Sovereign Green Bonds (Fiji)
| Sovereign Green Bonds (Fiji) | |
| Source: | London Stock Exchange |
| Domain: | Public Finance/Fundraising |
| Prerequisites: |
Adherence to Green Bond Principles |
|
Potential Impact: |
Substantial |
| Application to Armenia |
Armenia can follow the example of Fiji and issue sovereign bonds for financing of domestic climate mitigation and adaptation projects in the public sector. Some of the projects have already been identified through rigorous consultation process within the framework of designing “GCF – Armenia Country Cooperation Programme” (with around 200 mln USD portfolio). There are no regulatory impediments for the issuance of green bonds by Armenian banks observed. However, absence of respective provisions defining taxonomy, frameworks for management of proceeds and reporting makes the overall process cumbersome; In the short term perspective, any bank potentially willing to issue green bonds in accordance with the Green Bonds Principles should introduce the verification framework with the engagement of qualified international advisor. In the long term perspective, Central Bank of Armenia should define the taxonomy and introduce respective verification framework for management of proceeds and reporting |
In April 2018, Fiji became the first emerging market sovereign to list a green bond on London’s International Securities Market, raising capital that will support more than 80 domestic climate mitigation and adaptation projects.
Fiji has significant exposure to climate change; therefore, this represents a vital investment in the country’s future, which will support renewable energy development, avoiding deforestation projects and upgrading infrastructure for climate resilience. Proceeds from the landmark green bond will be used to finance the sustainable management of natural resources, renewable energy, water and energy efficiency, as well as clean and resilient transport and waste-water management.
There is no single global framework which must be followed to label a bond as “green”. However, the primary global guidance comes from the International Capital Markets Association which produced the Green Bond Principles, a set of voluntary process guidelines intended for broad market use, developed by a range of investment and multilateral banks, including the World Bank and IFC. The Green Bond Principles set the foundations for the elements to be incorporated within a Green Bond Policy Framework—a critical document to give credibility to a green bond. As a pioneer issuer, Fiji sought to set high standards for other nations to follow suit and was particularly supportive of the establishment of a robust and transparent process. This transparency has provided future sovereign countries with a roadmap they can follow when issuing their own green bond.
Since 2016, sixteen sovereigns have issued green bonds to finance green projects in governments’ budgets, exceeding USD 80 billion. Amid the COVID-19 pandemic, sovereign green-bond issuers have kept the issuance momentum in 2020 with several re-openings and a few inaugural issuances including Germany and Sweden. The overview of key takeaways from Fiji’s experience is presented in the table below.
IFC Guidance for Green Bond Issuers
| CONSIDERATIONS BEFORE ISSUING | PREPARING TO ISSUE |
|
ISSUANCE AND POST-ISSUANCE | ||
| 1 | Clearly identifying the reasons for issuing will drive many decisions in the issuance process. Reasons to issue may include moral leadership, setting a path for private sector issuers in the country, and reaching new investors. | 1 | The path for domestic versus international issuances diverges, with differing transaction costs, disclosure requirements and currency considerations. Whether domestic or international, roadshows will need to take care to explain the nature of the green bond. International prospectuses will require a similar level of effort as a vanilla bond issuance to meet regulatory requirements. | 1 |
The issuer should allow sufficient time in their calendar to explain the green bond to investors. |
| 2 |
Caution should be exercised if the driver is cheaper financing compared to a vanilla issuance, as evidence of a price premium, or ‘greenium’ (another term used for green bonds that are heavily oversubscribed and are priced tighter than vanilla bonds) is not well established for green bonds. |
2 |
The development of a green bond policy framework should align with an internationally recognized set of principles, such as the Green Bond Principles, to ensure a level of legitimacy in the investor’s eyes. The framework will require a form of external review, from second party opinions to full ratings, with differing associated transaction costs |
2 |
While green bonds are currently heavily oversubscribed, there is no clear trend that the issuance will provide a cheaper source of financing for the sovereign. |
| 3 |
A steering committee structure is critical to organize the relevant stakeholders, who are broader than a vanilla issuance |
3 |
Listing on a stock exchange can assist in pricing transparency, encourage secondary trading and improve global exposure of the bond, though trading volumes are typically low. A green bond listing must comply with the same listing requirements as a vanilla bond, in addition to the requirements of external review, a policy framework, and a commitment to transparent reporting. |
3 |
The issuance provides an excellent opportunity to leverage an issuer’s green credentials, and marketing and communications plans should be considered well in advance. |
| 4 |
It is essential that a central coordinator, often the treasury or the central bank with authority and capacity to see the big picture, is appointed. |
4 | Transparency is critical to the success of the green bond market, so resourcing and expertise must be applied to monitoring and reporting on the use of the proceeds, and over time, the impact of the projects funded. | ||
| 5 |
Identifying potentially eligible green projects will help determine the structure of the bond, which must also suit the overall debt profile of the sovereign. |
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| 6 |
Adequate budget should be set aside for additional compliance components of a green bond. |
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| 7 |
Any capacity gaps could be filled with external expertise; Fiji drew on the World Bank Group at each phase of the issuance. |