When you think of a ‘green’ sovereign, Iceland is one of the first names that comes to mind with its global leadership in commitment to sustainability. It was one of the first countries to pivot from oil towards renewable energy and now produces 99.9% of its electricity through renewable sources. But surprisingly, this small island nation had not issued a green or sustainable bond until last month. With its new bond, Iceland has achieved some impressive milestones and put its green credentials on show.
Iceland’s lack of a green bond over the last few years was not for want of trying. ‘Our sustainable journey started in 2020 when we set up a working group consisting of various ministries where we explored whether to establish a sustainable or green financing framework,’ said Esther Finnbogadóttir, head of funding and debt management at Iceland’s ministry of finance and economic affairs.
‘In the end after months of work, we came to the decision to create a sustainable financing framework,’ she said. ‘This was the best thing to do as it aligned with the goals and objectives of the government where there are not only green but social issues to finance’.
The sustainable framework was published in September 2021. However, the new government took office later that year, meaning any green transactions had to be delayed until 2022. ‘When we released our budget in 2022, a green bond was in the fiscal plan for that year,’ said Finnbogadóttir. ‘But due to the war in Ukraine and the market vulnerabilities that followed, we decided to postpone it as the execution risk was quite high.’ Then in 2023, Iceland faced a number of other issues including a change in the minister of finance.
Iceland’s careful and delicate approach to the transaction was due to its infrequent presence in the international capital markets and the need to get the deal right. Iceland re-entered the euro market in 2014 for the first time since 2006 using the proceeds to pay down its bilateral debt from the Nordics and Poland in relation to International Monetary Fund support. ‘Since then, we have only been issuing in the euro market to fund the foreign reserves of the central bank, so we have kept all the proceeds as deposits,’ said Finnbogadóttir. ‘All the needs of the budget are met in the domestic market.’
As a result, Iceland does not actually need to issue in the capital markets but does so to maintain a presence with international investors and a reputation for being an international borrower. The euro market was also important for Iceland’s debut green bond due to the strong development of the green and sustainable bond market in Europe.
Green debut in high demand
The €750m 10-year green bond met with demand reaching over €7bn from 270 accounts. ‘This was an exceptional trade for Iceland’s first green deal,’ said Matt Doherty, an EMEA syndicate banker at BNP Paribas, one of the banks that led the transaction. ‘It was their largest ever order book, printing through theoretical fair value with a potential greenium,’ he said. ‘It has everything to be a candidate for transaction of the year.’
A potential greenium is impressive given that the so-called premium for issuing green bonds in Europe has largely diminished in the public sector bond market. OMFIF’s 2024 Public sector debt outlook survey found that 43% of issuers believe there is no greenium at all with 40% stating it is only marginal.
Doherty said Iceland’s infrequent issuance in the capital markets was a big factor behind the success of the deal. ‘If you’re an investor that wants significant exposure to this name then you have to take advantage of the opportunity when they come to the primary market once every two or three years,’ he said.
Iceland’s green commitment and credentials were also important in driving interest from investors, with the sovereign’s sustainable financing framework receiving a ‘dark green’ rating from Cicero in its second-party opinion, the highest rating available. ‘The framework is likely to contribute to setting Iceland’s transport and buildings sector on a path towards the long-term vision of a low-carbon future, while also likely contributing to higher levels of nature and biodiversity preservation,’ said Cicero in its assessment.
Given its limited financing needs and eligible expenditures for green projects, Iceland is unlikely to bring another green bond for a while. The current bond will cover the green expenditures under the fiscal plan for the next three years. However, the sovereign’s sustainable financing framework allows for other thematic bonds such as those with social, blue and gender labels.
Iceland is the second sovereign from Europe to issue a debut green bond in 2024 following Romania’s inaugural transaction in this format, which also achieved impressive landmarks last month.
Burhan Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.