GORDON GECKO, the protagonist in the 1987 movie Wall Street, was made famous for uttering the line “Greed is good.”
Nearly 40 years after, the phrase, which defined a decade of excess and opulence, has become taboo. These days, green is good. And what a world of difference a letter makes.
While green is good, it costs to go green. Being conscientious of the triple bottom line—planet, people, profit—has a cost. In short, efforts to become sustainable and inclusive have price tags that few developing countries could afford.
This is where sustainability bonds come into focus. In such a short time, it has come to be known to generate the needed funds to allow Mother Nature to heal itself. It also paves the way for addressing inequalities wrought by decades of being greedy and profit- hungry.
“Sustainable bonds is more like a very general type [of instrument] to define fixed income, securities that can deliver positive environmental and social benefits,” Senior Economist on Economic Research and Development Impact Shu Tian of the Asian Development Bank’s (ADB) Macroeconomics Research Division Department told the BusinessMirror in an interview.
Bonds by definition
AS an umbrella of bonds, sustainability bonds are issued to respond specifically to social needs such as education and health, as well as green bonds that respond to environmental needs.
In an email to this newspaper, World Bank Treasury Sustainable Finance and ESG Advisory Program Head Farah Imrana Hussain and Financial Officer Abhishek Joseph said sustainability bonds support a combination of green and social projects and activities.
Hussain and Joseph said issuances of sustainability bonds are governed by Principles set out by the Zurich-based International Capital Markets Association (ICMA).
ICMA, based on its website, has over 600 members active in all segments of international debt capital markets in 66 jurisdictions globally. In the Philippines, ICMA member institutions are the ADB, the Bangko Sentral ng Pilipinas (BSP), and the Bureau of the Treasury.
In general, ICMA members are private and public sector issuers, banks and securities dealers, asset and fund managers, insurance companies, law firms, capital market infrastructure providers and central banks.
“These Principles have a stated mission and vision of promoting the role that global debt capital markets can play in financing progress towards environmental and social sustainability. These principles are updated periodically, in consultation with external stakeholders,” Hussain and Joseph said in an email to the BusinessMirror.
Green bonds subscribe to the Green Bond Principle (GBP) which was crafted by a number of banks in 2014. A report by the World Bank noted that ICMA serves as GBP’s Secretariat. There are several categories of green bonds in existence.
The World Bank report on green bonds identified these as bonds for renewable energy; energy efficiency (including efficient buildings); sustainable waste management; sustainable land use (including sustainable forestry and agriculture); and biodiversity conservation.
The list provided by the Washington-based lender includes clean transportation; sustainable water management (including clean and/or drinking water); and climate change adaptation. Bonds that aim to finance ocean and marine conservation are dubbed Blue bonds.
“Investors in green bonds expect information from issuers in sufficient detail to allow them to assess green bond offers, such as how issuers track and use green bond proceeds and how they report the positive impacts expected from green projects,” the report stated.
Social bonds, meanwhile, are aligned to ICMA’s Social Bonds Principle (SBP). Hussain and Joseph said the proceeds of these bonds are directed specifically towards projects and activities that have a positive social impact.
Some examples of these bonds are gender bonds. In May, United Nations Women estimated that it would take centuries to meet Sustainable Development Goal (SDG) 5, which aims to achieve gender equality and empowerment of all women and girls. Gender bonds can be used to specifically address these SDG needs.
The World Bank said the thematic bond market has expanded to include sustainability-linked bonds which do not earmark proceeds for specific projects or expenditures. Instead, issuers commit “to meeting predefined key performance indicators within a timeline for defined sustainability policies and actions.”
These indicators, the Washington-based lender stated, must be “verifiable and ambitious.” If the indicators are not met, the borrower is expected to increase its coupon payment to investors.
“In the case of use-of-proceeds bonds, the issuer discloses the types of projects that will be financed and the processes established to identify eligible assets and expenditures, tracks the allocation of bond proceeds, and reports the allocation of bond proceeds to eligible projects and the environmental impact of the projects supported,” stated the World Bank report released in October 2022.
Dollar signs
GLOBALLY, the World Bank said as of 31 June 2023, the cumulative amount of sustainability and social bonds issued in the market reached $750 billion and $650 billion, respectively. These bonds have been issued by public, private and international financial institutions, including the World Bank.
Hussain and Joseph said the data and details on the bonds and the purposes of the bonds are derived from various sources. They said Bloomberg and Dealogic are two of the data providers that track information on the number, amounts, and use of proceeds of these bonds.
“In early 2022, the Philippines issued its inaugural sustainability bonds link under its Sustainable Finance Framework link. It has subsequently raised follow-on issuances in the market,” Hussain and Joseph said.
Based on the latest Asia Bond Monitor, ADB said Sustainable bonds in the Association of Southeast Asian Nations (Asean) Plus 3 region, which includes 10 Asean countries, China, Korea and Japan, sustainable bonds outstanding reached $694.4 billion at the end of June 2023.
The report said sustainable bonds in the region grew 31.5 percent year-on-year and 5.1 percent quarter-on-quarter in the second quarter of 2023. ADB said the quarterly expansion was in line with the growth in the global sustainable bond market at 5.5 percent q-o-q during the same period. This brought the total global sustainable bonds outstanding to $3.6 trillion at the end of June.
Tian said there are 3,812 outstanding sustainable bonds in the Asean+3 region as of the end of the second quarter of 2023. This covered green bonds, social bonds, sustainability-linked, and transition bonds.
“It really started to explode in 2020. Of course it is on the trend of climbing,” Tian said. “[2020 marked the year] when there was greater awareness of these social and environmental issues. Especially for social, we saw an explosion of social bonds in 2020. I think during the pandemic, there was a lot of concerns about how to secure the social safety nets, how to support the vulnerable.”
Tian said in the Philippines, there are 26 sustainable bonds which amount to roughly $8.5 billion. This includes 12 green bonds for environment projects; 1 social bond for social issues such as gender; and 13 sustainability bonds, whose proceeds may be used for social and/or environmental projects.
In March 2022, the Philippines tapped the international capital markets for the first time with its offering of $2.25-billion triple tranche: 5-year, 10.5-year and 25-year Global Bonds.
The new 5-year Global Bonds were priced at US Treasury spreads of T+ 90 basis points (bps) with a coupon of 3.229 percent, after an initial price guidance of T+ 125 bps area; while the new 10.5-year Global Bonds were priced at T+ 125 bps and a coupon of 3.556 percent, after an initial price guidance of T+ 165 bps area. Further, the new 25-year Global Bonds were priced at 4.2 percent, which is 50 bps tighter than initial price guidance of 4.7 percent area.
The Department of Finance (DOF) statement noted that the 25-year Global Bonds were issued under the country’s Sustainable Finance Framework and marks the Philippines’s debut ESG Global Bonds offering. The transaction also marks the first triple tranche US dollar offering from the country.
Small players
In an interview with the BusinessMirror, Bangko Sentral ng Pilipinas (BSP) Assistant Governor Lyn Javier said sustainability bonds help diversify the risks in the financial system.
Javier said the issuance of these bonds also helps promote efforts to match long-term funding sources with long-term capital uses as well as facilitate funding for the country’s priority sectors.
She said the BSP encourages capital market development such as through the issuance of these bonds, among other efforts. This has allowed major banks to increase their participation in the ESG financing space through the creation of innovative products.
These innovations include the issuance of social bonds at the height of the pandemic to finance the needs of micro, small, and medium enterprises (MSMEs) and a recent issuance of blue bonds.
Even small financing institutions are also able to participate in the ESG financing space. Last July, ASA Philippines Foundation Inc. (ASA), the country’s leading microfinance non-government organization, issued P5 billion worth of gender bonds, the first in the Philippines.
The issuance is a 5-year fixed rate corporate note that intends to be used as working capital to its lending to women, their principal borrowers, to empower them and achieve financial inclusion for vulnerable and indigent women in the Philippines.
The classification was certified by social bond second-party opinion provider DNV (made possible through the technical assistance provided by the Asian Development Bank) and registered with the Securities and Exchange Commission (SEC).
“This means that smaller financial institutions could also tap the capital market to fund and prioritize projects pursuing the sustainability agenda. This would open doors now for smaller institutions like the micro, small and medium enterprises to tap the domestic capital market to fund transition projects or activities to promote adaptation as well in their adaptation and resilience in their operations. So this actually opens a lot of opportunities for the different stakeholders to have the financing needed in their transition plans,” Javier explained.
These efforts even from small players can contribute significantly to the country’s needs to undertake projects such as those that can help adapt to and mitigate climate-change impacts. Javier said in order to meet the country’s climate goals, the Philippines needs $168 billion, so that’s from 2020 to 2030.
Javier said developing countries in general would need $340 billion annually by 2030 and up to $565 billion by 2050 for adaptation efforts, while mitigation efforts would reach $850 annually by 2030.
In order to encourage banks and other financial institutions to issue more of these sustainable bonds, Javier said the BSP has exposed for comments the regulatory incentives that they are proving to promote sustainable finance.
These incentives, she said, include increasing the single borrower’s limit by 15 percent—for a very limited time period—to promote investments in sustainability products and infrastructure projects.
Javier also noted that the BSP is proposing to gradually reduce the reserve requirement for bonds to zero percent in its bid to encourage banks to issue sustainability bonds. Key to this is to also encourage banks to create products that will finance transitional activities for MSMEs.
She said these transition activities may not necessarily be green activities but are crucial in the overall effort to achieve net zero.
“We have to have financial products for the vulnerable sector to assist them also in the transition. And we have to also relay these views also to the region as well as into the international market,” Javier said.
Green washing
Tian said that while ADB does not have data on the impact of these bonds on a per-project or bond basis, there are mechanisms put in place to ensure that these bonds achieve their intended outcomes.
She said there are mechanisms put in place such as third-party certification available to check these bonds. The ADB senior economist also said in the case of green bonds, some of them are used to finance physical assets.
These include renewable energy through solar panels and wind turbines as well as green transport in the form of electric vehicles, so the public can physically see the impact of these bonds. In fact, Tian said, these kinds of third-party mechanisms can help add value to these kinds of bonds because they can easily be verified.
“I will just say in the market there is also a certification or a third-party opinion to ensure that your proceeds or your investment is made on the promised area so that it can deliver the targeted impacts, although we don’t have direct data for how much impact each bond generates, but I do believe that they are contributing to both environmental and social projects or investments,” Tian said.
Locally, Javier said the financial sector forum (FSF) developed the local sustainable finance taxonomy guidelines, which cover climate-change mitigation and adaptation objectives.
The FSF is a voluntary interagency body composed of the BSP, SEC, Insurance Commission (IC), and the Philippine Deposit Insurance Corporation (PDIC). It provides an institutionalized framework for consultation, coordination and exchange of information relative to the supervision and regulation of the financial system, while preserving each agency’s mandate.
BSP said the local taxonomy will serve as a tool to assess whether an economic activity is environmentally or socially sustainable.
MSMEs in focus
The document has also given particular focus to MSMEs in line with the thrust to promote inclusive green finance. The comment period for the guidelines ended last week.
“We have to ensure that the micro, small and medium enterprises are supported in the process. We don’t want indiscriminately adoption of the sustainability agenda leaving behind the micro, small medium enterprise,” Javier said.
In BSP’s first sustainability report, it featured the central bank’s participation in national and international conversations on sustainable finance, as well as its initiatives in the pipeline and future plans in pursuing the sustainability agenda.
These include the development of a taxonomy, grant of regulatory incentives to promote financing to sustainable projects and investments, and enhancements to stress testing guidelines, prudential reports, and disclosure requirements.
The BSP will also build up initiatives promoting inclusive green finance as it recognizes the benefits to vulnerable sectors such as the micro, small and medium enterprises in line with the interrelated objectives of promoting sustainable finance, digitalization, and financial inclusion.
Beyond profit
THE future of development finance moving forward carves a path toward sustainability and inclusivity. But it cannot be done by one agency alone. Collaboration is key to achieve the intended results.
“We have to always look for opportunities to collaborate, because it’s not a job for one man or one agency alone. So, there are several players that we all have to see the goals of the government, our commitments and how we could contribute to achieving this commitment,” Javier said.
Multilateral agencies agree. The World Bank, despite being hailed by Bloomberg as the top issuer of sustainable bonds, said greater collaboration between governments and the private sector is crucial in addressing the development needs of nations.
For its part, the World Bank issues approximately $55 billion to $65 billion worth of sustainability bonds every year to finance its sustainable development activities in agriculture, education, energy, finance/trade/industry, governance, health and social services, transportation, water/sanitation and themes: gender, environment.
The World Bank Sustainable Finance and ESG Advisory services team also facilitates the development of green, blue and social bond markets in emerging markets through pre- and post-issuance technical assistance for issuers.
The Washington-based lender also said they are facilitating capacity building or institutional investors in setting up Environmental, Social and Governance (ESG) strategies. They consider it part of their “mission to help facilitate the expansion of labelled issuances in the emerging markets and deliver not just the 2030 SDG, but the long-term environmental and social goals.”
“As challenges emerge from the increased climate impacts and social transformations, both the public and private sector will need to facilitate investments and financing to ensure a just transition, social equity, food security, and energy access across all spheres,” Hussain and Joseph said.
As for ADB, Tian said, the Manila-based multilateral development bank will focus on the development of a market ecosystem that will ensure that safeguards are in place for these kinds of investments. Multilateral institutions can act as “rating agencies” that watch out for green washing risks.
These governance mechanisms are important especially in light of the potential for these bonds to expand to beyond 2030, the deadline of the Sustainable Development Goals (SDGs). This is also especially the case given that, at the end of the day, these are debts that must be repaid.
She said even if the growth in sustainability bonds has significantly increased, there is still a lot of room to grow. At least in the Asean+3 region, three-fourths or 70 percent of the bonds were issued by the private sector. This means there is more space for government-issued sustainability bonds.
“The market is still developing. I would say especially in Asean+3, we do have more scope to attract more local currency financing and long-term financing. So, as the market gradually develops, we will see more local current long-term local currency financing to support these sustainable projects,” Tian said.
With all these developments happening and the bold new ways to address the world’s development constraints, it may be surmised that humanity is heading to a very different future, far from greed and profit.
Through these efforts, green may soon become not just the color of money but also the color of hope that one day, all can take part in the planet’s bounty longer than anyone can see within their lifetimes.
Gordon Gecko may just turn green with envy.
Image credits: Irstone | Dreamstime.com