Colombo Stock Exchange Chief Executive Rajeeva Bandaranaike discusses the introduction of Green Bonds to Sri Lanka. Green Bonds are fixed-income securities that finance or refinance projects that have a positive impact on the environment and climate. Although this is a relatively new concept that emerged in 2006, it has gained significant traction globally. The world is moving towards more green initiatives, and there is a growing segment of foreign investors who are interested in investing in these projects.
“By enabling the issuance of Green Bonds, we can potentially attract new foreign investors to generate funds for issuers implementing green projects in Sri Lanka,” Bandaranaike says explaining the rationale for introducing Green Bonds in this interview.
“Globally, over $2.5 trillion have been raised for Green Bonds, indicating the relatively large pool of investors interested in Green Bonds. This initiative also aligns well with the Central Bank’s roadmap on sustainable finance initiatives. These are some of the reasons why we have developed a regulatory framework for Green Bonds,” he says.
Bandaranaike also believes the IMF programme will positively impact the economy and the capital market. The proposed debt restructuring will bring clarity to the present uncertainties, which is important from an investor perspective. “Macroeconomic stability is what the market is looking for and this positive direction that the country is taking is likely to be well-received by the market. We believe Sri Lanka will experience some positive outcomes,” Bandaranaike avers.
The CSE introduced Green Bonds to Sri Lanka in April. What are the key differences between conventional bonds, corporate debentures and Green Bonds in terms of their underlying principles and features?
The main difference between a Green Bond and a conventional corporate debenture is in how the proceeds from the bond are used. While both types of bonds have similar features, the key difference lies in the exclusive use of the funds raised from Green Bonds for eligible green projects that align with international Green Bond standards. In essence, a Green Bond is no different from a corporate debenture in terms of its structure and features. The only distinguishing factor is the purpose for which the proceeds are utilized.
Could you explain the trading process of Green Bonds and how it differs from the trading of conventional bonds or corporate debentures?
The trading process for a Green Bond is very similar to that of a conventional bond. The existing platforms and transaction fees that apply to corporate debt will also apply to Green Bonds. Once a corporate debenture is listed, it is available for secondary trading. If a debenture holder wishes to exit the bond, they can sell it on our trading platform to a willing buyer. The same process will also apply to Green Bonds. Essentially, the listing process, trading process, and settlement will be similar for both types of bonds.
However, the key difference lies in the purpose for which the bond is used and some additional requirements apply to Green Bonds. Despite this difference, the trading process for Green Bonds will be very similar to that of conventional bonds.
What are the eligibility criteria for issuers of Green Bonds, investors and trading participants in the Green Bond market? Are there any specific requirements or standards?
When it comes to the criteria for issuers of Green Bonds, it is the same as for conventional debentures. However, there are some differences when it comes to investors. For Basel III corporate debentures, there are some restrictions as to who can buy these debentures but for Green Bonds, there are no restrictions as to who can invest and trade in Green Bonds. Existing participants such as dealers, private dealers, and stockbroking companies who trade in debt can also trade in Green Bonds.
When it comes to the criteria for issuers of Green Bonds, it is the same as for conventional debentures. However, there are some differences when it comes to investors. For Basel III corporate debentures, there are some restrictions as to who can buy these debentures but for Green Bonds, there are no restrictions as to who can invest and trade in Green Bonds. Existing participants such as dealers, private dealers, and stockbroking companies who trade in debt can also trade in Green Bonds.
The issuers of Green Bonds are required to use the funds raised exclusively for eligible green projects that adhere to international bond standards. These green projects are aligned with one of three international bond standards – the Green Bond Principles by the International Capital Markets Association, the European Green Bond Standard, and the Climate Bonds Initiative Standards.
In addition to compliance with these standards, there is also a requirement for an independent external reviewer to provide a second opinion on the alignment of the Green Bonds with international standards. The CSE has set eligibility criteria for independent external reviewers, and these guidelines are available on our website. The minimum content that the second-party opinion should contain is also specified on our website.
So, to sum it up, the criteria for issuers are the same as for conventional debentures, but there are additional requirements for Green Bonds such as compliance with international bond standards and an independent external review. However, as I said earlier investors do not face any restrictions, and existing participants can also trade in Green Bonds.
Can you provide an overview of the regulatory guidelines that govern the issuance and trading of Green Bonds? How do these regulations ensure transparency and accountability in the market?
The framework for listing corporate debt is also applicable to Green Bonds but with some additional disclosure requirements. These requirements are part of our regulatory framework and must be followed by issuers. Along with the quarterly financial statements and annual reports, which are required for corporate debentures, Green Bond issuers must submit some new reports on a quarterly and annual basis.
A requirement is the submission of the second-party opinion of the external reviewer on an annual basis until the proceeds of the green project are fully utilized. This ensures transparency and accountability, with enforcement actions for non-compliance providing further accountability.
The new disclosure requirements include a list of eligible green projects and a brief description of those projects, factors considered in determining eligible green projects, details of the systems, procedures, processes, and controls employed by the applicant company, and details about the allocation and use of proceeds. Additionally, green fencing or earmarking funds for eligible green projects must be disclosed, as well as the evaluation and selection of green projects. These requirements are necessary to ensure transparency and accountability in the issuance of Green Bonds.
What are the benefits for investors when investing in Green Bonds compared to conventional bonds or corporate debentures? How do Green Bonds provide unique opportunities for investors to align their investments with sustainability and environmental goals?
Green bonds offer several benefits to investors, issuers, and governments. For investors, Green Bonds can provide sustainable financial returns in the long run and help them satisfy ESG requirements for sustainable investment mandates. Green bonds also contribute to national climate adoption, food security, public health, energy supply, and other environmental initiatives.
In addition, Green Bonds increase transparency and accountability in the use and management of proceeds, becoming an additional risk management tool. By providing transparency on how the proceeds of the bond are being used, Green Bonds ensure that the climate impact of fixed-income investments is reported. This fosters greater awareness and expertise among investors on green and climate issues, encouraging them to invest in environmentally friendly climate-related projects.
From a government perspective, entities can benefit from the increased demand from socially responsible investors who have a strong appetite for investing in Green Bonds. Green Bonds also can raise large amounts of financial resources to support environmental projects for which funding may not be available otherwise. This makes it easier and more economical for companies to rely on more affordable capital to finance environmentally friendly projects.
In summary, Green Bonds have several benefits, including sustainable financial returns, greater transparency and accountability, and contribution to environmental initiatives. These benefits make it an attractive investment option for investors, issuers, and governments.
Could you discuss the risks associated with investing in Green Bonds? Are there any specific factors investors should consider before investing in Green Bonds? How do these risks differ from those with conventional bonds or corporate debentures?
When investing in any bond, default is always a primary risk that needs to be considered. The ability of the issuer to generate sufficient cash flows to repay the capital and interest is critical. For Green Bonds specifically, there is also the risk of “greenwashing,” where the project may not deliver the intended environmental benefits, or there may be non-disclosures of the disclosure requirements.
To mitigate these risks, investors should conduct due diligence on the issuer’s repayment capacity and ratings. Additionally, mandatory ratings for issuances of any corporate debt, including Green Bonds, provide investors with a thirdparty assessment of the probability of default.
To mitigate the risk of greenwashing, the issuer must disclose sufficient information about the project, and a second-party reviewer will assess that the funds are used to deliver the intended environmental benefits. These mechanisms are in place to help manage and mitigate the risks associated with investing in Green Bonds.
How will Green Bonds contribute to the Sri Lankan economy?
Green bonds can bring about economic benefits in two ways. Firstly, the funds generated from the Green Bonds will be used to finance ecofriendly projects, which will result in numerous environmental advantages for the country. This is a high priority for the government Secondly, by investing in Green Bonds, Sri Lanka can potentially attract a new segment of foreign investors who are interested in environmentally sustainable and climate-related investments. This opens up the opportunity to attract new foreign investments, leading to economic growth. Overall, Green Bonds have the potential to bring about positive impacts on the Sri Lankan economy, both environmentally and economically