Spotlight 5.1 Greening capital markets: Sovereign sustainable bonds
T
he economic stress arising from the COVID-19 (coronavirus) pandemic propelled expansion of sovereign sustainable bond issuances. The Climate Bonds Initiative (CBI) reports that the number of sovereign green, social, and sustainable bonds more than doubled in 2020. By the end of the year, sovereign green bonds amounted to $41 billion, or a 65 percent increase over 2019. That trend continued into 2021, with Italy raising approximately $10 billion in Europe’s largest green bond debut to date. Other advanced and emerging markets also intend to issue sovereign green bonds.1
Sustainable bonds are defined as bonds for which proceeds are used to finance or refinance green, blue, or social projects. A green bond is a debt security issued to raise capital specifically to support climate-related environmental projects.2 Voluntary best practice guidelines for sustainable bond issuances—the Green Bond Principles (GBP)—were established in 2014 by a consortium of investment banks.3 Sustainable bonds align with the four core components of the GBP. The current monitoring and development of the GBP guidelines are managed by the International Capital Market Association (ICMA).4 As of January 2022, there were no universally agreed-on definitions of green, social, or sustainable bonds, and the GBP do not provide details on what qualifies as such bonds—those definitions are largely left up to the issuers. The World Bank and International Finance Corporation (IFC) use their
own criteria and definitions for eligible green and social projects. In turn, the CBI provides separate categories of sector-specific green definitions and criteria.5 To ensure the transparency and accuracy of information disclosed by issuers to stakeholders, the GBP recommends pre- and post-issuance external reviews. For any proposed thematic bond, an issuer should appoint external review providers to assess the alignment of its bond or bond framework with the core components of the GBP. After issuance, the GBP recommends that an issuer’s management of proceeds be reviewed by an external auditor to verify the allocation of funds from green bond proceeds to eligible projects.6 Despite significant growth in recent years, sovereign green, social, and sustainable bonds account for only 0.5 percent of the sovereign bonds market.7 The first green bonds were issued
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