Sovereigns considering plans to issue in the green, social and sustainable bond market should not rush to do so, a group of leading bond investors told potential issuers at an OMFIF workshop. Instead, issuers should ensure they have fully scoped out taxonomies and engage thoroughly with potential buyers.
Green, social and sustainable bond issuance has skyrocketed over the past half decade, increasing ten-fold to $750bn in 2021 from $77bn in 2017. But as a relatively new financial instrument, a lack of developed and harmonised standards for issuers has impeded progress on the supply side. These bottlenecks have frustrated investors looking to expand holdings.
At the 30 November workshop, ‘Promoting sovereign sustainable bond issuance in central and eastern Europe’, OMFIF hosted a panel of private investors, all major buyers of green bonds, to speak about their appetite for GSS bonds and purchasing criteria. They were outspoken about their frustration with the current market, voicing particular disappointment that there are not more credible, large and liquid green bonds available, given the huge demand and strong source of funding. As a result, though eager to increase their holdings in the sustainable bond market, they have often been forced to turn away from deals, in large part due to concerns over issuers’ credibility. While unanimous in their willingness to help sovereigns formulate their issuance plans, they expressed the need for better engagement and transparency in return.
Broadly aligned in their criticism, panellists expressed two main concerns to a group of more than 10 sovereign issuers from central and eastern Europe, many of which are considering plans to issue a green, social or sustainable bond. First, there is insufficient transparency around the issuance frameworks for proceeds, impact and links to broader government policy. Second, many issuers do not engage with investors throughout the process outside of roadshows and new launches. In combination, this opacity and lack of communication has muddled credibility and lowered investor confidence, leading many to simply opt out.
‘When considering a new green bond issuance, we expect sovereigns to have up to date guidelines on their ministry of finance websites, which are easily accessible and easy digestible,’ one investor said, ‘but if you look at number of the those that do, it’s in the single digits.’
The investors offered concrete advice for those considering new bond issuances. For one, they said that the most successful sovereigns maintain engagement throughout the year, even in bad times; following through with non-roadshow updates, the investors insisted, will ultimately lead to better treatment by the market.
Furthermore, they want better access to information. Demonstrating how a GSS bond issuance is embedded in a longer-term strategy of debt management and decarbonisation is critical to gaining and maintaining investor confidence. They noted that while transparency has greatly improved following the European debt crisis, this has not yet spilled over into the GSS space.
The panel also warned, however, that many green bonds have been issued before they were ready for the market and that, in some cases, bonds’ criteria and framework were ‘just not good enough’ to comply with investors’ comprehensive sustainability standards. Though there is an increasingly urgent political imperative for visible progress on the global net zero agenda, from the investors’ perspective, it is important to get an issuance right the first time. Don’t rush and don’t greenwash, they warned — because the credibility damage incurred by a premature launch will lead to long-term damage.
At the workshop’s conclusion, panellists stressed their desire for open dialogue with sovereign issuers as they work towards launching more GSS bonds, emphasising the importance of collective efforts to help share best practices and feedback. For their part, the investors all signalled their willingness to disclose their own sustainability criteria and ‘green worthiness’ to issuers, if necessary. ‘It’s not something we’ve done in the past, but we would be happy to,’ one added.
Taylor Pearce is Economist at OMFIF’s Economic and Monetary Policy Institute.