Green Bond Rush Set to Spill Into Emerging Markets

Emerging markets are seeking to issue their first nature-linked bonds in a push to render their debt more sustainable, with proposals between the World Bank and other national creditors linking new debt to biodiversity and carbon emissions goals. Recent forecasts suggest that the market could reach as much as $500 billion this year.

Trends toward greening sovereign debt have picked up momentum in recent months as governments ramp up their climate efforts to meet the goals of the Paris Agreement and ensure a sustainable recovery from the pandemic. So far, the US, China, UK and Germany have all taken steps to address these challenges, with Pakistan set to be the first emerging market player to follow suit.

Malik Amin Aslam, a climate-change advisor to Prime Minister Imran Khan, told Bloomberg that the country has plans to issue a new ‘nature-performance’ bond of up to $1 billion this year. The investment will work towards increasing the country’s green energy usage and planting 10 billion trees by 2023.

“It’s a win-win for us, because it’s helping us do what we wanted to do but at the same time creating a novel instrument to finance that whole process”, Aslam said in an interview.

While initial issuance of green bonds was largely limited to supranational institutions, there has been a surge in their popularity among not only sovereign governments but also the private sector. Increased pressure to improve companies’ ESG rankings, together with their tax breaks and low interest rates, make them an increasingly attractive route for companies to raise capital.

In January, PJSC Sovcombank became the first Russian issuer to place social eurobonds, with the placement valued at $300 million. The four-year eurobonds were mainly purchased by investors from continental Europe, Russia and the United Kingdom, with demand peaking at $900 million.

Yet with all their virtue signalling, should we be sceptical of companies’ ability to achieve such lofty targets?

According to research carried out by the Bank for International Settlements, the answer might be yes. The study revealed not only that companies issuing the most green bonds tended to be among the lowest carbon emitters in the first place, but also that there was no statistically significant correlation between a company’s green bond issuance and their decarbonisation.

There are efforts to mitigate this concern. For instance, the aforementioned Sovcombank is open to providing funding to challenging industries, provided they outline in their development strategy their goals and processes to reduce that negative impact. For companies not focused on reversing their negative environmental impacts, the bank gradually reduces the amount of funding. Their logic is that if they refuse to lend to challenging industries, full stop, the borrower may turn to another bank that doesn’t impose any environmental and sustainability terms.

The vagueness of the term “green bond” also makes it hard to define what exactly should fall under its bracket. While most people would have no trouble in classifying solar and wind as green projects, there would be a far less clear-cut response about nuclear ventures. Chinese issuance of green bonds to fund ‘clean coal’ projects attracted widespread criticism, for example, ultimately forcing the government to exclude fossil fuels from their green bonds taxonomy.

Governments are subsequently facing increased pressure to address these challenges and to create a common set of rules to verify an investment’s “greenness”. French Finance Minister Bruno LeMaire urged Europe and the U.S. just last week to agree on a common regulatory framework following his talks with U.S. President Joe Biden’s climate envoy, John Kerry. As it stands, however, it will likely be a long road ahead until this legislature comes to fruition.

In any case, it seems climate bonds are set for a bumper year ahead and emerging markets are along for the ride. According to a survey carried out by BNY Mellon, 76% of global public investors identified green bonds as their favoured asset class out of all sustainable investments, while 45% said they plan on increasing their holdings in the near future.