(Bloomberg) — Sustainable debt sales are suddenly booming in Latin America, as investors looking for larger returns in environmentally and socially friendly securities grow more comfortable with buying high-yield bonds.Borrowers in the region have raised about $8.7 billion in international debt deals tied to environmental, social and governance projects so far this year, according to data compiled by Bloomberg. That’s approaching the record $10.8 billion issued all of last year.And there’s plenty more to come. Governments across the region are planning green bond sales, and IDB Invest, the private sector arm of the Inter-American Development Bank Group, is working with borrowers on 15 additional green, social and sustainability bonds this year, according to Gema Sacristan, the chief investment officer.The growing volume of sales reflects a market that was once relatively small and is becoming increasingly global and liquid, in part because investment funds focusing on ESG debt have grown bigger. Many issuers can cut their borrowing costs by borrowing in the market, by 0.15 percentage point or more.“The momentum we’re seeing in Latin America around these products is driven by investor sentiment and appetite,” said Esohe Denise Odaro, chair of green, social and sustainability-linked bond principles at the International Capital Markets Association and head of investor relations at the International Finance Corp. The IFC is an arm of the World Bank that encourages private investment in developing economies, and is on track to sell record volumes of ESG bonds this year.Many issuers in Latin America are junk rated, while most of the ESG market focuses on investment-grade companies and governments. That may explain why Latin American governments and companies issued just 2% of the roughly $1.6 trillion of ESG debt sold globally from 2018 to 2020.But in recent months, investors in environmental or sustainable notes have grown more comfortable with buying high-yield bonds to earn higher returns. One portion of the market that’s particularly interesting to Latin American issuers is sustainability-linked debt.Those bonds and loans differ from more commonly sold green debt, in which a company uses proceeds to finance environmental projects. With sustainability-linked notes, corporations set targets, such as reducing carbon emissions. If they fail to meet the goals, they are penalized — and investors are rewarded — with an increase in interest rates. That’s allowed corporations that may not focus on environmental businesses, such as car rental companies, to tap the market.“The hard thing to do for many issuers is really finding a way to strictly apply the proceeds in an impactful way,” said Jake Gearhart, managing director, head of emerging markets syndicate and Latin America director of capital markets at Deutsche Bank.Transition finance, which allows the largest carbon-emitting industries and companies to raise capital and use the proceeds for activities that help them reduce their carbon footprint, could contribute as much as $1 trillion per year to the economy worldwide, according to S&P Global Ratings. That will include sutainability-linked debt, credit analysts led by Lori Shapiro wrote in a report Tuesday.Green or Greenwashing?As sales blossom, some investors and analysts have raised questions about whether the securities are really green, or are more greenwashing.Xtract Research analyst Valerie Potenza said in some cases the interest-rate increase built into sustainability-linked bonds may be irrelevant. In others, investors have no real way of knowing the borrower is meeting its goals.“At least for the moment, a sustainability-linked bond may simply be whatever one issuer says it is,” she wrote in a Feb. 19 note. “Many of these deals may simply be feel-good bonds, paying lip service to environmentally conscious goals (of both the issuer and investor) by including ‘sustainability’ in the name.”In the short term, the skepticism is unlikely to derail the pace of sales from Latin America. Borrowers are eager to show they’re on the same footing as places such as Europe, which has been the leader in the ESG market, said Anne van Riel, co-head for sustainable finance capital markets Americas at BNP Paribas.“It’s a combination of genuine interest in making things better, especially when there’s so much negative focus on some of these topics, combined with pride in showing what they do and what they deliver,” she said in an interview.Italian electricity and energy company Enel SpA pioneered sustainability-linked issuance in 2019. Since then, the structure has caught on in Latin America, where Brazilian pulp and paper producer Suzano SA became the second company in the world to sell the bonds. Suzano has since issued more of the notes, and other Brazilian companies have followed, including packaging maker Klabin SA, vehicle leasing company Movida Participacoes SA and holding company Simpar SA.Meanwhile, Argentinian e-commerce retailer MercadoLibre Inc. and family run soy and corn producer Andre Maggi Participacoes SA sold sustainable bonds this year, a related structure in which the proceeds can be used to finance green and social projects.Klabin was able to cut its borrowing costs by 0.35 percentage point on its $500 million sustainability-linked bond issued in January, said Gustavo Rocha Garcia, the company’s treasurer.(Adds IDB Invest officer in third paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.