According to the Asian Development Bank, developing countries in Asia will need to invest an estimated $26 trillion through 2030, or $1.7 trillion per year, in infrastructure to maintain growth, eliminate poverty, and address climate change. Given their limited public resources, developing countries in Asia will need to find ways to mobilize and leverage significant amounts of private capital to meet the investment requirements for the Paris Agreement and the Sustainable Development Goals.
An increasingly attractive financing option is to tap the growing green bonds market, which exceeded $100 billion in new issuances in 2017. For issuers of green bonds, the benefits include helping to reinforce issuer sustainability investment programs for investors, improving collaboration between sustainability and finance teams, and raising capital for climate change and sustainability related investments.
The People’s Republic of China’s role in the global green bonds market, the recent launch of the green bond guidelines by the Ministry of Environment in Japan, growing momentum in India, and the recent adoption of green bonds standards by the ASEAN Capital Markets Forum underscore the growth potential of the green bonds market in Asia. In an accompanying ADBI working paper, the potential green bonds issuance is estimated at approximately $425 billion per year.
As policy makers in Asia look for ways to expand access to the green bonds market, they may find inspiration in the Nordic region. For decades, Sweden, Norway, Denmark, and Finland have been leaders in creating policy conditions to support a sustainable economy. The Nordic countries have also pioneered the use of green bonds to mobilize capital for sustainability goals.
The Nordic experience includes using green bonds to access debt markets for cities as well as through aggregation vehicles called Subnational Pooled Financing Mechanisms (SPFM). SPFMs aggregate the financial needs of members into a pooled financing agency, which then issues debt and distributes the proceeds from the borrowing or bond offering to its subnational members. The accompanying ADBI working paper describes the green bonds experience of leading Nordic issuers of green bonds, including City of Gothenburg, Kommuninvest (Sweden), Kommunalbanken (Norway), Kommunekredit (Denmark), and MuniFin (Finland).
For both developed and developing countries, SPFMs offer the potential to reduce the fiscal burden on national governments of having to support subnational entities; lower costs for infrastructure projects by reducing the perceived risk through a consolidated financial entity that can borrow on the capital markets; lower financing costs due to diversified risk at the aggregate level; lower project development costs when projects can be standardized; and lower the costs for the monitoring and reporting of the use of proceeds through the use of shared approaches. For Asian countries, it will be important to determine whether legal, regulatory, or financial conditions are present to allow replication of a pooled financing model similar that in the Nordic region.
A second area where the Nordic experience in green bonds may be of value is in impact reporting. This year, a group of Nordic public sector issuers issued a guide for impact reporting for Nordic public sector green bond issuances. The key aspects include reporting on the basis of the share of the project’s total investment cost that the issuer has financed with green bonds, and reporting on impacts based on amounts disbursed and outstanding. For environmental reporting, issuances should report on the direct environmental impacts as well as the indirect effects, commit to reporting expected impacts calculated prior to issuance, describe net benefits, and highlight methodologies used and the potential uncertainties.
As regional capital markets deepen, policy makers have the opportunity to foster a regulatory environment that is supportive of green bonds issuance. Importing approaches from northern Europe, where they have been proven to work, offers the potential to help bring developing Asia closer to meeting its significant needs for investment in low-carbon, sustainable infrastructure.
To read the full working paper, click here.