The EBRD's investment in green bonds passes €1bn

Channels: Debt, Green Bonds

Companies: European Bank for Reconstruction and Development, Scatec, PKO Bank Hipoteczny

People: Friso de Jong, Dan Storey, Melis Ekmen-Tabojer

As the multilateral development institution celebrates a milestone, Friso de Jong and Dan Storey explain the EBRD's future work priorities

With its €65 million ($67 million) investment in a green covered bond from PKO Bank Hipoteczny (PKO BH) this month, the EBRD has now invested more than €1 billion in green bonds.

Taken together, these bonds are worth more than €7 billion in total, and represent 54% of the monetary value of total non-sovereign green bond issuance from EBRD economies1.

Many are pioneering green bonds that were 'firsts' for the issuer, country or sector.

As the first ever euro-denominated green covered bond from Poland and the first out of the EBRD's EU region, this latest €500 million issuance was no different and it followed a PLN 250 million ($54 million) bond from PKO BH in 2019 that was the first green covered bond from a major Polish financial institution. EBRD invested PLN 50 million in this earlier bond. Issued under a framework certified by the Climate Bonds Initiative as aligned with its Climate Bonds Standard, both bonds use proceeds to finance low-carbon residential buildings.

There is more to do to develop green bond markets in EBRD economies

After a slow beginning, green bond issuance is now accelerating in many of the economies where the EBRD works. EBRD's 2021 investment of €524 million in 17 green bonds was more than half of its total investment in green bonds to date.

From Central and Eastern Europe to the Southern and Eastern Mediterranean, Turkey and the Caucasus, an increasing number of our clients are using green bonds to raise funding and opening the way for further issuers to follow suit.

There is, however, more to do to increase the breadth and depth of the green bond markets in EBRD economies. Total issuance from the EBRD region is just over $16 billion and represents less than 1% of the global market2. In addition, issuance is highly concentrated in a few countries, with green bonds from EU countries where the EBRD works accounting for 67% of the total.

Increasing access to green finance requires us to support more clients to come to market and to encourage more investment into their green bonds, particularly in our non-EU countries of operation.

This is why, in addition to direct investment in green bonds, the EBRD works to stimulate their supply and demand through a range of activities. These include knowledge sharing, providing technical assistance to help individual issuers – as we are doing in Armenia, Morocco, and Romania – and offering credit enhancement to attract international institutional investors to new countries and new sectors – as we did with a recent issue in Egypt.

Renewable power producer Scatec's CBI-certified $334.5 million green bond, backed by six solar plants, was the country's first private green project bond issuance.

The EBRD provided a $30 million credit enhancement facility to attract international institutional investors to the country's renewable energy sector and pave the way for further green bond issuances in the future.

Issuing green bonds can help improve corporate climate governance

Such activities have other benefits. They familiarise issuers and local and international investors with what makes for a green investment in different sectoral and country contexts and ultimately can help to green the whole financial system as green bonds also provide a way to improve corporate climate governance.

By requiring issuers to identify eligible projects, follow transparent selection criteria, link green assets financed by the bond to the larger strategy and governance of the institution, and establish monitoring systems to report on the use of proceeds and environmental benefits, they help prepare them to meet the requirements of future legislation, for example, mandatory climate-related disclosures.

In this way, green bonds not only help to enhance issuers' reputations for environmental responsibility but also demonstrate a certain level of governance when it comes to managing the climate-related challenges and opportunities facing an organisation.

As demands for climate-related disclosures from regulators and investors grow and measures such as the EU carbon border taxes are implemented, the ability to demonstrate competent climate governance will be essential to maintain and enhance access to capital and markets.

There are many reasons for issuers to consider green bonds

There are many reasons for issuers to consider green bonds in addition to regulatory drivers and reputational advantages. They can allow issuers to broaden their investor base, attract buy-and-hold investors, and potentially enjoy pricing benefits.

The EBRD can support financial and non-financial corporate clients to explore green bonds and other alternatives for raising finance such as sustainability-linked bonds.

As Melis Ekmen-Tabojer, director for EU banks & structured finance at the EBRD, says: "Green bonds remain a nascent asset class in the EBRD region, and financial institutions considering green bond issuance face the challenges of navigating still evolving market standards and regulatory requirements and the headwinds of market volatility caused by current geopolitical tensions.

"We stand ready to continue supporting our partner banks through these difficult times and, by promoting best market standards, we want to help them to thrive in the growing markets for green capital."

All analysis in this article is based on the Environmental Finance Green Bond Database and EBRD's own research.

Friso de Jong is principal for sustainable energy financing facilities at the EBRD. Dan Storey is an associate for knowledge sharing and outreach for the green economy and climate action.


Notes:

1 Excluding Belarus and Russia whose access to EBRD resources has been suspended, Cyprus where EBRD no longer invests, and Czech Republic where EBRD only recently resumed operations.
2 Global green bond markets have grown rapidly over the last five years and had reached over USD 1.8 trillion in cumulative issuance by June 2022.