Chile Cools on Climate, Penguin Defense in Risk to Green Credits

The Atacama salt flat in the Atacama Desert, Chile. Photographer: Cristobal Olivares/Bloomberg Photo by Cristobal Olivares /Bloomberg

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(Bloomberg) — President José Antonio Kast’s pledge to ease environmental regulations to boost investment threatens to have unintended consequences for Chile — pushing up borrowing costs in a nation that has pioneered green debt sales in the region. 

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Within days of coming to office, Kast’s administration withdrew dozens of environmental decrees and suspended the designation of new biodiversity zones, promising a review. Among the natural assets in focus are Magellanic penguins and an endangered frog species first discovered by Charles Darwin. The moves are part of Kast’s broader pledge to slash red tape, revive growth and narrow the widening budget deficit.

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But there’s a catch. Chile has some of the cheapest borrowing costs in Latin America because of its low debt burden, but also because it has proved adept at selling bonds associated with environmental, social and governance goals. Almost 40% of its outstanding debt is tied to targets such as reducing greenhouse emissions and improving gender equality, far higher than any other major country in the region. 

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“The biggest impact would probably be reputational, given that Chile has built up a very strong reputation in the sustainable bond market,” said Kathrin Muehlbronner, senior vice president of the sovereign risk group at Moody’s Ratings.

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The South American nation issued $1.5 billion in bonds in January with two biodiversity “key performance indicators” — at least 30% of national land should be protected by 2030 and at least 10% of that land should be “effectively managed” to ensure its protection. If the government fails to reach those targets, it has to pay investors a step-up in the coupon payments of 25 basis points starting in 2032. 

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Those extra future payments would equal a present value of $13.7 million, according to calculations by Bloomberg.

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Volte-Face

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Kast, a proponent of free markets, came to office on March 11, taking over from the leftist administration of Gabriel Boric. The business community and right-wing politicians have blamed regulations and bureaucracy for stifling investment. But some are balking at Kast’s intervention.

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“Chile needs to grow and attract big investments with agility, but that progress can’t come at the cost of its natural heritage,” Evelyn Matthei, a former presidential candidate for the right, said this week in response to the suspension of the decrees.

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Chile became the first country in the world to borrow debt linked to specific sustainability targets, known as key performance indicators, in 2022. That is the type of debt it sold again this year.

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Under the broader ESG category, Boric’s government sold more than $40 billion in bonds. So Kast’s move to backtrack on new environmental controls marks a sharp contrast with Boric’s legacy.

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“It is evidence of the shifting political momentum for sustainability in Chile,” said Victor Laudisio, a nature specialist at S&P Global Ratings. “The stock of sustainable bonds will gradually shift throughout this year, and next year they might decrease the stock as a percentage of total debt.”