Pictet AM’s Barton forecasts growth in EM green bond issuance in 2022

Barton, who is head of emerging market debt at Pictet AM, observed “a big uptake” in social bonds last year and said there were a number of reasons for this.

“First of all, we have seen developed countries leading the way in that space and it has made sense for emerging markets who need to access financing to look at those developments as well,” she said, adding that EMs are “at the coalface” when it comes to climate change.

“We did a study almost two years back now – but it is still really pertinent – showing that by 2100, economic output in some EM countries could be up to 60% lower on some scenarios in terms of climate change,” Barton said.

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She explained that ESG and green bond issuance by EM countries is bringing about more transparency in fiscal accounts, citing Chile as an example.

“Chile’s green bonds – when they went through their budget to see what expenditures are suitable for inclusion – it actually revealed to them [Chile] the need for clarity on government spending… bringing light into fiscal accounts, which is really interesting.”

Barton said that, within EMs, Latin America has been led by Chile, which has “always been pretty innovative in terms of how it’s thought about its financial market development”.

“I have been asked this question in the past: are EMs following where DMs [are] leading? That is underestimating EMs. I think sometimes EMs can be leaders and I think Chile has been a leader in this space,” she added.

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Before investing in ESG or green bonds issued by EMs, Pictet AM’s due diligence process involves studying the prospectus to “understand what they are actually targeting”.

Barton said they also look for third-party accreditation, as well as involvement from development banks, such as the World Bank.

“There comes a point at which you do not want investment going into superfluous projects – there has to be intent and meaningfulness. These projects should be evaluated on their own terms – that is something we are watching for very carefully as well,” Barton explained.

“What we have not seen is a sovereign issuing a sustainability-linked bond, so that could be the next interesting stage in that space. In Chile, they are looking at sustainability-linked bonds and that could start to be interesting for some emerging markets, obviously with some challenges as well.”

Barton said that, while there are some “naysayers” when it comes to EM countries issuing green and social bonds, overall, “optimism is warranted”.