The Green Bond Revolution

Dr. Priscilla Mifsud Parker | 15 Nov 2017

Investment Funds

Investing in corporate bonds listed on the Malta Stock Exchange has always been popular with Maltese investors. As a result of tighter bank credit, Maltese companies are increasingly opting for capital market financing. This is evidenced by the increased issuance of corporate bonds on the Malta Stock Exchange. Furthermore, we have also recently witnessed a higher usage of Malta’s capital markets by non-Maltese entities with the aim of raising finance for investments outside of Malta. The local market has however not yet examined the possibility of utilising Malta’s capital markets to obtain a listing of debt securities which would not only benefit investors directly through the rate of return made, but also indirectly by improving our environment. In 2008 the World Bank launched the “Strategic Framework for Development and Climate Change”.  Such initiative was designed in order to better co-ordinate, encourage and stimulate both public and private sector activity to mitigate and reverse the damage caused to our environment since the industrial revolution. Since then the World Bank issued US$10.2 billion in Green Bonds[1].

Understanding the Green Bond Revolution 

So, what are Green Bonds? Are they any different to conventional bond issues?

The International Capital Markets Association (“ICMA”) defines Green Bonds as the enabling of capital raising for investment in new or existing projects which provide environmental benefits. The financing raised will be solely used for the financing or re-financing of green projects such as renewable energy, the energy-efficiency sector, green transport and wastewater treatment. The ICMA in June 2017 issued the Green Bond Principles (“GBP”). Such GBP recommend a clear disclosure process for issuers in order for all relevant parties from traditional investors to professional institutions to understand the characteristics of any Green Bond issues. The GBP also established four core components – being the use of proceeds, project selection and evaluation process, reporting requirements and management of capital finance raised. The GBP provide a more detailed understanding of each core principle.

Four Types of Green Bonds 

The GBP also categorise Green Bonds into four categories as described below. Each type of Green Bond is aligned with the principles of the GBP. The types of bonds are as follows:

The first type of Green Bond is referred to as Traditional Green Bonds. Traditional Green Bonds are akin to the issuing of a standard bond with recourse-to-the-issuer in alignment with the GBP.

Following such, there are Green Revenue Bonds; a non-recourse debt obligation, where the credit exposure of the bond is pledged to the future cash flows of the revenue streams, fees, etc. The use of such proceeds shall be made in projects which are related or unrelated to green ventures.

Another type is the Green Project Bond. This bond will be tied down to one or more green projects for which the investor has direct exposure to the risk of such project with or without potential recourse to the issuer, and that is aligned with the GBP.

Finally, we have the securitised Green Bond. The securitised Green Bond is a bond which is collateralised by one or more specific green project(s). These may also include but is not limited to asset backed securities, mortgage backed securities and covered bonds. The first source of repayment is generally the cash flows of the assets. This type of bond covers, for example, asset-backed securitisations of rooftop solar PV and/or energy efficiency assets.

How could Malta benefit from the listing of Green Bonds?

So how can these bonds benefit the investing and non-investing Maltese public both financially and also from a cleaner environment point of view?

The EU has a target to reduce greenhouse emissions by twenty percent (20%) compared to levels recorded in the 1990 and have energy generated from renewable sources increase by twenty percent (20%)[2]. Malta’s target for energy generation from renewable sources is of ten percent (10%) and for reduction in greenhouse gases is of five percent (5%) compared to levels recorded in 2005[3].

In May 2017 the Government put forward its Low Carbon Development Strategy (“LCDS”) which looks to test the anticipated climate change scenarios up to 2050. The strategy looks at coherence, regulation, participation, finance and capacity. The LCDS states that the shift to a low carbon infrastructure will have an impact on both public and private financing requirements, not only from a capital outlay but also from a savings and payback period perspective. The LCDS makes reference to Malta’s financial services industry and the creation of new financial instruments to facilitate such transition.

The introduction of a seamless and time considerate regime for the listing of Green Bonds on the Malta Stock Exchange could lead to strong investment in pushing Malta ahead in this low carbon emission strategy.

For small to medium-sized projects of up to five million euros (€5m), companies could now make well use of the Prospects which is a platform set up by the Malta Stock Exchange in line with its commitment to open up new capital market opportunities for small and medium-sized enterprises accessible to both Maltese as well as non-Maltese companies. On the other hand, larger projects would require a listing on the main market, which may be a lengthier and expensive process, and which could result in such projects not taking off.

A way forward

The Government and the Listing Authority, together with the Malta Stock Exchange as well as relevant stakeholders should sit down and discuss a  focused regime which would allow a quicker time-to-market, whilst always taking into account the necessary safeguards to protect the investing public.

Moreover, separate regimes may be established for the retail investor and the more sophisticated institutional investors, thus allowing a quicker time-to-market for those projects which are targeting institutional investors which are able and willing to take higher risks. Such a distinction in the regimes could provide a welcome opening for the local institutional market, which at this point in time is highly liquid and lacks necessary projects to invest in.

There are countless projects which can be serviced through green bonds from the most obvious such as solar farms, energy efficiencies in new and refurbished buildings, waste water treatment to transportation, sustainable water and clean infrastructure. The possibilities are endless, we just need to get our heads together and come up with the appropriate infrastructure and incentives to take it forward.

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