Putting Green Bonds on a Sustainable Path in Emerging Markets

Global green bond issuance is estimated to top US$206bn in 2017, according to figures from Moody’s, but the development of the asset class in emerging markets is still being hampered by lack of incentives, standards and awareness, according to sustainable finance professionals.

Apr 6, 2017 // 3:06PM

Following discussions at the 2017 Climate Bonds Annual Conference and Green Bond Awards in London in March, Bonds & Loans explores four key elements required for sustainable finance to become mainstream in emerging markets.

Standards: International Harmonisation is the Next Step

What qualifies a project as ‘green’ – and what qualifications are recognised by regulators and investors? What about disclosures – how do you measure the impact of the projects being financed through climate-aligned instruments? How does the pathway to the market differ between green and conventional transactions?

The industry is making progress on delivering answers to these questions among others, with the help of national capital markets regulators and Central Banks. In emerging markets, countries like China, India, Nigeria and Mexico are leading the way in terms of developing reference guidelines for prospective green bond issuers, an important step in developing a viable market for these instruments and making issuers and investors comfortable with the asset class. However, more work needs to be done in harmonising those frameworks across jurisdictions, particularly for the benefit of both cross-border issuers and global emerging market investors. Multilateral lenders and associations could play a leading role here.

Evangelism Is Necessary for Knowledge (and Benefit) Dissemination

With the green bond market doubling in size between 2015 and 2016 and with policymakers bolstering their commitments to tackling climate change, it is easy to forget that the vast majority of issuers and borrowers are not necessarily attuned to the benefits of structuring a transaction in a green format – and there are benefits.

Beyond providing entities with an innovative tool that helps reduce carbon emissions and diversify funding, green bonds are consistently oversubscribed, with final pricing tightening on average between 1-15bp within seven to 28 days after issuing, and most performed better than their corresponding index, according to Climate Bonds Initiative research. Many of these benefits could also extend to green securities issued by prospective borrowers outside the public sector, utilities, energy and banking sector – the leading sectors driving green bonds thus far. But without Evangelism – from governments, banks (Central and otherwise), investors and industry associations – the market is likely doomed to stall.

After the Sovereign, Corporates Need to Step Up – Possibly Through Loans

Governments – whether at the sovereign or sub-sovereign level – have taken a leading role in developing the green bond market by both issuing guidelines for prospective borrowers, and critically, launching green securities of their own. But in emerging markets, the pipeline is largely dominated by state-owned development banks or large private sector financial institutions (one big exception to this being China, where issuers across a fairly broad range of sectors have tapped the green bond market).

Corporates have identified a number of barriers to issuing green bonds, including the high cost of certification and impact reporting, minimum deal size requirements, a steep learning curve, and a scarcity of exotic green structures.

One of the things that could help issuers bridge this gap is securing green bilateral loans, which could allow to build internal expertise in sustainable finance and act as a benchmark for future green transactions – without being hampered by issue size or the exorbitant cost of hedging trades. It would also give borrowers more latitude to work with lenders on innovative structures that may be more suitable than a vanilla green bond.

Incentives Can Help, But Should Be Limited to the Short Term

A raft of incentives – from tax incentives for borrowers and investors, to grant schemes that help issuers foot the bill for sustainability reporting and certification – have been proposed in a number of jurisdictions to help expedite the green bond market’s development. But incentives should only be considered a short-term measure, due in part to their potential to distort pricing and their political vulnerability.

Incentives for sustainable finance in emerging markets (indeed global markets more broadly) should revolve around the normalisation of the green bond market through organic growth (through clear and well-formulated guidelines, and knowledge dissemination), rather than extensive preferential treatment (through grants and tax breaks).

If you enjoyed this article, you may be interested in our Emerging Markets Sustainable Finance Report that is being released in August 2017.  To receive your free copy email

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