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What Governments Need To Know About Green Bond Fiji Shows Way

What Governments Need To Know About Green Bond Fiji Shows Way
April 02
11:04 2018

There have been many lessons learned through the issuance of the first emerging economy sovereign green bond to Fiji, which can be applied to future sovereign issuers.
In a report, Guidance for Sovereign Green Bond Issuers, focuses on lessons from Fiji’s historic making move in being the first emerging economy to issue a sovereign green bond.

In recognition of that leadership, Fiji has just been awarded a prestigious Green Bond Pioneer Award at the Climate Bonds Initiative’s conference in London.


What is Green Bond?

What exactly is Green Bond? Well, Green bonds are fixed income, liquid financial instruments used to raise funds dedicated to climate mitigation, adaptation and other environment-friendly projects.

This provides investors with an attractive investment proposition and an opportunity to support environmentally and socially sound projects.

According to the report, the sovereign green bond presents countries with an opportunity to demonstrate national leadership in the green financing agenda while giving exposure to a new investor base and solidifying a country’s commitment to complying with the Paris Climate Change Agreement.

The report said: “While green bonds allow sovereign issuers to appeal to a new class of investors—domestically or internationally— in addition to the usual costs associated with the preparation of a vanilla government bond, green bonds require upfront and ongoing resources that are not recoverable through bond proceeds.

“Many potential investors need to be educated on the benefits of a green bond—for themselves and the country as a whole.

“Studies have shown an increasing number of millennials are attracted to investments that will have a positive environmental impact, making it a wise choice for retail issuances and institutions whose customer base will increasingly include millennials.”

Clearly identifying the reasons for issuing will drive many decisions in the issuance process.

The report highlighted that if a country’s motivation to issue a green bond is prompted by a desire for cheaper financing compared to a vanilla issuance, then caution should be exercised.

“While it has been suggested they may have the potential to attract a pricing premium, or ‘greenium’ compared to vanilla bonds, especially in liquid global markets such as USD and Euro denominations, there is no conclusive empirical data to confirm this assertion.

“Carefully identifying potentially eligible green projects will help determine the structure of the bond, which must also suit the overall debt profile of the sovereign.

“Projects can be defined quite broadly and may include tax relief, subsidies, financing and refinancing.”

However, it noted that all expenditures should be assessed by an external reviewer to ensure they qualify as ‘green’.


Transparency is critical

“Transparency at every step of the process 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 the impact of funded projects.

“An extensive level of work is required to set up these processes, but if done early on, and with the collaboration of all government parties, accountability and consistency will be achieved, increasing the sovereign’s ability to meet their green economy objectives.

“For an international issuance, there is a significant appetite for green bonds from both environmental, social and governance-focused (ESG) investors, and institutional investors with mandates to have a minimum percentage of their portfolio meeting ESG standards.

“But it should be remembered that international sovereign issuances require a significantly greater effort in terms of regulatory compliance compared to that of a domestic issuance.

“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

“This transparency has provided future sovereign countries with a roadmap they can follow when issuing their own green bond.”

Here’s everything Governments need to know at a glance (see Table).


Fiji a pioneer

The Guidance for Sovereign Green Bond Issuers, developed by IFC, says there’s significant appetite for international issuances of green bonds from environmental, social and governance focused investors, as well as institutional investors.

In an earlier statement Governor of the Reserve Bank of Fiji, Ariff Ali said: “Fiji’s sovereign green bond attracted interest from both local and international investors, with the foreign investor participation a first for Fijian dollar denominated bonds.

“Fiji has shown that small economies, under threat from climate change, can deliver effective, credible and innovative ways to finance climate work, and it’s hoped other nations will learn from Fiji’s experience that it’s possible to pursue new markets for climate action.”

The report says while there are additional costs involved for international issuances of sovereign green bonds, compared to standard government bonds, they do allow countries to reach new classes of investors.

It says transparency at every step of the process is critical to the success of the green bond market, so resourcing and expertise needs to be applied to both monitoring and reporting on the use of proceeds.

And in what could be a potential plus for emerging economies, the report says an increasing number of millennials are now attracted to investments delivering a positive impact.

As a pioneer issuer, the report says Fiji sought to set high standards for other nations to follow suit and was supportive of the establishment of a robust and transparent process.

The report provides a step by step roadmap for other sovereign nations to follow when considering issuing their own green bond.





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