Despite their minimal contribution to global greenhouse gas emissions, Caribbean countries are disproportionately affected by climate change. We are particularly exposed to rising sea levels, intensified hurricanes, and other extreme weather events, which can result in significant economic losses. In response, the Caribbean nations have shown their commitment to climate action, implementing various plans and measures to mitigate emissions and adapt to the changing climate. These are noted in the Nationally Determined Contributions (NDCs), which are climate action plans submitted by countries under the Paris Agreement. They outline efforts by each country to reduce emissions (i.e. mitigate) and adapt to the impacts of climate change.

In this article we feature three examples of Caribbean countries Barbados, Jamaica, and Trinidad and Tobago and a very brief summary of their NDCs. The source of information as well as the NDC’s for all participating countries can be found at https://unfccc.int/NDCREG. Barbados has implemented a comprehensive program, the Roofs to Reefs Program (R2RP), focusing on water management, renewable energy, and ecosystem restoration. Jamaica has enhanced its Nationally Determined Contributions (NDC) targets, aiming to reduce emissions from the land use and forestry sector and further emissions reductions in the energy sector. Trinidad and Tobago has developed a Carbon Reduction Strategy targeting its power generation, transportation and industrial sectors. These initiatives demonstrate a strong regional commitment to addressing climate change through proactive measures. A brief summary of some key aspects of each country’s NDC is noted in the table below. We highlight the Adaptation and Mitigation measures, terms which we introduced in a previous article.

[i] Sources:

https://unfccc.int/sites/default/files/NDC/2022-06/Trinidad%20and%20Tobago%20Final%20INDC.pdf

https://unfccc.int/sites/default/files/NDC/2022-06/2021%20Barbados%20NDC%20update%20-%2021%20July%202021.pdf

https://unfccc.int/sites/default/files/NDC/2022-06/Updated%20NDC%20Jamaica%20-%20ICTU%20Guidance.pdf

[ii] Conditional contributions refer to climate action targets that depend on external support, such as international financing or technological assistance. Unconditional contributions are those that a country commits to achieving using its own resources, without relying on external aid.

In recent years, the Caribbean has become a notable region for sustainability financing, adopting innovative financial instruments to address pressing environmental and social challenges. With its vulnerability to climate change and natural disasters, the Caribbean’s embrace of green finance is not only a strategic choice but a necessity. This article explores the different types of sustainability financing instruments that have been utilized in the Caribbean, with a focus on their application and impact.

Green Bonds: Financing a Greener Future

Green bonds are debt securities issued to raise capital specifically for projects with environmental benefits. These projects often include renewable energy, energy efficiency, and climate change mitigation. The Caribbean has seen several significant green bond issuances aimed at fostering sustainability. One notable example is the Jamaica Public Service Company’s (JPS) green bond issued in 2021. JPS, the island’s sole distributor of electricity, issued a US $50 million green bond to fund renewable energy projects, including the development of solar and wind power facilities. This move not only aimed to reduce Jamaica’s reliance on imported fossil fuels but also aligned with the country’s goal of achieving 50% renewable energy by 2030. Another example is the cumulative financing undertaken by William’s Renewable Energy in Barbados where nine green issues between 2018 and 2021 totaling US $28.3 million helped fund the company’s solar projects.

Blue Bonds: Protecting Ocean Resources

Blue bonds are similar to green bonds but are specifically designed to finance marine and ocean-based projects. These projects often focus on sustainable fisheries, marine conservation, and the preservation of coral reefs. Given the Caribbean’s rich marine biodiversity and reliance on marine resources for tourism and livelihoods, blue bonds have become an essential tool for the region. In 2019, the Seychelles set a precedent with its issuance of the world’s first sovereign blue bond, which raised US $15 million for sustainable marine and fisheries projects. This model inspired Caribbean nations, such as Belize, which issued its own blue bond in 2021. Belize’s US $364 million blue bond restructuring aimed to protect its marine ecosystems and enhance climate resilience, emphasizing the country’s commitment to preserving its marine resources. Belize’s debt was reduced by 12% of GDP and locked in commitment to protect 30% of Belize’s ocean in addition to a range of other conservation measures.  In 2022, the Blue Bonds for Ocean Conservation Program, enabled Barbados to replace relatively expensive pre-existing debt (7.2% average cost) with significantly lower all-in cost of financing (4.9%). This debt repurchase was funded by new financing (the “Blue Loan”) arranged by Credit Suisse and CIBC FirstCaribbean in US Dollars (50%) and Barbadian Dollars (BBD) (50%), and co-guaranteed by The Inter-American Development Bank (IDB) and The Nature Conservancy (TNC), an environmental organization.

Social Bonds: Development Must Include People

Social bonds focus on projects that create positive impacts for people and communities to improve the conditions under which they live. In 2023, the Home Mortgage Bank (HMB) in Trinidad & Tobago issued a US $44.3 million social bond to provide mortgages for low- and middle-income families. Bond issues such as HMB’s help nations reduce poverty and close inequality gaps. These are critical issues to be tackled by Caribbean governments and social bonds are an attractive vehicle for financing.

Sustainability-Linked Bonds: Tying Finance to Performance

Sustainability-linked bonds (SLBs) differ from green, blue and social bonds in that the proceeds are not tied to specific projects. Instead, SLBs are linked to the issuer’s overall sustainability performance, with financial terms such as interest rates tied to the achievement of predefined sustainability targets. In October 2021, the energy company, Ege Haina, issued a US $300 million SLB in the Dominican Republic. It was oversubscribed three times, suggesting the huge potential for SLBs in the region.

Debt-for-Nature Swaps: Converting Debt into Conservation

Debt-for-nature swaps involve the exchange of a portion of a country’s debt for commitments to invest in environmental conservation. This instrument type can be beneficial for Caribbean nations, where many face high levels of debt alongside urgent environmental challenges. A landmark global example is the 2016 debt-for-nature swap between the Seychelles and its Paris Club creditors, facilitated by The Nature Conservancy. The swap converted US $21.6 million of Seychelles’ debt into funding for marine conservation projects, establishing marine protected areas and promoting sustainable fisheries. Inspired by this success, Barbados announced a similar initiative in 2021, aiming to swap debt for investments in climate resilience and environmental protection. Belize’s US $364 million blue bond is also considered a debt-for-nature swap. The swap resulted in a US $189 million reduction in principal outstanding and created an estimated US $180 million in conservation funding, accessible over 20 years.

Sustainability-Linked Loans: Incentivizing Sustainable Practices

Sustainability-linked loans (SLLs) function similarly to sustainability-linked bonds, offering more favorable loan terms based on the borrower’s achievement of sustainability performance targets. These loans are gaining popularity among Caribbean businesses and institutions committed to sustainability. In 2022, FirstCaribbean International Bank (FCIB) launched its first sustainability-linked loan, providing US $75 million to a leading regional hospitality group. The loan’s terms were tied to the group’s targets for reducing carbon emissions and improving water conservation practices. This initiative marked a significant step in encouraging private sector engagement in sustainability efforts across the Caribbean.

Conclusion: A Region Leading by Example

The Caribbean’s adoption of diverse sustainability financing instruments underscores the region’s proactive approach to addressing environmental and social challenges. From green and blue bonds to social bonds to sustainability-linked loans and debt-for-nature swaps, these tools are enabling Caribbean nations to finance critical projects that promote resilience, conservation, and sustainable development.

As the impacts of climate change intensify, the Caribbean’s innovative use of sustainability finance serves as a model for other regions. By leveraging these instruments, Caribbean nations are not only protecting their unique environments but also paving the way for a more sustainable and resilient future.

RATING ACTION:

 On May 10, 2024, CariCRIS lowered the assigned issuer/corporate credit ratings by 3 notches to CariD (Foreign and Local Currency Ratings) on the regional rating scale, and ttD on the Trinidad and Tobago (T&T) national scale as well as jmD on the Jamaica national scale to NiQuan Energy Trinidad Limited (NETL or the Company). 

RATING SENSITIVITY FACTORS:

 Factors that could, individually or collectively, lead to an improvement in the ratings include:

• Reattainment of a long-term GSC
• Further formal extension to the STNI’s maturity
• Full commercialisation of operations with a track record of on-spec production and adequate debt servicing

Analysts’ Contact Info:

Keith Hamlet
Mobile : 1-868-487-8356
khamlet@caricris.com

Brandon Singh
bsingh@caricris.com

www.caricris.com
info@caricris.com

Disclaimer: CariCRIS has taken due care and caution in compilation of data for this product. Information has been obtained by CariCRIS from
sources which it considers reliable. However, CariCRIS does not guarantee the accuracy, adequacy or completeness of any information and is
not responsible for any errors or omissions or for the results obtained from the use of such information. No part of this report may be
published / reproduced in any form without CariCRIS’ prior written approval. CariCRIS is also not responsible for any errors in transmission
and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this product.

CariCRIS lowers its ratings for NiQuan Energy Trinidad Limited

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As we enter the second week of our Eco Essentials series, we aim to introduce key climate risk terminology to help readers better understand the global conversations surrounding this issue. Climate change poses significant threats to the Caribbean, affecting its ecosystems, economies, and communities. Understanding and managing these risks is essential for the region’s stability and development.

Climate-related risks are divided into physical risks (both acute and chronic) and transition risks. Physical risks, as the name suggests, include the physical impact from weather events and long-term environmental changes, while transition risks result from the shift to a low-carbon economy. We will explain these in more detail below.

Physical Risks

These involve direct damage from climate-related events and long-term shifts in climate patterns.

Acute Physical Risks in the Caribbean primarily involve extreme weather events such as hurricanes, tropical storms, and heavy rainfall. These events can cause immediate and severe damage to infrastructure, disrupt livelihoods, and result in significant economic losses. We have seen many examples of these over the years which have caused widespread damage to many countries in the region.

Chronic Physical Risks include gradual environmental changes such as sea-level rise, increased temperatures, and altered rainfall patterns. These changes threaten coastal infrastructure, freshwater resources, agriculture, and tourism, which are crucial to the Caribbean economies. For instance, rising sea levels pose a persistent threat to low-lying areas, potentially leading to displacement of communities and loss of land.

In the broader economy, physical risks like extreme weather events (hurricanes, floods) can damage infrastructure, disrupt operations, and lead to financial losses for banks, insurance companies, and other financial institutions. Rising sea levels and extreme weather events can erode beaches, damage coastal infrastructure (hotels, resorts), and disrupt tourism activities, resulting in decreased tourist arrivals, revenue loss, and job losses in the tourism sector. These physical risks can also disrupt supply chains, damage factories and warehouses, and increase operating costs.

Transition Risks

Transition Risks arise from the global shift towards a low-carbon economy. This transition can lead to policy changes, new legal frameworks, technological shifts, market transformation, and reputational impacts. Caribbean nations, heavily reliant on fossil fuels and tourism, face risks associated with changes in global energy markets and tourism trends. Transitioning to renewable energy sources and sustainable tourism practices presents both a challenge and an opportunity for these island economies.

Like physical risks, transition risks have tangible implications. Moving to a low-carbon economy can result in stranded assets (e.g. untapped fossil fuel reserves) and increased credit risk for companies heavily invested in carbon-intensive industries. Financial institutions with exposure to these industries may face losses and need to adjust their portfolios. Policies aimed at reducing carbon emissions, such as carbon taxes or restrictions on air travel, could raise travel costs and reduce demand for tourism in certain destinations. Additionally, changing consumer preferences for more sustainable tourism options could necessitate significant investments in infrastructure and marketing. Stricter environmental regulations and carbon pricing can increase production costs for manufacturers, particularly those reliant on fossil fuels. This could lead to reduced competitiveness, pressure to adopt cleaner technologies, and potential job losses in certain sectors.

How do we address these risks?

Here we will introduce two additional terms Mitigation and Adaptation. These are two distinct but complementary strategies for addressing climate risk.

Mitigation focuses on reducing greenhouse gas emissions and slowing down the pace of climate change. It involves actions like transitioning to renewable energy sources, improving energy efficiency, promoting the use of electric and hybrid vehicles, setting emissions reduction targets and regulations for key sectors, and adopting sustainable practices.

Adaptation focuses on adjusting to the current and future effects of climate change. It involves actions like building seawalls and storm surge barriers to protect against rising sea levels, improving drainage systems to handle heavy rainfall and reduce flooding, developing drought-resistant crops, restoring and preserving coral reefs to protect coastlines and support marine biodiversity and improving early warning systems for extreme weather events.

While mitigation tackles the causes of climate change, adaptation addresses its impacts. Both strategies are crucial and often interconnected, as effective mitigation reduces the need for adaptation in the future by limiting the extent of climate change experienced. Conversely, robust adaptation strategies can help communities and ecosystems cope with climate change that is already unavoidable.

As we continue this series, we will give some insight into some of strategies being adopted by the countries in the region to mitigate and adapt to the growing risks associated with climate change. Continue to follow and let us know your thoughts in the comments.

RATING ACTION:

 On March 12, 2024, CariCRIS reaffirmed the Issuer/Corporate Credit ratings assigned to Massy Holdings Limited and its subsidiaries (Massy or the Group) at CariAA+ (Foreign and Local Currency Ratings) on its regional rating scale and ttAA+ (Foreign and Local Currency Ratings) on its Trinidad and Tobago national rating scale. A stable outlook was maintained. 

RATING SENSITIVITY FACTORS:

 Factors that could, individually or collectively, lead to an improvement in the ratings and/or outlook include:

• Continued intraregional and extra-regional expansion resulting in an increase in operating revenue by > 15% for 2 consecutive financial periods
• An improvement in operating profit margin to > 12.5% for 2 consecutive financial periods
• An increase in operating cash flows leading to an improvement in effective debt service coverage ratio (DSCR) to > 7.5 times for 2 consecutive financial periods

Factors that could, individually or collectively, lead to a lowering of the ratings and/or outlook include:

• A deterioration in operating profit margin to < 5% for 2 consecutive financial periods
• A decline in operating cash flows leading to a deterioration in effective DSCR to < 1.2 times for 2 consecutive financial periods
• Negative reputational and/ or financial impact due to findings of the independent investigation into the Group’s governance

Analysts’ Contact Info:

Keith Hamlet
Mobile: 1-868-487-8356
khamlet@caricris.com

Megan Dass
Mobile: 1-868-713-6863
mdass@caricris.com

www.caricris.com
info@caricris.com

Disclaimer: CariCRIS has taken due care and caution in compilation of data for this product. Information has been obtained by CariCRIS from sources which it considers reliable. However, CariCRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. No part of this report may be published / reproduced in any form without CariCRIS’ prior written approval. CariCRIS is also not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this product.

CariCRIS reaffirms overall ‘high creditworthiness’ ratings of Massy Holdings Limited and its subsidiaries

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In the vibrant tapestry of sustainable development, various hues emerge, each representing a facet of environmental, social, and economic vitality. From the lush greens of renewable energy to the azure blues of marine conservation, and the warm oranges of community resilience, the Caribbean region finds itself at the nexus of this spectrum. The diverse colors of sustainable development are very significant and hold a tremendous potential for the Caribbean’s prosperity. Let’s look at some of the hues now from a Caribbean perspective.

Green Economy: This refers to an economic system that aims to reduce environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. It is closely related to ecological economics and focuses on the intersection of the economy, the environment, and society. Key aspects often include reducing carbon emissions, increasing energy and resource efficiency, and preventing loss of biodiversity. Some of the financial instruments that will be used to mobilize private sector capital are debt swaps and Green, Social, Sustainability and Sustainability-linked (GSSS+ or “thematic”) bonds. Thematic bonds have been issued in Barbados, Dominican Republic and Trinidad and Tobago. However, the regional thematic bond market is very small and embryonic in comparison to the Latin American economies and the world

Blue Economy: This concept extends the sustainability focus to the oceans and waterways. It encompasses economic activities that directly or indirectly take advantage of the marine environment. This includes industries like fishing, aquaculture, tourism, and renewable energy (such as offshore wind and tidal power). The blue economy aims to promote the growth of these sectors in a sustainable way that preserves aquatic and marine ecosystems. Blue bonds and blue loans are innovative instruments that earmark funds for ocean-friendly projects and protecting critical clean water resources. In 2022, the Blue Bonds for Ocean Conservation Program, enabled Barbados to replace relatively expensive pre-existing debt (7.2% average cost) with significantly lower all-in cost of financing (4.9%). This debt repurchase was funded by new financing (the “Blue Loan”) arranged by Credit Suisse and CIBC FirstCaribbean in USD (50%) and Barbadian Dollars (BBD) (50%), and co-guaranteed by IDB and TNC. Other financing mechanisms to support blue economy projects include impact investing, venture capital, and blended finance. Developing insurance products tailored to ocean risks (such as extreme weather events, coastal erosion, and marine pollution) can attract investment and protect blue economy assets.

Orange Economy: Sometimes referred to in discussions about creative industries, the orange economy includes sectors such as arts, culture, and entertainment. Architecture, visual and performing arts, crafts, film, design, publishing, research and development, games and toys, fashion, music, advertising, software, TV, radio, and video games are also some of the sectors that make up the Orange Economy. It’s about leveraging creativity and innovation to foster economic growth, which also can include preserving cultural heritage and promoting social inclusion. The creative economy also includes tourism and cultural heritage. Potential is great for the Caribbean region and tie-in with the traditional tourism offerings are feasible. In Trinidad and Tobago, the Ministry of Tourism, Culture and the Arts estimated visitor expenditure for the 2024 Carnival period was US $94.2 million excluding private fetes and parties, which are major activities. The creative economy was expected to reach a global valuation of US $985 billion by 2023, and a projected 10% of global GDP by 2030. Public-Private Partnerships (PPPs) are one of the common methods of financing used in the orange economy. PPPs include collaborating with governments, private companies, and NGOs to fund cultural events, festivals, and artistic initiatives. These partnerships promote creativity and boost economic activity.

The spectrum of sustainable development offers a kaleidoscope of opportunities for the Caribbean region to thrive in harmony with society and its celebrated nature. By harnessing the greens of renewable energy, blues of marine conservation, and oranges of community resilience, Caribbean nations can paint a picture of prosperity that is both vibrant and enduring.