The climate crisis and societal challenges such as rising inequality are generating a momentum for change in the world of business and politics. This is demonstrated by the commitment, at the 50th meeting of the World Economic Forum in Davos, by 140 of the world’s largest companies to support efforts to develop a core set of common metrics and disclosures of non-financial factors to their investors and stakeholders, called “Stakeholder Capitalism.”
The chief executive officers increasingly see topics of environmental, social and governance (ESG) and sustainable development goals as important to long-term business value creation.
In this evolving global context, governments, institutions and corporations are increasingly issuing green bonds to increase market appeal to a broader investor class and to be environmentally and socially responsible.
Green bonds explained
Green bonds are, generally, debt securities whose issuance proceeds are ring-fenced and exclusively applied to the finance or re-finance of new and/or existing projects that will promote progress on environmentally sustainable activities. However, there has been international criticism of the green bond market with some questioning the green credentials of certain bonds – such as “clean-coal” projects in China. There is a concern that “greenwashing” is occurring due to the absence of a globally accepted definition of what can be termed a green bond and what are environmentally sustainable activities. Greenwashing is understood to mean an unsubstantiated claim to deceive or mislead consumers into believing that a product is environmentally friendly.
The EU has taken the lead in developing a general assessment framework in respect of environmentally sustainable activities (not specific to green bonds). An action plan was created and it has developed a “taxonomy to understand whether an economic activity is environmentally sustainable”. EU member states approved the initial version of the taxonomy in December 2019. The taxonomy’s guidelines and classifications will enable institutions to assess whether an activity is environmentally sustainable. It is proposed that the taxonomy disclosures will be phased in over the next couple of years. However, while this is a progressive step, the Commission is still to develop an EU green bond standard.
The EU has introduced two new climate-related benchmarks: the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark. The main objectives of the new climate benchmarks are to (i) allow a significant level of comparability of climate benchmark methodologies, (ii) provide investors with an appropriate tool that is aligned with their investment strategy, (iii) increase transparency on investors’ impact, specifically with regard to climate change and the energy transition, and (iv) disincentivise greenwashing. However, while this is a progressive step the Commission is still to develop an EU green bond specific standard and it remains to be seen how these will impact the market.
In Ireland, in order to be eligible for inclusion in the “Euronext Green Bonds” initiative, the green bonds must be aligned with recognisable industry standards such as ICMA Green Bond Principles or the Climate Bond Initiative Taxonomy. They must also be accompanied by an appropriate external review performed by an independent third party.
Green bonds have historically been issued by multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank. The Irish Government has plans to issue a green bond with eligible project categories ranging from sustainable water and waste management to renewable energy, energy efficiency and climate change adaption projects.
According to the Climate Bonds Initiative, in 2019 a new global record of $257 billion of green bonds was issued worldwide, this is an increase of 51% on 2018’s annual amount. However, to put this figure in context, there was a total of $1.34 trillion worth of bonds (green and non-green) issued in 2018 worldwide. The European green bond market saw an increase of 74% year-on-year and accounted for 45% of global issuance. However, the OECD calculates that a total of $6.9 trillion (across all sources of finance, including green bonds) is needed annually to meet the Paris Agreement goals. If the Paris Agreement goals are to be achieved, this rapid growth and use of green bonds will need to continue (and increase).
Listing Green Bonds in Ireland
Ireland offers a number of advantages when issuing green bonds:
The stock exchange in Dublin - Euronext Dublin, part of the Euronext Group - is the world’s number one venue for bond listing. The Euronext group lists 46,000 debt securities, issued by issuers from 90 jurisdictions.
The Euronext group hosts “Euronext Green Bonds”, which is a dedicated community of green bond issuers where eligible green bonds listed on all Euronext locations are consolidated onto one highly visible area allowing issuers to showcase their ESG credentials and giving investors a transparent discovery process.
Euronext Dublin offers a relatively fast listing process: Euronext Dublin will return initial comments, on documents, after 3 clear business days and subsequent comments after 2 business days for any additional submissions. Approval is granted on a same-day basis.
Listing on the Global Exchange Market (GEM) of Euronext Dublin’s regulated market can facilitate the payment of interest without any withholding tax by relying on the quoted Eurobond exemption. A “quoted Eurobond” is defined as a security that is quoted on a recognised stock exchange and carries a right to interest.
With the projected global increase in green bond issuance in the coming years, together with the continued attractiveness of doing business in Ireland, any issuer should consider listing in Ireland.