Sovereign Green Bond Issuance to Accelerate as Governments Seek to Promote Sustainable Policies

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Tuesday, July 10, 2018 /10:46 AM / Moody’s Investors Service

The pace of sovereign green bond issuance is set to accelerate as governments seek to promote sustainable policy agendas, encourage private capital into low-carbon and climate-resilient infrastructure, as well as signal their commitment to the Paris Agreement, says Moody's Investors Service in a report published today.

Thus far, seven sovereign issuers have sold green bonds for a combined equivalent of $25.5 billion. The government of Poland (A2 stable) announced the inaugural sovereign green bond issue in December 2016, and since then France (Aa2 positive), Fiji (Ba3 stable), Nigeria (B2 stable), Belgium (Aa3 stable) and Lithuania (A3 stable) have all issued green bonds. The government of Indonesia (Baa2 stable) unveiled the first sovereign green sukuk early this year.

"Green bond issuance provides a strong signal of a government's commitment to its climate and environmental policy agenda and, in particular, how it intends to raise capital to implement its Paris Agreement commitments," said Rahul Ghosh, a Senior Vice President at Moody's.

The diverse use of proceeds from the sale of sovereign green bonds will support investor demand for the securities. Sovereigns tend to spend a higher proportion of proceeds on a range of projects, including clean transportation, waste management and land use, whereas the broader green bond market is predominantly used to fund energy-related projects. As a consequence, green sovereign bonds enable investors to diversify their exposures.

However, the diverse use of proceeds also presents the market for sovereign green bonds with a challenge in terms of granular reporting. While there is consensus on how to measure environmental impact for renewable energy-related projects, there is less consensus around how to measure it for projects such as land use and climate adaptation.

Sovereign issuers are taking steps to ensure effective management of green bond proceeds, including enacting legislation to ring-fence funds, on-lending proceeds to public investment companies, and committing to independent audits by external parties.

Moody's has assigned Green Bond Assessments (GBAs) to four sovereign green bonds to date, including transactions from the governments of Poland, Nigeria and Lithuania and covering a total of $2.1 billion of assessed debt in US dollar equivalent terms.


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