Smaller sovereigns opting for flexibility with debut ESG issuance

Green projects harder to find as NGEU funds arrive

European sovereign borrowers with smaller funding programmes are developing broader environmental, social and governance bond frameworks given the limited expenditures they have for green projects which have been further reduced by the arrival of the Next Generation EU funds.

‘We’ve decided to go with a sustainable bond framework to have more flexibility due to the small size of the issuance that we have,’ said Stelios Leonidou, senior economist and head of front office at Cyprus’s Public Debt Management Office, speaking at the virtual ‘Global sovereign green, social and sustainable issuance’ forum, hosted by OMFIF’s Sovereign Debt Institute on 13 December.

That flexibility will allow Cyprus to issue not just green bonds but other forms of ESG-labelled debt for different projects, including those with a social purpose and enable the sovereign to issue bonds with a decent size and good liquidity. ‘For a small issuer like ourselves the liquidity of the bond is significant especially in these kinds of conditions we are having now,’ said Leonidou.

Iceland has also opted for a sustainable bond framework. The sovereign published its framework in September 2021 but has yet to issue a debut ESG-labelled bond.

Esther Finnbogadóttir, head of funding and debt management at Iceland’s ministry of finance and economic affairs, said its plans were delayed last year due to the elections in Iceland and again this year due to the volatile market conditions. ‘We are not in a hurry and we want to do this quite well so that we can be satisfied with the result,’ said Finnbogadóttir.

Greece is, at least initially, going down the more traditional route of a standard green bond framework with the aim of issuing a ‘dark green’ bond. This will not be an easy target, admitted Dimitris Tsakonas, director general of Greece’s Public Debt Management Agency, but it is part of Greece’s plans of improving its brand in the capital markets.

Greece will not be a frequent issuer of green bonds, given its limited green expenditures, with the aim of issuing a new green bond every two or three years with a maximum size of €1bn. The arrival of the NGEU funds for green projects has further reduced Greece’s green expenditures so the potential to find projects not funded by NGEU and other EU structural funds ‘is a little bit limited,’ said Tsakonas.

Due to the limited size and infrequent issuance of its green bonds, Greece is likely to be affected by lower liquidity and, as a result, investors will demand a liquidity premium, according to Tsakonas, which will counter any potential ‘greenium’. However, there is a provision in Greece’s draft green bond framework for it to be expanded into a broader sustainable bond framework that will allow it to issue other forms of ESG-labelled bonds and get around the potential liquidity issues of its green issuance.

The NGEU funds are also making it difficult for Cyprus to find enough eligible green expenditures for green bonds. ‘It’s actually reducing our eligible asset pool quite significantly,’ said Leonidou, ‘which is quite the reason why we decided to go with a sustainable route as a significant part of our green projects in our budget are either partly or fully financed either by NGEU or EU structural funds.’

Burhan Khadbai is Head of Content at OMFIF’s Sovereign Debt Institute.

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