Africa’s first ever corporate green bond, which was issued earlier in 2019, has fuelled hopes of a new opportunity in emerging markets. But some observers are more cautious, citing Western risk aversion, illiquidity and a lack of guidance. Can these hurdles be overcome? Silvia Pavoni investigates.

Gregory Jobome says that convincing his boss on the merits of issuing a green bond was “very easy”. Just like Mr Jobome, who is in charge of risk management at Nigeria’s Access Bank, the chief executive, Herbert Wigwe, thought it would be a natural progression to their work in sustainability.

Tapping in on the Nigerian Green Bond Market Development Programme launched in 2018 was also a smart move, as Nigeria is one of a handful of sovereigns to have issued green bonds. It seemed like a natural move, says Mr Jobome. Access Bank went on to raise N15bn ($41m) in March 2019, in what became the first corporate green bond out of Africa, being certified as such by the not-for-profit organisation Climate Bonds Initiative. 

Dearth of interest?

Others in emerging markets, however, still find it hard not only to convince a bank's hierarchy but also to attract sufficient investor interest. In 2018, only 3% of total emerging market bonds were green and they were issued by very few markets. More than three-quarters of the $140bn emerging market green bonds issued between 2012 and 2018 were from China. India, Mexico and Brazil follow at a significant distance, according to data from Bloomberg, Environmental Finance and the Climate Bonds Initiative analysed by the World Bank’s International Finance Corporation (IFC).

Out of those emerging market green bond issuances, 57% were from financial institutions. Getting more banks to participate, it is argued, would create a virtuous cycle, directing local and international investor funds and ultimately providing financing to sustainable projects.

For example, the IFC has identified that the largest climate-related funding needs in emerging markets are in green buildings: a total of $24,700bn from 2019 to 2030, of which more than half are in eastern Asia-Pacific alone.

Financing green real estate – through a mortgage or another type of loan – is a good fit for the proceeds of green bonds. Furthermore, given the potential size of the green loan market, international investors are welcome and banks, as issuers accustomed to raising foreign currency funds, might better appeal to these investors.

The IFC’s chief investment officer, Jean-Marie Masse, says banks already tend to be active as issuers of dollar-denominated debt and “should be natural candidates [to issue green bonds] because they can have a supply of green loans”. Between 2014 and 2018, 291 financial institutions from 44 emerging markets issued $645bn-worth of cross-border bonds, or bonds issued in dollars or euros, and with a maturity of at least one year, according to IFC analysis of Bloomberg data. All of those financial institutions are potentially well placed to go green.

Obstacles to pass 

Several practical obstacles challenge his theory, however. “Access to green projects in emerging markets does happen through banks and banks have a crucial role to play in emerging market green bonds,” says Orith Azoulay, global head of green and sustainable finance at Natixis’s corporate and investment bank. “[But] the mass of green bond investors remains Western, it is very European. [And the investor] who really wants to go green does not really invest in emerging markets.”

It is not just exposure to emerging market risk; some investors are sceptical about green bonds in general, as the market is still illiquid. “It’s a bond with the same credit rating and the same interest rate, but [investors] have to live with less liquidity,” said Hiro Mizuno, chief investment officer at Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, in a July 2019 interview with the Financial Times. The GPIF, however, does encourage asset managers to consider environmental, social and governance factors in their investment decisions. Trevor Allen, head of sustainable research at BNP Paribas, agrees that a lack of liquidity is a big issue.

First-time green issuers may more naturally wish to raise local currency funds, which presents a challenge even for the most committed foreign investors. “If you look at green bond issuances in emerging markets, very often when first-time issuers come to the market, they try to find local investors,” says Carlo Oly, head of relationship management at the Luxembourg Stock Exchange, which has a segment dedicated to green bonds. “So purely from a technical perspective, it is quite challenging for international investors to [access] the local currency. You need to be accepted in the [local] clearing system.”

Although challenges in dealing with local currency issuances remain, concerns around pricing and liquidity may soon ease off as more investors look at green assets and issuers come back to the market, helping to familiarise investors with them and boosting volumes as well as liquidity. Qian Li, head of financial institutions at ICBC's Luxembourg branch, says: “[Green] investors are not big hedge funds, they are not there to make a big profit... So there’s a possibility as an issuer that you can tighten up [the price].” Among its existing green notes, ICBC also issued a $2.2bn bond in 2019, denominated in renminbi, dollars and euros linked to Belt and Road Initiative green projects.

PRI obligations

Peter Munro, director, market practices and regulatory policy, at the International Capital Market Association (ICMA), is also hopeful. He notes that increasing numbers of investors are signing up to the UN Principles for Responsible Investment (PRI), which now includes 2800 signatories between asset owners (such as pension funds) and asset managers that manage $106,400bn in assets, from the 100 attracted at launch in 2006.

Mr Munro adds that emerging market issuers should see the supply problem as advantageous. There is “huge demand there but supply is limited,” he says, which is “a great opportunity for emerging market [issuers] who can offer green character to diversify their investor base.” Buying green bonds would help fulfil investors’ PRI commitments too.

On one hand, investors need to be rewarded or protected from higher emerging market risks; on the other, emerging market banks need to prepare green frameworks that will govern their debt obligations and raise sufficient interest from both local and international markets.

Ms Azoulay at Natixis says multilateral development banks have a role to play here, and are doing so. For example, the private sector arm of the Inter-American Development Bank, IDB Invest, has been assisting banks in Latin America and the Caribbean with green and social bond issuances. The European Bank for Reconstruction and Development announced plans in December 2018 to directly invest €250m in, and mobilise €1bn in private sector capital towards, green and sustainability bonds issued by financial institutions in the countries where it operates.

IFC assistance

Meanwhile, on a global scale, the IFC has partnered with Amundi Asset Management to create a $2bn emerging market green bond fund that focuses on financial institutions. From an investor point of view, the fund allays concerns over emerging market risk by providing a first-loss absorption of up to 10%, covered by the IFC, so that investments’ “senior tranche has essentially a risk exposure of BBB+", says Maxim Vydrine, deputy head of emerging markets debt management at Amundi. “It allows [investors] to invest in a diversified pool of bonds in emerging markets and still have an investment grade-equivalent exposure,” he adds.

At the same time, the IFC offers potential issuers a green bond technical assistance programme, which prepares banks through training, advice on reporting and sharing information. The programme is funded by the Swiss State Secretariat for Economic Affairs, the Swedish International Development Co-operation Agency and the Luxembourg Ministry of Finance. 

Launched in March 2018, Amundi’s fund is “gradually greening over time”, says Mr Vydrine. “At the moment we’re 19.3%; we need to get to 100% by year seven”, he adds, which is when all capital should be invested in emerging market financial institutions’ green paper. Currently, only a small fraction of the $1.42bn the fund has already raised is invested in the target bonds, with larger volumes invested in emerging market sovereigns and general purpose financial institutions notes. This highlights the challenges in finding suitable green issuances. 

Getting ready for a green issuance is a costly and complex task. To begin with, it requires the creation of an internal green framework, to govern the bank’s lending activity, and the establishment of appropriate and transparent reporting. The resulting bond would need to comply with national rules on green issuances, when available. Meeting additional international standards would be a bonus.

A lack of guidelines

Few emerging markets have national guidelines on what is green, and not all are mandatory. Of the 13 emerging market frameworks analysed by the IFC and the Climate Bonds Initiative on behalf of the Sustainable Banking Network, there are rules and official guidelines by the Association of South-east Asian Nations’ Capital Market Forum at a regional level and nationally in China, India, Indonesia, Malaysia, Nigeria and Morocco. South Africa, Kenya, Mexico, Peru and Chile have listing requirements, while green bonds are based on a voluntary private sector framework in Brazil.

All of these align with international standards including the ICMA’s green bond principles and the Climate Bonds Initiative’s climate bonds standard and certification. But many emerging markets have no guidelines, whether mandatory or industry-based.

There is also a lack of internationally recognised taxonomy that classifies what makes an asset green, although there are efforts towards harmonisation in Europe and China. And there are bank-specific challenges to overcome as the taxonomy needs to be able to identify which parts of the existing loan portfolio are green, to create a destination for proceeds more readily.

In the case of Access Bank, the Nigerian institution’s green bond was mostly used to refinance existing green loans, which were easy to tag. “We’ve been doing sustainability for a decade,” says Mr Jobome. But at Bank of Georgia, head of treasury Kakhaber Davitaia says being able to identify those existing green loans would be a big undertaking. The biggest challenge, however, may still be elsewhere. “I am sure that we can find some green projects in our portfolios,” says Mr Davitaia, “[but] I have to persuade management first. When someone [initially] said to me that we should issue a green bond, I didn’t understand it either.”

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