From little drops to groundswell, emerging markets bonds on the path to sustainable finance
The global issuance of green bonds is expected to soar to USD 300 billion in 2020 according to Moody’s market intelligence estimate, while the Climate Bonds Initiative (CBI) posts a more ambitious figure of USD 350 billion. These projections are driven, among other things, by the tailwinds of the impressive performance that was recorded globally in 2019 when total issuances amounted to USD 257.7 billion – a remarkable rise of 51% above the figures posted in 2018. Europe alone accounted for 45% of overall issuance, followed by Asia-Pacific – 25% and North America 23%. As in other years, 2019 remained dominated by the outing of issuers in developed countries who made up 13 out of the top 15 countries (in terms of the volumes of issuances), the other two being China and the United Arab Emirates. Although emerging markets are considerably lagging in the green finance market, especially when assessed against the volumes of issuances in developed markets, this market segment seems promising. In 2019 new players from emerging economies including Kenya, Saudi Arabia, Ecuador, and Barbados entered the local markets and there were even repeat sovereign issuances by Chile, Indonesia and Nigeria.
Governments and businesses in these economies are awakening to the reality that green bonds and loans, and indeed sustainable finance in general become indispensable instruments in catalyzing economic growth and development as the battle against climate change gains momentum and the SDGs push forward. Besides this, there are more and more announcements of institutional investors divesting away from carbon-intensive economic sectors in favor of green alternatives. Prominent multilateral development banks (MDBs) like World Bank and EIB have also issued statements announcing the end of funding for fossil-fuel projects with stringent exceptions in few cases. This raises critical budgetary concerns for some of those economies that are highly dependent on fossil resource rent and also on periodic funding from MDBs.
Observing this trend from a climate and sustainability perspective is crucial for several reasons. Emerging markets will be most impacted by climate change both in terms of their vulnerability to extreme weather events and the level of investments needed to fund adaptation and mitigation initiatives. For many of these countries, the marginal abatement cost per ton of CO2, is much lower than in developed economies. They hold the greatest potential for population increase and economic growth, and they would see the most rise in greenfield projects, especially infrastructural projects that have the highest risk of CO2 lock-in, but equally guarantee the availability of basic services (SDGs). This is why sustainability and green finance can become a powerful tool to support the climate objectives of emerging economies.
A glimpse into the experience of some green bond issuers in emerging markets presents an outlook of optimism. Nigeria returned to the market in 2019 with its Series II green bond issuance of USD 30 million issuance after its 2017 debut, giving boost to the government’s commitment to unconditionally caught CO2 emissions by 20% by 2030. The first private sector Certified Climate Bond in Africa also came from Nigeria, where Access Bank will be splitting the proceeds for mitigation and adaptation projects, namely; solar energy generation facilities and coastal flood defenses. Elsewhere, we even find higher deal volumes such as the first green Islamic bond of USD 600 million, issued by Majid Al Futtaim, a UAE-based project developer after it had developed its green bond framework targeting renewable energy and energy efficiency projects. The duo of Chile’s USD 1.42 billion sovereign green bonds issued in mid-June 2019 and the EUR861 million that followed it in the same month initiated Latin America into the league of green bonds issuers
SDGs, a crucial entry point to enable emerging countries tap sustainable finance
Ten years away from delivering on the 2030 Agenda, the greatest SDG gaps still remain in emerging countries, where massive investments are seriously needed.
Some issuers in these countries are now turning to the market with innovative sustainability bonds frameworks like Ecuador, which issued in January the first sovereign social bond, a USD 400 million bond aimed at affordable and sustainable housing, and lastly the SDG sovereign bond framework recently released by the government of Mexico (see dedicated article in this March newsletter, section “Deals”). Thanks to its SDG framework, Mexico will be able to enhance transparency of its budgetary process (that embeds SDG tagging/mapping of the expenses), preserve or boost the volume of resources earmarked to projects or programs that effectively contribute to closing SDGs gaps. Benefiting from an independent Opinion from the UNDP, this Framework is based on a two-fold eligibility that includes a geospatial criterion.
Promising as these examples are, most of these countries still face major hurdles that impede their ability to adequately tap into this product category. A fundamental problem, particularly for domestic issuances in Africa, is that the capital markets lack enough liquidity owing to their relatively small size and structure. This problem is further amplified by the fact that many of these markets still lack adequate regulatory architecture and standards such as the EU Taxonomy or EU Green Bond Standard being developed in Europe to establish the needed common language, provide issuers with safeguards, governance & guidelines and boost investors’ confidence, and all in all minimize the risks of greenwashing. Additionally, there is often a deficit of reliable sustainability data, and relevant indicators (output, outcome, or worse impact indicators), not to mention challenging budgeting processes.
In order to tackle these barriers and facilitate the development of sustainable finance products in these countries, all stakeholders must be ready to actively play their roles. Governments need to rise up to the challenge of enhancing their capacities to build robust frameworks. Adapting the model public-private partnership to the design of products will prove useful, as demonstrated by the successful launch of Amundi Planet Emerging Green One (AP EGO) fund 2 years ago. The rationale behind this initiative, which was co-developed with the IFC, is to provide risk cushion in the form of subordinated tranches to investors in AP EGO. Investors, including those without previous experience in emerging market debt, were able to commit to the senior tranche. Another beneficial element of the AP EGO fund is the provision of technical assistance. The IFC supports it with a Green Bond Technical Assistance Program dedicated to green bond issuances and disseminating of knowledge and best practices.
Intergovernmental collaboration between countries can also fast-track the growth of sustainable finance market in emerging economies. The EU, for example, has started working with emerging countries to support knowledge dissemination and promote best practices in sustainable finance. This is the aim of the international Platform on Sustainable Finance (IPSF) launched on October 2019 by the EU, Canada, China, India, Kenya, Argentina, Morocco and Chile. One of the missions of the IPSF is to compare the different initiatives and identify barriers and opportunities to help scale up environmentally sustainable finance internationally.
The transition clock is ticking, every region including emerging markets are needed on board if the world is to succeed in the fight against climate change and achieve the 2030 Agenda.
 Worldwide investment needs to achieve the SDGs have been assessed by the UNEP-Fi (2018, Rethinking impact to finance the SDGs) and stand at $6tn per year on average. Of this amount, advanced countries represent $1.5 per year while emerging markets and developing countries represent $4.5tn