Green Bonds are a debt financing instrument designed to raise funds and finance new or existing projects that have a positive impact on the environment and climate change. Issuers of this type of bonds can be governments, municipalities, banks, companies, and supranational institutions. Examples of projects financed by them are renewable energy, energy efficiency, clean transport, sustainable water management, responsible waste management, protection of aquatic ecosystems, sustainable agriculture, etc.
The first green bonds are thought to date back to 2008, when, following the interest from Swedish pension funds to invest in climate protection projects, the World Bank issued for the first time a debt-financed instrument to raise resources to support projects with a climate change focus. In the following years, fundraising through green bonds on the capital markets has accelerated and registered explosive growth over the last 5 years and is increasingly attracting the attention of investors. Having USD 295 billion of bonds being issued in 2020, the volume is expected to grow to USD 480 billion by the end of 2021 and double to USD 1 trillion by the end of 2023. The potential of green bonds is enormous, as their amount at the end of 2021 against the backdrop of the global bond market is still below 1%.
What makes a bond green?
At present, there is still no single regulation, standard and legal definition of the concept of green bonds and the principles that govern the issuance of this type of debt instrument are favourable, recommendatory and rather voluntary than legally binding. In practice, most issuers use the principles developed by ICMA (International Capital Markets Association) and called Green Bond Principles. These are principles and guidelines, produced annually, that define the acceptable use of funds raised by green bonds, the process of selecting and evaluating each green project, the management and use of the financial resource, and proper detailed reporting by the issuer.
At the beginning of 2020, right after the signing of the Green Deal, the European Commission announced the creation of a green standard for bonds in the EU. This standard has been part of the Commission’s action plan since 2018 to finance sustainable growth and is expected to serve as a voluntary gold standard for green bonds. The use of the standard will allow countries and companies to more easily raise large-scale finance for climate change and environmental projects, and at the same time protect investors in these instruments as much as possible. The standard will use the detailed definitions of green activities set out in the EU Taxonomy (classification) to determine what is considered a green investment. The need for this standard comes in the context of rapidly growing green bond issuance in the EU, which has grown more than five times in the last 5 years, making companies and countries in the EU the global leader in this market with more than 50% share. To date, the lack of clear definitions for green projects, insufficient standardization and transparency create uncertainty and additional costs for issuers and investors. The Green Standard will provide green bond issuers a reliable and credible way to demonstrate their strong dedication and commitment to the environment. For investors, the standard will give them confidence that their investments are green and sustainable.
What are the main elements of the EU green bond standard:
- Voluntary: the standard is voluntary and includes uniform requirements for any issuer that wants to call its bond a “European Green Bond”.
- Linked to the EU Taxonomy: the standard requires all issuers to allocate 100% of the funds raised through a green bond to economic activities that fall entirely within the EU Taxonomy.
- Comprehensive: the standard is open to issuers inside and outside the EU, including private companies, countries, financial institutions, and supranational institutions.
- External audit: the European Green Bonds will be audited by external auditors who will ensure that the bonds comply with the Green Standard and in particular that the projects and activities financed are part of the Taxonomy. The external auditors will be registered and supervised by ESMA (European Securities and Markets Authority) and will be subject to certain strict requirements for professional classification, transparency, and avoidance of conflicts of interest.
- Transparent: the standard follows best practices for transparency and external audit, promoting investment sustainability and investor protection. Issuers are required to provide detailed pre- and post-issuance reports that include the specific financing objectives, environmental impact, and clear allocation of funds spent.
Over the past few years, CEE countries have also decided to take advantage of the growing investor interest in green bonds and were able to raise fresh resources to finance climate and environmental projects. The Republic of Bulgaria could also benefit from this trend and finance green projects by issuing green bonds. The procedure for the preparation of the necessary documentation and the selection of the financial institutions-managers for the issuance is similar to that of previous Eurobond issuances. The green bond issuance programme should be approved by the Parliament and the amount should be within the debt envelope of the budget for the respective year. The procedure takes on average between 2-3 months.
CEE countries issued green bonds:
|Issuer||Currency||Issued denomination||Interest coupon||Date of issuance||Maturity date|
|Poland||EUR||1 000 000 000.00||1.125%||31.01.2018||07.08.2026|
|Poland||EUR||1 500 000 000.00||1.000%||28.02.2019||07.03.2029|
|Poland||EUR||500 000 000.00||2.000%||28.02.2019||08.03.2049|
|Hungary||EUR||1 500 000 000.00||1.750%||02.06.2020||05.06.2035|
|Serbia||EUR||1 000 000 000.00||1.000%||16.09.2021||23.09.2028|
Author: Martin Tarpanov – investment consultant and expert in long-term financial instruments with 15 years of experience in global markets