In response to a recent webinar on emerging market green bond issuance we have hand-picked a selection of audience questions for webinar speakers Dirk Dijksma, head of innovation investments at Symbiotics and Shushanik Hovsepyan, head of capital markets at Ameriabank.
The Armenian bank issued its €42 million ($50 million) inaugural green bond in November.
Symbiotics provides a platform to enable emerging market financial institutions to issue sustainable bonds through Symbiotics' own special purpose vehicle (SPV).
The SPV then loans the bond proceeds to the issuer. By doing this, the issuer does not need its own framework or second-party opinion and receives guidance on reporting and other requirements.
Their responses to the audience questions are below.
The Issuer case studies: financing the green transition in emerging markets webinar was run by Environmental Finance ran in partnership with the IFC.
Click here to read a summary of the webinar. Register here to watch the webinar on demand.
Benefits and challenges of green bond issuance
What are the challenges regarding availability of green or sustainable assets and how can these be addressed?
Dirk Dijksma: "Social assets are in general not a problem for microfinance and smaller banks (in most cases this is their "sweet-spot"). In emerging markets, in particular, it is more difficult to find eligible green assets that meet internationally recognised criteria. Also, issuers don't always have the technical capacity to identify green assets and/or flag the use of proceeds in their systems."
Did Ameriabank find it difficult to find projects that met demanding [green] eligibility criteria?
Shushanik Hovsepyan: "The major challenge was the alignment of our existing green business with the [ICMA] Green Bond Principles. We already had significant experience in financing green projects, so it was not too hard to identify relevant projects."
On issuance costs, which are the most daunting and what is their percentage [relative] to total costs? Are there innovative ways to reduce the costs on the part of issuers in emerging markets?
DD: "Each issuer is required to have a framework and a second party opinion. The cost and time to put this in place is substantial, especially as a percentage of a relatively small bond issuance. This is why Symbiotics structured a platform with its own framework and second party opinion. It can issue multiple green, social or sustainability bonds, significantly reducing the fixed cost per bond. The cost benefit is shared with the issuer, which reduces the issuance cost substantially. You could assess the possibility to replicate this structure in your own market for smaller issuers."
In terms of incentives, what are some of the key fiscal incentives expected by issuers and investors as part of green bond market development at country level?
DD: "Government tax incentives can be provided on renewable energy, energy efficiency or other eligible categories."
Given the large percentage of green bonds targeting energy and transport, what is the view on opportunities in other sectors such as agriculture, forestry and related land-based projects?
SH: "I think the targeting depends on the country's economy structure and availability of natural resources. For countries like Armenia, that doesn't have large territories or forests, the main categories of green assets fall into categories of renewable energy, energy efficiency, sustainable buildings, etc. But we do have categories like land use and aquatic resources. And I think a sector like agriculture has diverse options for sustainability - natural fertilisers, nature-based solutions, more efficient water distribution, storage and irrigation, using biofuels."
Using taxonomies and frameworks
What are the main challenges for commercial banking in terms of taxonomies?
SH: "Identifying the scope of the framework, use of proceeds and coming up with right eligibility criteria (quantitative and qualitative indicators, certifications etc.)"
DD: "Choosing which standard or taxonomy to integrate. Public or private sector standards differ in terms of data requirements."
Is there a taxonomy or green bond principles that were provided from the Armenian regulator or central bank? Is there a local provider of second party opinions?
SH: "No, there is not. We have issued the green bonds based on international best practice (ICMA Green Bond Principles). And the second party opinion provider – Sustainalytics – is an international, well-known firm in this business. Our project was the first green bond in Armenia, and it will support and accelerate the establishment of a local green bond market."
Investor interest
Was Ameriabank's issuance a public bond or a locally placed private placement?
SH: "It was a private placement, but with a further registration of Trading Prospectus (is in process) and listing on the local exchange."
Are the investors investing in BBB-rated green bonds and B-rated bonds different to other types of investors?
DD: "The majority of the investors worldwide cannot invest in sub-investment grade paper. This is a key hurdle."
Was there any push back from investors given Armenia was in a state a war at the time?
SH: "To put it correctly - the military conflict was in the territory of Artsakh [a breakaway state whose territory is internationally recognised as part of Azerbaijan], so Armenia was only involved indirectly. Anyway, despite challenges, there were no business disruptions or significant changes in the project pipelines. We successfully closed the deal in November with no change of the initial timeline and terms."
Advice for issuers of green bonds in emerging markets
For first-time sovereign entity issuers in emerging markets, how can costs of issuance be covered? Would grants be an option for example?
DD: "It could be worthwhile to talk to Development Finance Institutions (DFIs) and other organisations to request assistance in the issuance of a first green bond. I have no direct examples of where DFIs have assisted sovereigns to issue, but there are examples for the private sector."
Which aspects of the IFC's Green Bond Technical Assistance Program (GP TAP) programme did you find particularly useful?
SH: "Enhanced knowledge and building in-house expertise."
DD: "Detailed knowledge transfer to the participants. A clear message that issuing a sustainable bond is possible."
Zambia has just finalised the development of green bond guidelines and listing rules. We are now looking at projects and potential issuers. What advice can you give us on key issues to take into account as a frontier market, especially given that our sovereign debt levels are quite high? What are the top four things we need to get right?
DD: "Rule of law, clear legal framework, regulatory framework, clarity on impact reporting (taxonomy), alignment of stakeholders."
Have you considered integrating blockchain platforms/digital ledger technologies (DLT) to ease and make more efficient measuring and reporting requirements?
DD: "We have deep knowledge of DLT, but we are awaiting regulatory guidance and technical developments for larger scale adoption to take place. Especially off-chain verification remains a crucial weak link in this aspect. It is this part where DLT has little benefit and this is actually one of the biggest hurdles as there is a traditional verifier required in the process to provide trust."
