When Fiji, the tiny South Pacific island-nation, launched the first-ever emerging market sovereign green bond late last year, it was partly a symbolic move ahead of its role as president of the United Nations Climate Change Conference.
Fijian Prime Minister Frank Bainimarama declared the country was "[setting] an example to other climate-vulnerable nations."
But while meant as a paradigm, investors heavily oversubscribed to the roughly US$50 million bond "to support climate change mitigation and adaption" on the island, including meeting renewable energy and emissions reduction targets. Fiji is now working to launch a second green bond.
"They were surprised to find that the bond was incredibly successful," Sean Kidney, CEO of Climate Bonds Initiative, a not-for-profit organization focused on bond market funding for climate change solutions, said of the issuance.
Other emerging-market countries have taken notice. Nigeria launched a green bond at the end of 2017 worth US$29.72 million, while Indonesia and Lithuania followed in 2018 with issuances totaling US$1.25 billion and US$23.9 million, respectively. All three bonds were oversubscribed.
Those offerings add to far larger issuances from developed nations like France, which has completed five sovereign green bond issues worth a combined US$16.74 billion, and Belgium, which launched its first sovereign green bond in March worth US$5.55 billion.
All told, there are now seven countries with sovereign green bond issuances under their belts — compared to just two a year ago — and more preparing to join them.
Rapid growth, courtesy of Paris
At US$14.07 billion, the amount of sovereign green bonds issued so far in 2018 has outstripped that for the whole of 2017. While still a fraction of the more-than US$400 billion green bond market overall, the growth could mark the start of a rapidly accelerating trend, experts say, as an increasing number of countries turn to such debt as a source of funding.
According to Climate Bonds Initiative, there are about 15 countries preparing for sovereign green bond offerings. These include both developed countries, like the U.K. and Sweden, and developing countries, like Morocco, Kenya and Argentina.
In Hong Kong, meanwhile, the government announced plans to launch the world's largest sovereign green bond program, worth some US$12.8 billion, as part of its 2018-2019 budget.
Experts say that there are several factors behind the broadening popularity of sovereign green bonds, though they note a major one is the United Nations-backed Paris Agreement on Climate Change, which came into force in November 2016 and establishes targets for the nearly 200 countries participating.
"Under the Paris Agreement, countries are obligated to meet their commitments ... and green bonds are of a nice way to do that," said Trisha Taneja, product manager of sustainable finance solutions at Sustainalytics, which has provided the green-bond label for several sovereign issuances, including those from Poland and Belgium.
Making a market
The green bond market itself had a bumper year in 2017, with issuances jumping about 83% to a record US$160 billion. While the bulk of the funds raised came in the form of financial institution, corporate and asset-backed security issuances — accounting for about 55% of the total — sovereign bonds emerged from near-obscurity to almost 7% of the total last year and are tracking at about 15% for 2018.
In some circumstances, the sovereigns have taken the lead from local governments and government-related institutions that have launched successful placements. In Lithuania, for instance, the government announced plans to issue its US$23.92 million sovereign green bond to renovate apartment buildings months after state-controlled energy company Lietuvos Energija had successfully placed its first green bond worth US$342.27 million.
Overall, local government issuances last year was US$13.84 billion, nearly double the amount raised in 2016, while green bonds from government-backed entities jumped nearly 60% year over year to US$23.96 billion.
"That is… providing some sovereigns with the comfort that financial markets are open to sovereign green finance," said Tallat Hussain, an environmental lawyer whose firm, White & Case, advised on the first ever sovereign green bond in 2016 for Poland.
In other countries, it is the sovereign that helps to create or expand a local market for other issuers. Climate Bonds Initiative CEO Sean Kidney pointed to Nigeria, where he said interest for green bonds has gained traction at the state level and within the financial sector following the sovereign issuance.
"It took the Nigerian government [issuing] the sovereign for the market to get started," Kidney said. "And that's what's so important about sovereign green bonds: they help kick-start markets."
Major bond programs, such as the one planned in Hong Kong, "can also help establish a market pricing for green bonds that then allows corporate issuers and banks to enter the market." he added.
"Of course, the bonds from richer countries are much bigger because they tend to have developed bond markets and the capacity to do a big bond, but ... we see more developing countries wanting to issue green bonds," he said.
Many emerging economies also are facing capital flight issues. Global investor sentiment has deteriorated amid currency and inflationary crises in both Argentina and Turkey, for example, further compounding ongoing deleveraging efforts as the U.S. gradually hikes interest rate and China combats a funding crunch. Funds raised from green bonds could help make up for some of that lost capital.
Emerging-market countries "are working hard to try and attract money for the investments they need to make, and the green theme is a very good marketing device if you've got to attract investors," Kidney noted.
The pool of investors willing to invest in green products also has increased sharply. More than US$22 trillion in global assets are now invested in a sustainable way, representing about a quarter of all funds under professional management, according to a Morgan Stanley report published in June.
But the market remains comparably small for investors, and issuances are still few and far between.
Sustainalytics' Taneja attributed this partly to red tape within the sovereigns, requiring often time-consuming coordination among multiple government departments and the identification of green assets that meet international standards.
"I know a lot of sovereign issuers have taken months to prepare for the issue, or even longer," Taneja said.
Efforts to improve on that are underway. A number of countries are developing green financing frameworks that establish best practices for green bond issuances, while others are working to harmonize existing regional and national standards. This should speed up the process and "make it clearer to investors what the rules are," Climate Bonds' Kidney said, in turn enabling more sovereigns to go to market.
"It's a matter of when they bring them out and how long it takes them — not if," Kidney said. "So we're optimistic about the growth."