Financial instruments in Latin America

The Mexican legal system accommodates contemporary sustainable financing instruments, such as sustainability-linked loans and bonds, thematic bonds and social venture capital. The flexibility of these instruments is crucial as the market evolves, allowing the adoption of international sustainable finance tools by both private and public issuers.

Latin America, with its privileged geographical location and rich biodiversity, recognises the importance of protecting these vital resources for both its own economy and that of the global community. Facing the effects of climate change, the Latin American region has made international commitments and has begun implementing mitigation measures. This requires a solid regulatory framework, trained personnel and competent authorities.

Mexico has been developing a comprehensive strategy in environmental, social and governance (ESG) matters, aiming to promote sustainable financing that allocates resources to climate transition and conservation projects, driving ESG investments from institutional investors such as pension fund managers (known as AFORES) and insurance companies. Public policies, such as the National Development Plan and the National Climate Change Strategy, support these initiatives, fostering a more responsible and sustainable capital market.

Sustainable financing in Mexico aims to allocate resources to projects focused on climate transition, conservation and adaptation. Recent sustainability-linked bonds in Mexico have established key performance indicators (KPIs) with the aim of enhancing diversity, inclusivity and commitment to transition goals within business plans.

Legislative changes have encouraged leading institutional investors, including AFORES and insurance companies, to incorporate ESG criteria in their investments, stimulating the market and creating a project pipeline. Since January 2022, AFORES are required to assess ESG factors in their investments. Likewise, insurance, bonding and mutual companies have to apply sustainable taxonomy in their investments as of January 2025. Significant public policies, such as the National Development Plan 2019–2024 and the National Climate Change Strategy, complement private companies’ ESG-themed issuances in the capital market.^[1] In June 2024, the National Insurance and Bonding Commission published an amending Circular 2/24 to the Sole Insurance and Surety Regulation, establishing the basis for insurance and bonding companies to integrate ESG criteria into their operations, including (1) the implementation of an investment policy that must specify the ESG criteria that the assets and investment instruments that each insurance and bonding company may acquire must meet, and (2) disclose to the public in their solvency and financial condition report the status of implementation of ESG criteria in their investment policy. Circular 2/24 enters into force on 1 January 2025, therefore insurance and bonding companies will need to review and adjust their investment policy from that date and put in place mechanisms to ensure the implementation of the ESG criteria under the conditions set out in Circular 2/24.^[2]

Development of international standards for blue and green bonds

As Mexico and Latin America continue to develop their sustainable financing strategies, the evolution of international standards for green and blue bonds is crucial in shaping the market. These standards promote transparency and consistency in sustainability reporting, which are essential for building investor confidence and ensuring the effective allocation of resources to environmentally beneficial projects.

Green and blue bonds, as debt instruments – including traditional, capital or hybrid structures – designed to fund projects with positive environmental outcomes, are fundamental to addressing climate change and advancing environmental sustainability. To support this growing market, international frameworks have standardised the issuance and reporting processes for these bonds. These efforts complement the region’s regulatory developments and increase the adoption of ESG principles, ensuring that investments align with both local sustainability goals and global targets.

The International Capital Market Association has become a global leader in setting standards for sustainable finance. Its Green Bond Principles (GBPs),^[3] as well as the Social Bond Principles and the Sustainability-Linked Bond Principles (widely regarded as the de facto global issuance standards), have become a cornerstone in the international sustainable bond market, fostering integrity across borders.

More precise principles are being developed to provide issuers and investors with greater clarity regarding the requirements that must be met to label a bond as a green bond. In Mexico, for instance, these requirements are structured around five key components:^[4]

• use of proceeds from the issuance;
• the evaluation and project selection process;
• emission proceeds management;
• reporting; and
• an independent third-party opinion.

The success of the GBPs, not only in Mexico but throughout Latin America, has contributed significantly to the development of additional frameworks to address a broader range of environmental and sustainability challenges. Initially, the GBPs focused on financing projects with general environmental benefits, but their clear guidelines have provided a solid foundation for innovation in sustainable finance. As the financial market began to recognise the potential of thematic bonds to direct investments towards specific environmental priorities, new frameworks were developed to address specific ESG challenges more efficiently.

One notable example is the development of blue bonds, which are directly modelled on the structure established by the GBPs. Whereas green bonds aim to support a wide array of environmental initiatives, blue bonds are specifically designed to address water-related challenges, with a focus on protecting marine ecosystems and enhance access to clean water and sanitation. This holistic approach strengthens the region’s ability to address interconnected environmental challenges while promoting a more inclusive and sustainable future.

In Latin America, there are substantial opportunities for fostering a thriving blue economy, leveraging the region’s rich marine biodiversity and extensive coastline. These bonds fund projects such as sustainable fishing practices, coral reef preservation and enhancing the resilience of coastal communities to the effects of climate change.^[5] This targeted approach not only provides investors with greater clarity regarding the effect on the environment of their contributions but also directs critical funding towards areas that have traditionally been underfunded within the broader green finance ecosystem.

Similarly, frameworks for social bonds and sustainability-linked bonds represent a crucial evolution in the development of sustainable finance, addressing a broader spectrum of societal and environmental challenges. Social bonds are crucial in addressing some of society’s most pressing challenges by funding projects that aim to create real, measurable benefits, from enhancing access to good-quality education and healthcare to ensuring safe and affordable housing. By directing resources to areas where they can make the most difference, social bonds have the power to drive meaningful change and foster more equitable and inclusive communities – something that financial systems should prioritise now more than ever.

Meanwhile, sustainability-linked bonds adopt a results-oriented approach by aligning financial terms to the issuer’s ability to meet specific sustainability targets. These bonds incentivise issuers to achieve measurable outcomes, such as reducing greenhouse gas (GHG) emissions, improving water management or enhancing social development programmes. This connection between financial performance and sustainability goals introduces a level of accountability that aligns market incentives with broader development objectives.

Both frameworks are built on the core principles set forth by the GBPs, such as the transparent use of proceeds, clearly defined criteria for project evaluation and selection, and comprehensive reporting. These foundational elements, which are also central to green and blue bonds, ensure accountability and credibility in sustainable financing. The distinguishing factor of these frameworks is their adaptability; they are designed to meet the specific demands of particular sectors and align with diverse sustainability objectives, making them highly versatile tools for addressing a range of global challenges.

This adaptability allows these frameworks to broaden the reach of sustainable finance. Beyond focusing on environmental priorities such as renewable energy and biodiversity conservation, they also target pressing social and economic issues, including inequality and the provision of essential services. By addressing these interconnected priorities, these standards contribute to the creation of a more inclusive and sustainable financial ecosystem that meets the multifaceted needs of today’s world.

Given these opportunities, it is imperative for financial institutions in Latin America to strengthen their role in promoting sustainable economic growth through the development of innovative financial instruments. Both public and private financial institutions in the region should continue to prioritise the successful issuance of green and sustainability bonds, including blue bonds, to ensure the efficient mobilisation of resources for environmental and social objectives.

The creation of international standards for blue and green bonds has been fundamental in shaping the sustainable finance landscape, offering financial institutions a solid framework to channel investments towards effective environmental and social projects. The development of these standards has set the benchmark for transparency and accountability in sustainable finance.

To complement the development of international standards for green and blue bonds, efforts at the global level have focused on enhancing sustainability-related disclosures. In 2021, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) to create Sustainability Disclosure Standards (IFRS-S), providing companies with a framework for preparing consistent and comparable sustainability information. By June 2023, the ISSB had released its first two standards, IFRS S1 and IFRS S2, which mandate entities to disclose financial information on sustainability-related risks and opportunities. These disclosures are essential for investors and creditors as they significantly influence decisions by affecting entities’ cash flows, access to financing and cost of capital.^[6]

The IFRS S1 and IFRS S2 standards are primarily aimed at entities listed on stock exchanges and provide a structured approach to reporting sustainability information that aligns with the needs of various users. Investors and creditors require more detailed insights beyond traditional financial statements, especially regarding ESG factors. These aspects represent material financial risks that directly affect an entity’s long-term viability, underscoring the importance of transparent and standardised disclosures in promoting sustainable and responsible financial practices.

In July 2023, the International Organization of Securities Commissions endorsed the ISSB Standards, encouraging its 130 member jurisdictions to incorporate them into their regulatory frameworks. This move reflects a global push toward harmonised sustainability reporting practices. Approximately 30 jurisdictions, including Mexico, are actively working on implementing these standards. Locally, the Mexican financial system is adapting to the rise of sustainability-linked instruments, such as loans and bonds, even in the absence of a comprehensive legal framework.

To further advance sustainable finance, Mexico introduced its Sustainable Taxonomy in March 2023. This initiative provides a framework to classify economic activities that contribute to Mexico’s environmental, climate and social objectives. By directing financial flows towards sustainable investments, the aim of the Sustainable Taxonomy is to enhance market transparency, to mitigate greenwashing risks and to create a foundation for integrating international standards alongside locally driven sustainability efforts.^[7]

A significant regulatory milestone followed in September 2024, when the National Banking and Securities Commission (CNBV) issued a circular mandating that non-financial entities adopt the ISSB Standards by 2025.^[8] In the same month, the CNBV proposed amendments to the General Provisions for securities issuers and other market participants. The regulatory proposal consists of amending the current provisions to stipulate that issuers (other than financial entities and federal and local authorities) must present financial information about sustainability in the notes to their financial statements and in their annual reports, in accordance with IFRS S1 and IFRS S2 standards, as well as the sustainability disclosure standards applicable in the country of origin, as appropriate. These amendments are subject to approval by Congress.^[9] This complements existing local standards for small and medium-sized businesses and aligns Mexico’s financial practices with global expectations. By adopting these standards, Mexico aims to enhance the transparency and comparability of sustainability-related disclosures, strengthening investor confidence and attracting both national and international capital.

This regulatory alignment not only supports the expansion of sustainable financial instruments, such as green, blue and sustainability-linked bonds, but also integrates ESG criteria more deeply into the financial ecosystem. The effects are already visible: in the first quarter of 2024, thematic bond issuances in Mexico reached 135.1 billion pesos, significantly surpassing the 40 billion Mexican pesos issued in the same period of 2023.^[10]

Major issuances in 2024 include América Movil’s green bond for 20 billion pesos, aimed at financing or refinancing green and social projects; Arca Continental’s sustainability-linked bond for 6.4 billion pesos, with KPIs to reduce GHG emissions and increase the use of recycled PET plastic; and Banobras’s^[11] sustainable bond for 8.3 billion pesos, intended to support affordable infrastructure and mobility projects benefiting women.

In addition to regulatory efforts, national initiatives led by private associations, such as the Mexican Association of Real Estate Infrastructure Trusts (AMEFIBRA) and the national pension fund managers’ association, AMAFORE, are critical in standardising ESG reporting and disclosure practices. These initiatives include adopting responsible investment principles, ongoing ESG-related communication, and implementing frameworks such as the Task Force on Climate-related Financial Disclosures and climate scenario analysis.^[12]

The development of international standards has been crucial in driving progress, providing a solid framework for the adoption of sustainable financial instruments. By integrating these standards and fostering innovative solutions, Latin America is shaping a financial framework that not only aligns with global sustainability objectives but also effectively addresses the region’s pressing environmental and social challenges. This strategic approach positions Latin America as a front runner in sustainable finance, paving the way for a more resilient and inclusive future.

Innovative financial instruments for sustainability and decarbonisation in Latin America

The development of sustainable financial instruments is not only relevant in theoretical terms but is also crucial to analyse what is being implemented in local capital markets. As previously mentioned, Latin America has made significant progress in adopting green and sustainable financial instruments, reflecting a commitment to addressing the region’s environmental and economic challenges.

A standout example of this effort is the Green Finance Platform of Latin America and the Caribbean, which serves as a collaborative space for development banks, private financial institutions and influential actors in financial markets. This initiative seeks to promote sustainable instruments through the exchange of knowledge and experiences between public and private sectors, encouraging the development of innovative solutions in green financing.

Latin America possesses abundant energy resources, both renewable and non-renewable, providing a strategic advantage in the transition towards cleaner energy. The region is home to some of the world’s most dynamic renewable energy markets, positioning it as a key player in designing and adopting financial instruments focused on decarbonisation and economic sustainability.

The implementation of these instruments represents a unique opportunity to address the challenges of climate change, promote sustainable economic growth and attract responsible investments, solidifying Latin America as a leader in financial and environmental innovation.

Green financing has become a key driver of sustainable development in Latin America, with the Inter-American Development Bank (IDB) and IDB Invest leading 12 major initiatives to promote these types of instruments in the region.^[13] Beyond being a broad concept, the aim of green financing is to channel resources from both the public and private sectors towards projects that prioritise sustainable development. Although frequently linked to climate financing, it extends beyond this scope, significantly expanding its potential impact.

Green financing cannot be understood without considering the legal, economic and institutional challenges specific to each country. This requires establishing the conditions needed to attract investments that not only prevent and reduce environmental harm but also actively support the delivery of critical environmental goods and services. For these initiatives to be effective, regulatory frameworks must provide stability and certainty to investors, fostering an economy that supports long-term sustainable projects.

One of the most significant aspects of these initiatives is how they encourage collaboration between the public and private sectors, an essential element for building a more resilient economy. Integrating ESG criteria not only into financial markets but also into corporate strategies is a necessary step to ensure that projects have a real and lasting effect in the region. This collaboration is especially important as the relationship between climate change and businesses becomes increasingly relevant, generating both risks and opportunities that companies must address.

In this context, the role of boards of directors (referred to differently across Latin American countries) and officers is crucial in ensuring good governance that inherently includes effective climate governance. Their leadership is key to navigating these challenges and leveraging opportunities, aligning corporate strategies with sustainability objectives.

In particular, directors must comply with the company’s bylaws and regulations and therefore:

• act in the best interests of the company;
• integrate and implement objectives and strategies at all levels of the company;
• create, adopt and observe a best practice guide; and
• comply with their fiduciary duties of care and diligence, in accordance with the Principles of Corporate Governance published by the Organisation for Economic Co-operation and Development and, in the case of Mexico, the Code of Corporate Governance Principles and Best Practices published by the Mexican Business Coordinating Council.

Chapter Zero Mexico, established as part of the Climate Governance Initiative, promotes the Principles on Climate Governance within boards of directors in Mexico, encouraging them to take climate action at board level.

Green financing offers a unique opportunity for Latin America to address these climate-related challenges and lead the transition to a more sustainable economy. This journey requires not only financial innovation but also a strong commitment from all stakeholders, with the potential to transform the region’s economic and environmental future.

Building on the foundations of green financing, instruments such as green, social and thematic bonds have emerged as powerful tools to drive sustainable development and decarbonisation in Latin America. These bonds not only address the environmental and social priorities of the region but also reflect a growing sophistication in aligning capital markets with sustainability goals. Transition bonds, for instance, offer a practical solution by funding projects that, while not entirely green, are aligned with the broader objectives of reducing effects on the environment and advancing sustainability.

Despite the lingering effects of the covid-19 pandemic on regional economies, Latin America’s sustainable debt market has demonstrated resilience and growth. Green bonds continue to dominate the landscape, but the increasing issuance of social and sustainability bonds highlights the region’s ability to diversify its financing options and address broader challenges, such as social inequality and access to essential services.

The increasing issuance of bonds denominated in local currencies marks another important milestone, indicating the strengthening and consolidation of domestic green markets. Chile and Brazil have positioned themselves as leaders in the issuance of green, social and sustainability bonds, followed closely by Mexico.^[14] Together, these three countries account for a substantial portion of the region’s sustainable bond issuances, demonstrating their commitment to advancing sustainable development through innovative financial instruments.

This progress underscores the importance of strong regulatory frameworks and the integration of ESG criteria to ensure that these instruments are not only effective but also credible. By aligning financial markets with sustainable goals, Latin America can support long-term economic stability, attract international investments and reinforce its position as a global leader in green financing. Through continuous innovation and collaboration, the region has the potential to turn its abundant resources into a foundation for a sustainable and resilient future.

Building on recent advancements in sustainable financing, the development of decarbonisation instruments in Latin America represents a critical step in aligning the region’s financial markets with global climate objectives. These instruments provide a pathway for the region to effectively integrate climate action into its economic strategies while addressing its unique challenges and priorities.

The primary strategies for achieving decarbonisation include (1) reducing demand for activities that do not contribute to well-being, (2) improving energy and material efficiency, (3) decarbonising energy sources and material inputs while transitioning end-use systems to these options, and (4) reducing GHG emissions through sustainable land use practices and technical processes for negative emissions. The real challenge, however, is ensuring that each country adopts tailored strategies that align these broad transformations with national circumstances and priorities.^[15]

Deep decarbonisation towards net-zero emissions does not mean that all countries must achieve GHG neutrality simultaneously. Instead, it is vital for each region and sector to align its emissions trajectories with the global goal of carbon neutrality. In this context, the Deep Decarbonization Pathways Project for Latin America and the Caribbean (DDPLAC)^[16] is a pivotal initiative that explores how six countries in the region – Argentina, Colombia, Costa Rica, Ecuador, Mexico and Peru – can enhance their citizens’ quality of life and drive sustainable development while reducing net carbon dioxide emissions to zero. This initiative also incorporates appropriate reductions for other GHGs.

The DDPLAC provides a framework for understanding how these countries can achieve significant emissions reductions through customised strategies. By considering regional dynamics and national priorities, this standard not only highlights the potential for sustainable development but also underscores the critical role of collaboration and innovation in addressing climate challenges in Latin America. Through initiatives such as this, the region demonstrates its commitment to leading the way in the global transition towards a low-carbon future.

The development of sustainable financial instruments in Latin America, such as green, blue and social bonds, and those focused on decarbonisation, is essential for aligning financial markets with the region’s sustainability and development priorities. More than just financing mechanisms, these instruments represent a tangible response to the environmental and social challenges the region faces.

A notable example is transition bonds, designed to fund sectors that are not yet fully green but are committed to evolving towards more sustainable models. These bonds are particularly relevant for companies that, while lacking sufficient sustainable assets, are taking clear steps to reduce their environmental impact. Transition finance is not just a growing trend but a strategic necessity to advance the decarbonisation of key activities and sectors. The development and refinement of these instruments must be paired with concrete ambitions to ensure they truly drive the structural change needed in the region.

Different regions in Latin America are increasingly recognising the importance of environmental regulations and their role in shaping sustainable finance instruments. The connection between regulatory frameworks and financial markets is crucial for fostering investment in projects that reduce negative environmental externalities and drive sustainability. However, while sustainable financial instruments hold significant potential, their success depends on being structured with clear and measurable goals, a challenge that many countries in the region are still navigating.

Brazil, for example, has laid important groundwork for sustainable finance through Law No. 9,605, which establishes criminal and administrative penalties for activities harmful to the environment, and Law No. 6,938, which defines the Brazilian National Environmental Policy and the framework for environmental civil liability. These regulatory measures are pivotal, as they create the accountability needed to attract and guide investment in green and sustainable projects. The Central Bank of Brazil has also taken a bold step by introducing a resolution that disqualifies agricultural production in irregular areas – such as deforested lands or embargoed zones – from receiving investments or accessing rural credit. This regulation ties financial incentives directly to environmental compliance, providing a model for aligning financial instruments with sustainability goals.^[17]

Argentina, meanwhile, has introduced its Law on Minimum Budgets for Adaptation and Mitigation to Global Climate Change, which establishes baseline environmental protection commitments.^[18] This Law provides the regulatory certainty needed to develop financial instruments that address climate change adaptation and mitigation. By setting clear objectives, these frameworks create opportunities for tools such as green bonds, sustainability-linked loans and transition bonds to thrive in the financial markets.

These examples demonstrate that regulatory progress is fundamental for the development of effective sustainable finance instruments in Latin America. Without strong legal and institutional backing, it becomes difficult to build the credibility and trust required to attract both local and international investors.

To further advance sustainable finance, countries in the region must prioritise the integration of regulatory frameworks with financial innovation. This includes designing instruments that align with global benchmarks, such as the Paris Agreement or the Sustainable Development Goals, while also addressing local environmental and economic challenges. The potential for Latin America to lead in this area is immense but achieving that leadership will require continued collaboration between financial institutions and the public and private sector to ensure that regulations and instruments evolve hand in hand.

Ultimately, the development of sustainable financial instruments in Latin America represents a unique opportunity to transform financial markets into catalysts for sustainable development. If they are clearly structured, aligned with global standards and adapted to local circumstances, these instruments have the potential to address the region’s most pressing environmental and social challenges. The key lies in strengthening transparency, fostering collaboration and ensuring that the effects of these tools are tangible and equitable, thereby reinforcing Latin America’s role as a leader in the transition towards a sustainable future.

Acknowledgements

The authors thank their colleagues Danielle Cámara, Enrique Salcedo and Sofia Mitre for their assistance with this chapter.

Endnotes