changed to encourage institutional investors to put money into the real estate sector locally, in long-term financing. If you look at where most Latam institutional investors put their money, it is US Treasuries, local treasuries. Some consider infrastructure to carry the same level of risk as a hedge fund.

At IDB Invest, we want to work with the public sector to change rules and to encourage institutional investors to get into the real economy. Especially now, as Latin America tries to recover from the Covid-19 crisis and when public budgets are under enormous pressure. It is going to be very important that institutional investors directly support the real economy. 

Q: You talked about sustainable infrastructure, but what about sustainability as an asset class?

A: If you look at the Principles for Responsible Investment signatures in Latin America, they have grown dramatically. There are now 149 signatories with $1.4bn in assets under management. But they don’t have too many opportunities to invest in the region. There is demand, but there aren’t many investment opportunities.

At IDB Invest we are putting a lot of emphasis on developing new asset classes in Latin America: sustainable bonds, social bonds and green bonds. There are a lot of opportunities in infrastructure, agriculture, climate change adaptation and mitigation. In climate change mitigation, most Latam countries have advanced quite a lot in terms of renewable energy. But in terms of adapting to the consequences of climate change, considering the devastation regularly brought by natural disasters to the region, countries still have a lot of work to do.

We are putting a lot of emphasis on developing new asset classes in Latin America: sustainable bonds, social bonds and green bonds

Gema Sacristan, IDB Invest

So those Latam investors interested in sustainability — they end up investing outside of the region, in dollars or euros. That doesn’t help Latin America. This is why we really want to work on this. Because we’re a developmental bank, we can talk with governments and regulators to create opportunities. We also talk to investors and issuers. I would like to see some transition bonds in 2021, for example, helping companies to move from brown to green assets. I am talking to four chief executives of big Latam companies to do that.

Q: In addition to climate change, IDB Invest has worked on social factors too. Will social bonds grow? 

A: We have done some gender bonds and we’re doing a lot of work around social housing and financial inclusion. In August, we did the world’s first gender bond where returns are linked to outcomes, with Banco Davivienda in Colombia — a $100bn seven-year bond, bought entirely by IDB, to finance the growth of Davivienda’s women-led small businesses portfolio and the purchase of social-interest houses by women in Colombia.

If the objectives are achieved, the issuer gets a discount on the interest payment. We really see a clear change in the trend from green to social in Latin America. A lot of our clients are much more interested in issuing social bonds than green bonds. On the social side, we already have a number of mandates for 2021, including two gender bonds: one in the Dominican Republic and a very big one in Brazil. We are also going to do the first sustainable bond in Panama, which will have a mix of social and green aspects. And I really would like to do more in health and education.

The interview has been edited for clarity and brevity.

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