Moody’s expects sovereign green bond issuance to accelerate

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A sign for Moody's rating agency is displayed at the company headquarters in New York, September 18, 2012. — AFP

By Cathy Rose A. Garcia, Associate Editor

Sovereign green bond issuance is seen to pick up pace, as governments promote sustainable policy agendas and encourage the flow of capital into low-carbon and climate-resilient infrastructure, according to a report by Moody’s Investors Service.

“A diverse deployment of green bond proceeds will attract investors, but sovereigns face challenges in terms of their ability to provide granular impact reporting and effective proceeds management,” Moody’s said in a July 9 report, “Green Bonds – Sovereign.”

“Ultimately, the scaling up of sovereign green finance will require sustained political support.”

Seven sovereigns have so far sold green bonds totaling $25.5 billion, raising funds for climate mitigation programs.

The government of Poland unveiled the first sovereign green bond issue in December 2016, followed by France, Fiji, Nigeria, Belgium and Lithuania. The Indonesian government issued the first sovereign green sukuk earlier this year.

“We expect the pace of sovereign green bond issuance to accelerate over the coming years,” Moody’s said. “Firstly, green bond issuance provides a strong signal of a government’s commitment to its climate and environmental policy agenda and, in particular, how it intends to raise capital to implement its Paris Agreement commitments.”

It noted sovereign green bond issuance also allows governments to channel private sector capital into green and sustainable investments.

“Public financing will be also critical in enhancing an economy’s climate resilience, given that governments (both at a national and sub-national level) are typically the first line of defense in dealing with the aftermath of extreme weather events and/or natural disaster,” Moody’s said. “Other sovereigns, particularly in emerging markets, may also look to green bonds as an attractive means to finance large-scale climate adaptation and resilience investments.”

Moody’s also said the deployment of sovereign green bond proceeds to a diverse array of projects will support investor demand. This is in contrast to the broader green bond market, where funds are mostly used for energy-related projects.

“Sovereigns tend to spend a higher proportion of proceeds on clean transportation, waste management, land use, and climate adaptation projects, compared to the broader market which predominantly funds energy-related projects,” it said. “This trend will support market growth and maturity as it allows green investors to diversify exposure and non-sovereign issuers to consider financing a broader suite of projects.”

However, Moody’s noted that consistent impact reporting is a challenge as sovereigns tend to allocate proceeds to intangible spending.

“The challenge of impact reporting on a more diverse set of project types is reflected in the wide variety of impact metrics cited in sovereign green bond frameworks, limiting the ability to compare or aggregate the environment benefits derived from green bonds,” it said.

Moody’s said sovereign issuers are taking steps to manage the proceeds from green bonds, despite complexities of public finances.

“The intricacies of central government financing, such as intergovernmental fiscal transfers, make it difficult to ensure effective segregation and tracking of green bond proceeds and raise potential double counting issues,” it said. “Nevertheless, sovereign issuers are addressing the challenge of proceeds management in a variety of ways. Some governments have ring-fenced proceeds into dedicated green bond accounts.”

There are no plans for the Philippine government to issue green bonds.

Last month, the International Finance Corporation (IFC) issued $90 million worth of peso-denominated green bonds called the “Mabuhay Bond.”

“IFC will use the proceeds of the bond to finance the Energy Development Corporation’s (EDC) capital expenditure program, which is focused on optimizing the generation output of its geothermal power plants and improving resiliency to climate impacts,” the statement read.

EDC and its subsidiaries own and operate a diversified portfolio of renewable energy projects in the Philippines with a total installed capacity of 1,472 megawatts, including geothermal, hydro, wind, and solar projects as of end-2017.