With Donald Trump expected to reverse US rules on climate-related disclosures and roll back regulations on air and water quality, the future of the United States’ role in combating climate change looks uncertain. However, the global sustainable finance market, particularly in Latin America, is likely to continue growing—especially with a sustained focus on European investors.
US Withdrawal from Climate Regulations
Trump’s anticipated policy changes, such as pulling out of the Paris Agreement or undermining climate-related regulations, have caused concern over whether the US will meet its decarbonization targets. While this shift could slow progress domestically, it may not drastically impact sustainability markets. As Graham Stock, a senior sovereign strategist for emerging markets at RBC BlueBay Asset Management, points out, European investors will continue to drive the momentum for sustainable finance.
Despite the US potentially retreating from the global climate agenda, European regulations—including the EU’s Corporate Sustainability Reporting Directive—have been a significant force in the market’s growth. This trend is expected to persist, especially since European investors have been primary players in the ESG (Environmental, Social, and Governance) space.
Green Bonds and Latin American Growth
The global issuance of green, social, sustainability, and sustainability-linked bonds is projected to hit $1 trillion in 2024, a significant jump from $980 billion in 2023. While the demand for these bonds is predominantly driven by European investors, Latin American companies are still active in the market. These companies issue bonds to fund green projects despite a slightly reduced “greenium”—a premium typically associated with ESG-linked bonds.
As Alan Siow, co-head of emerging market corporate debt at Ninety One, observes, US investors were never the largest buyers of ESG bonds. The bulk of this demand has come from Europe, and Trump’s presidency is unlikely to shift this dynamic. However, some caution is emerging in the market as investors come to terms with the fact that focusing solely on “good actors” does not always deliver the expected returns.
The Rise of Hard-to-Abate Sectors
Despite Trump’s expected push to increase US oil production, which could dampen some climate efforts, the sustainable finance market may still find opportunities in hard-to-abate sectors like oil and metals. Companies in these sectors are seeking to reduce their carbon emissions through transition or sustainability-linked bonds, which offer an opportunity for financing emissions reductions. Kara Succoso Mangone from Goldman Sachs highlighted the growing role of metals companies in sustainable funds, noting the need for materials like steel to produce wind turbines.
As for the oil industry, some companies are taking steps to reduce methane emissions, an effort that can be tracked and financed through green investments. However, for such projects to be classified as “green,” they must meet strict standards and undergo independent evaluations.
European Influence on Sustainable Finance
The strength of Europe’s demand for sustainable bonds cannot be overstated. Although Trump’s policies could create more regulatory divergence between the US and Europe, Graham Stock remains confident that European demand for ESG products will persist. European banks are likely to continue facilitating green bond issuances from Latin American firms, especially when investor demand is high. Benjamin Souza from BlackRock also confirms that there is ongoing demand from specific investors for green bonds despite the changing political landscape.
The Role of Multilateral Development Banks
Trump’s policies could also impact the priorities of multilateral development banks (MDBs) like the World Bank and Inter-American Development Bank (IDB), where the US holds significant sway. If the US exits the Paris Agreement, the focus of these banks may shift away from climate change initiatives, potentially affecting climate-related infrastructure projects. This could put more pressure on private investors to fund ESG initiatives. As Vijaya Ramachandran from the Breakthrough Institute notes, this shift in priorities would underscore the importance of private sector involvement in sustainable finance.
The Market Outlook
Despite political challenges, the sustainable bond market is expected to continue growing, particularly in Latin America, where green bonds are increasingly important. Regulations in Europe will continue to stimulate demand, and investor interest in sustainable bonds is expected to remain strong, given their potential for better returns. Graham Stock emphasizes that green bonds will continue to trade well in the secondary market, as they are likely to attract long-term, dedicated investors.
In conclusion, while the US may step back from climate regulations under Trump’s administration, the global sustainable finance market—particularly in Europe and Latin America—will likely keep growing, driven by investor demand and regulatory frameworks outside the US. The shift in US policy may cause some temporary turbulence, but it won’t derail the long-term trajectory of sustainable finance.
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