Debt securities

Green bond issuance is more profitable than ordinary debt securities

If fossil fuel companies switch to clean energy, they would have to issue green bonds to fund their projects, Sean Kidney, chief executive of the Climate Bonds Initiative, told Balkan Green Energy News. Such financial tools have yet to gain a foothold in the Western Balkans, where operators of state-owned coal plants face increasing pressure from the European Union to decarbonize. As Serbia prepares a legal framework for issuing sovereign green bonds, Kidney points out that it could get an interest rate up to 25 basis points lower than that of a regular bond.

Green or climate bonds are a fundraising tool for projects that mitigate climate change and its impact and introduce the principles of the circular economy. For example, emitters can invest in resource efficiency, waste management, preservation of biodiversity and water resources, and pollution control.

Sean Kidney, head of the Climate Bonds Initiative (CBI), an international organization that certifies climate bonds, said demand for these bonds is “much higher” than for conventional bonds, as a growing number of investors made a commitment that their activities would be environmentally sustainable. .

What are the stakes and the benefits for a government or business when issuing green bonds versus ordinary debt?

The challenge will always be to do something the market is comfortable with – when it comes to reporting, accountability and other matters. But they will get more investment. There are more people who would buy a green bond than a regular bond.

Is it because of the environmental objectives of investors, in the sense that they are obliged to invest in sustainable projects?

Absoutely. The over-subscription rate for green bonds is much higher. In March, Italy placed 8.5 billion euros in green bonds maturing in 2045 and they were 9.4 times oversubscribed. It was a lot for Italian sovereign bonds. And 65% of the package was bought by investors commissioned by the Greens.

In other words, they were all new investors, who otherwise wouldn’t buy ordinary Italian bonds.

There is a cheaper interest rate in Europe for those who can issue in dollars or euros, which are liquid currencies, because there is so much demand and because in the secondary markets green bonds keep their value. In a crisis, an ordinary bond loses value, although it usually bounces back eventually. But green bonds retain their value because investors are very confident in their ability to be able to trade them and earn good value for them.

In a crisis, an ordinary bond loses value, although it usually ends up bouncing back, but green bonds retain their value

When the Germans issue a green bond, they can get an interest rate two basis points lower than that of a regular bond. That doesn’t sound like much, but it can be a lot of money if the package is worth several billion dollars. The spread, the difference, can be much larger if the country has a lower credit rating, like Serbia.

We haven’t seen a lot of green bonds in emerging markets, especially low quality, which means high yield. It will be interesting to see. Serbia could get a rate 5 to 25 points lower than that of a vanilla bond, an ordinary bond. The country could enlist the support of the European Bank for Reconstruction and Development and other international financial institutions in the process.

Turkey’s Aydem Renewables recently sold a bundle of $ 750 million green bonds as part of a strategy to turn its wind and hydropower assets into hybrid power plants by adding photovoltaic capacity. But the demand was only 2.1 times higher.

The 2.1 oversubscription for the Turkish bond is actually excellent – given the market’s dislike of anything Turkish at the moment, thanks to the shifting monetary policy of the central bank.

What is the role of the Climate Bonds Initiative in the market?

The International Capital Market Association applies the principles of green bonds, guidelines for reporting and transparency. What it does not do are guidelines for what can be called green. And that’s what we’ve been doing for the past ten years. So we’ve developed some green criteria and definitions, if you will. And today, we are also working with governments to develop regulatory criteria.

In China, at the beginning of 2015, they introduced the regulation of green bonds as well as the definitions that we advised them. A year later, I was a member of a high level EU expert group that proposed a taxonomy, and now regulations are coming in on what you are allowed to call sustainable.

We also work with regulators and central banks, investors, banks and issuers around the world. We have a certification system, covering about 20% of the world market.

Does Serbia have to certify its green bonds with the CBI?

This could be a very good way to gain the confidence of investors across Europe as we are considered a gold standard. We review the obligation and assess the use of the product. We look at how they come up with what they would do with the money and make a comment, which will reach the market.

What is the difference between climate bonds and green bonds?

You will see the terms used interchangeably. But it depends on the country. In China, there are many pollution prevention obligations, which are not specifically about the climate, but they are all called green. In Europe, everything in the green market is about the climate.

The sustainable bond segment covers social bonds and green bonds, the proceeds of which are used in both areas. Now we’re also seeing blue bonds and resilience bonds, which are actually different flavors of the same ice cream, the same idea.

CBI has recently developed the tools that allow developers of hydropower projects to assess their performance when they wish to raise funds through green bonds. Small hydropower plants are a controversial issue in the Balkans as environmentalists and locals alike claim that some investors are diverting entire rivers into pipelines. What factor separates green and non-green projects from your organization’s perspective?

Most of the things we do as a society have an environmental impact, but at least we can protect large areas of the Earth. This is something we have to do. In areas where we have already damaged the landscape, there is plenty of room for priority investments.

We have to shut down fossil fuels very, very quickly, because they’re killing us as a species, and shifting to any kind of low-carbon energy. Hydroelectricity is the biggest source. It is still possible to do more, but not very much in Europe.

On the other hand, we have pumps and water towers all over our towns and they could be fitted with rotors to power streetlights all over the region. It’s not just the big dams.

Kidney: In places like Serbia, we don’t expect much from new hydropower plants, but we do hope that there will be improvements on existing hydropower plants.

We said in the criteria that dams must have very low emissions. For new hydropower plants, this is a maximum of 50 grams of carbon dioxide per kilowatt hour, which is equivalent to wind and solar power.

A large dam would not qualify because it floods large areas and methane is emitted when plants and trees rot. He would not qualify. But run-of-river dams keep rivers flowing, while briefly stopping the flow at certain stages, which is generally acceptable. Managing methane emissions is a crucial issue.

In southern Yunnan, China is preventing water from flowing into the Mekong River and impacting people in Southeast Asian countries. This is false and it would not be admissible. We need to increase hydropower, but we need tough rules on how to do it.

We hope that we can influence the hydropower sector to stop doing bad projects and focus on projects for the good. In places like Serbia, we don’t expect much from new hydropower plants, but we hope that there will be improvements on existing hydropower plants.

What if the issuer does not use the funds as required?

It is very rare that someone does not do what they said they would do. The market goes down very hard if they default in any way. Essentially, it becomes much more expensive to go into debt afterwards.

State-owned enterprises dominate the electricity sector in the Balkans, and coal holds a majority stake in most countries. Plans are underway to replace fossil fuel with solar power and other renewables and battery storage at old mining sites and thermal power plants that would be shut down. Would it be a good idea for companies or governments to finance projects with green bonds?

Yes! If fossil fuel companies are becoming clean energy companies, they should definitely be issuing green bonds. The Indian National Thermal Power Company (public sector coal) did it a few years ago in Europe, to get funds to install solar power plants. It was a huge success.


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