Issuing green bonds is more cost effective than ordinary debt securities

Issuing green bonds cost effective ordinary debt

Sean Kidney


September 6, 2021






September 6, 2021





If fossil fuel companies are transitioning to clean energy, they should issue green bonds to finance their projects, Chief Executive Officer of the Climate Bonds Initiative Sean Kidney told Balkan Green Energy News. Such financial tools are yet to get a foothold in the Western Balkans, where state-owned coal power plant operators are facing increasing pressure from the European Union to decarbonize. As Serbia is preparing a legal framework for issuing sovereign green bonds, Kidney points out it could get an interest rate that is as much as 25 basis points lower than for an ordinary bond.

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

Sean Kidney, the head of the Climate Bonds Initiative (CBI), an international organization that certifies climate bonds, said the demand for them is “way higher” than for conventional ones as an increasing number of investors made commitments their activities would be environmentally sustainable.

What are the challenges and benefits for a government or a company when they issue green bonds compared to ordinary debt?

The challenge will always be in doing something that the market is comfortable with – in reporting and accountability and other issues. But they will get more investment. There are more people that would buy a green bond than an ordinary bond.

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

Absolutely. The oversubscription rate for green bonds is way higher. In March, Italy placed EUR 8.5 billion in green bonds maturing in 2045 and they were 9.4 times oversubscribed. That was a lot for Italian sovereign bonds. And 65% of the package was bought by green-mandated investors.

In other words, they were all new investors, who would otherwise not buy ordinary Italian bonds.

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

When there is a crisis, an ordinary bond loses value, though it usually bounces back eventually, but green bonds hold their value

When Germans issue a green bond, they can get an interest rate that is two basis points lower than for an ordinary bond. It doesn’t seem much, but it can be a lot of money if the package is worth several billion euros. The spread, the difference, can be quite bigger if the country has a lower credit rating, like Serbia.

We haven’t seen many green bonds in emerging markets, especially at junk grade, which means high yield. It will be interesting to see. Serbia could get a rate that is between five and 25 points lower than for a vanilla bond, an ordinary bond. The country could get support from the European Bank for Reconstruction and Development and other international financial institutions in the process.

Aydem Renewables from Turkey recently sold a USD 750 million green bond package 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 great – given the market’s antipathy to anything Turkish at the moment, thanks to gyrating monetary policy at the central bank.

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

The International Capital Market Association runs the green bond principles, the guidelines for reporting and transparency. What it doesn’t do is guidelines for what can be called green. And that’s what we’ve done for the last ten years. So we developed criteria and green definitions, if you like. And nowadays we also work with governments to develop regulatory criteria.

In China, at the beginning of 2015, they introduced green bond regulations and also the definitions that we advised them for. A year later, I was a member of an EU high-level expert group that proposed a taxonomy, and now there is regulation coming in about what you are allowed to call sustainable.

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

Should Serbia certify its green bonds with CBI?

It might be quite a good way to win the confidence of investors across Europe because as we are seen as a gold standard. We review the bond and assess the use of proceeds. We look at how they are proposing 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’s quite a lot of pollution prevention bonds, which are not specifically about the climate, but they are all called green. In Europe, everything that’s in the green market addresses the climate.

The sustainability bond segment covers social bonds and green bonds for which the proceeds are used in both areas. Now we also see blue bonds and resilience bonds, which are actually different flavors of the same gelato, the same idea.

CBI recently developed the tools for developers of hydropower projects to assess their performance when they wish to raise funds via green bonds. Small hydropower plants are a controversial issue in the Balkans as environmentalists and the local population claim some investors are diverting whole rivers into pipes. What factor separates green projects from the non-green ones from your organization’s point of view?

Most things we do as a society leave an environmental impact but at least we can get large areas of the Earth protected. That is something that we’ve got to do. In the areas where we already damaged the landscape, there is lots of room for priority investments.

We need to close down fossil fuels very, very fast, as they are killing us as a species, and shift to any kind of low-carbon energy. Hydro is the largest source. There is still scope to do more, though not a huge amount in Europe.

On the other hand, we have pumps and water towers everywhere in our cities and they could be equipped with rotors to power street lights throughout the area. It’s not just big dams.

Kidney: In places like Serbia we are not expecting a lot of new hydro, but we are hoping there would be improvements on existing hydropower plants.

We said in the criteria that dams need to have very low emissions. For new hydro it is a maximum of 50 grams of carbon dioxide per kilowatt-hour, equivalent to wind and solar power.

A big dam would not qualify as it floods large areas and methane is emitted as plants and trees rot. It would not qualify. But run-of-river dams keep rivers flowing, while briefly stopping the flow at some stages, and that is generally okay. Managing methane emissions is a critical issue.

In southern Yunnan, China is stopping water from flowing down the Mekong and impacting the people in Southeast Asian countries. It is wrong and it wouldn’t qualify. We do need to increase hydro, but we need tough rules about how to do it.

We hope we can influence the hydro sector to stop doing bad projects and to focus on the projects for the good. In places like Serbia we are not expecting a lot of new hydro, but we are hoping there would be improvements on existing hydropower plants.

What happens if the issuer doesn’t use the funds the way that it was obligated to?

It’s very rare for anyone to not do what they said they would do. The market comes down very harshly if they default in any kind of way. Essentially it becomes much more expensive to raise debt afterwards.

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

Yes! If fossil fuel companies are transitioning to become clean energy companies, they should certainly issue green bonds. India’s National Thermal Power Company (public sector coal) did it a few years ago in Europe, to obtain funds to install solar power plants. It was a great success.

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