Mexico’s ESG Bond Has Skeptics Questioning Do-Good Bona Fides

(Bloomberg) -- The sustainable bond industry’s push into developing nations is sparking concerns about how sure investors can be that the money is being used for good, with Mexico’s sale the latest to raise eyebrows among skeptics.

The issue has come to the fore as Latin America becomes the new frontier for investors looking to do good at the same time they make money. Mexico issued 750 million euros ($910 million) of sovereign sustainable bonds in September, and the notes have since made their way into funds and indexes focused on securities that are supposed to help make the world a better place.

In reality, there’s no actual guarantee the money raised will be used with environmental, social and governance considerations in mind -- so-called ESG factors that underlie a global market for $2.1 trillion of bonds, mostly from established players such as the U.S., France and Germany. As issuance increases from developing nations with less robust controls, skeptics see a growing potential for “greenwashing,” or using vague goals of improving the planet to raise money cheaply.

“In the developing world, it’s very difficult because you don’t know where the money goes,” said Luis Maizel, co-founder of LM Capital Group in San Diego, adding that on top of the issues tracking how the money is spent, ESG metrics are hard to measure in any case. “You have to trust the issuer.”

Mexican officials outlined lofty goals for the proceeds, including spending on social services in underserved regions that was endorsed by the United Nations. But there’s no enforcement mechanism. The prospectus is clear: Even if the nation doesn’t use the money for social development or if the actual impact of the spending is zilch, investors have no recourse. Mexico’s Finance Ministry acknowledges that the programs meant to be financed with the bonds would have gone ahead in any case.

But by raising the money with ESG credentials, Mexico likely reduced its borrowing costs. Calculating the exact savings is difficult because of the complex variables that go into any issuance, but the interest rate was Mexico’s second-lowest ever in the euro market. The sale was more than five times oversubscribed and attracted about 80 investors that weren’t regular participants in Mexican debt sales, according to Natixis, which structured the notes.

The bonds have rallied since the sale, returning 3.1% compared with a 2.3% gain for a benchmark index.

Mexico doesn’t seem a natural fit for an ESG sovereign bond. The administration of President Andres Manuel Lopez Obrador has come under criticism for pushing to rescue the faltering state oil company while fighting the expansion of private renewable energy companies. His efforts to build a passenger train cutting through a sensitive rain forest has met with objections from environmental groups. This year, homicides in Mexico are on track to eclipse last year’s record, climbing 1.1% through October.

Julio Mariscal, the head of Latin American debt capital markets at Natixis, said that government officials aware of the reputation and fearing investor pushback opted for a more general sale of sustainable bonds, instead of a note with a specific “green” environmental designation.

Exxon, Marlboros

Julieta Brambila, a spokeswoman for the Finance Ministry, says the robust demand for the bonds shows traders’ confidence. “If there were concerns on the part of investors for the use of proceeds, they would not have bought the bonds,” she said.

Of course worries about the realities of sustainable investing are widespread. Criteria can be broad and vary widely from one index creator to another -- Exxon Mobil Corp. and Philip Morris International qualify by some measures -- leading critics to say it’s just another way for Wall Street to profit.

But with demand soaring as proponents tout a way for social justice to become part of investing, companies and governments globally have borrowed a record $447.8 billion this year in sustainable bonds, compared to $261.5 billion raised last year, according to data compiled by Bloomberg. Sales of social bonds in particular have skyrocketed globally and especially in emerging markets as poorer nations struggle to combat the pandemic, with both Chile and Ecuador among regional issuers.

United Nations

To be sure, the framework for Mexico’s sale does have some good points. For one thing, the country has committed to regular progress reports. In a relatively new area of finance with few real enforcement mechanisms anywhere in the world, the transparency pledge alone is a win.

Mexico’s bond was issued with the support of the United Nations Development Program, which helped pitch the deal to potential investors. It was the first security with an official stamp of approval from the UN, which plans to put its heft behind sales from other countries in the future.

Still, the UN acknowledges the lack of firm rules for ensuring the money goes toward the stated goals.

“We cannot guarantee that the fiscal space that is created through these operations doesn’t go somewhere else,” said Luis Felipe Lopez, the Development Program’s director for Latin America and the Caribbean.

Sage Advisory Services ESG analyst Andrew Poreda says Mexico’s ability to sell these types of bonds in the future will depend on the government’s transparency.

It comes down to whether Mexico is “going to showcase dollar-by-dollar spending,” he said from Austin. “Does this money really help?”

©2020 Bloomberg L.P.