Emerging Market Green Bonds Report 2020 On the Road to Green Recovery This document is for the exclusive attention of professional investors, investment service providers, and other professionals in the financial industry. Spring 2021 Amundi Asset Management (Amundi) and International Finance Corporation (IFC) produced this report. All trademarks and logos belong to their respective owners. Copyright; Disclaimers © 2021 Amundi Asset Management and International Finance Corporation. All rights reserved. Amundi and IFC agree that the copyright and all related intellectual property rights in the materials in this Report are jointly owned by them. Copying and/or transmitting portions or all of these materials without permission may be a violation of applicable law. 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Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. Any queries on rights and licenses, including subsidiary rights, pertaining to IFC should be addressed to IFC Communications, 2121 Pennsylvania Avenue, N.W., Washington, DC, 20433. All other queries should be directed to Amundi. Amundi Asset Management, French “Société par Actions Simplifiée” - SAS with share capital of €1,086,262,605 - Portfolio Management Company licensed by the AMF (French securities regulator) under no. GP 04000036 Registered office: 90 boulevard Pasteur - 75015 Paris - France - 437 574 452 RCS Paris. Website: www.amundi.com. Photo credit: iStock by Getty Images. Acknowledgments Amundi and IFC would like to thank all of the contributors, internal and external reviewers, and interviewees for their time and immensely valuable support producing this report. Special thanks to Alan Meng (Head of Data Analysis and Services, Climate Bonds Initiative) and all the relevant personnel at Amundi and IFC who made the production of this report possible with their valuable advice and input. Amundi: Jean-Jacques Barbéris, Timothée Jaulin, Eric Dussoubs, Sergei Strigo, Maxim Vydrine, Reema Desai, Erwan Crehalet, Tobias Hessenberger, Esther Law, Dany Da Fonseca, Joan Elbaz, Sanchit Thukral. IFC: Jeffrey Anderson, Paulo de Bolle, Dimitri Demekas, John Gandolfo, Egidio Germanetti, Anup Jagwani, Rabih Kanaan, Haruko Koide, Jean Pierre Lacombe, Laure Lepastier, Honglin Li, Facundo Martin, Henry Pulizzi, Jean-Marie Masse, Jessica Stallings. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 3 KEY HIGHLIGHTS Highlights for 2020 $40 billion 21% emerging market green bond issuances increase in emerging market ex-China in 2020 green bond issuances from 2019 $226 billion $260 billion emerging market green bonds cumulative projected emerging market green bond issuance through 2020 issuance between 2021-2023 $100 billion 50% projected annual emerging market green bond of cumulative green bond issuance issuance by 2023 by financial institutions 43 7 emerging markets have issued green bonds emerging markets with debut offerings since 2012 in 2020 Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 4 TABLE OF CONTENTS Key Highlights...................................................................................................................................................................................................3 Foreword...........................................................................................................................................................................................................5 Abbreviations and Acronyms........................................................................................................................................................................6 Executive Summary.........................................................................................................................................................................................7 Introduction......................................................................................................................................................................................................8 Market Analysis: The Current State of the Market.................................................................................................................................10 • A Regional View...........................................................................................................................................................................................................13 • Trends in Emerging Market Green Bond Issuance........................................................................................................................................... 17 Market Performance.....................................................................................................................................................................................19 Regulatory and Policy Developments......................................................................................................................................................22 Green Bond Outlook....................................................................................................................................................................................27 Annex���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������34 Endnotes���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������35 Investment Disclaimer���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������36 Contact Details...............................................................................................................................................................................................37 Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 5 FOREWORD Amundi Asset Management “ While both short-term and long-term effects of the COVID-19 crisis remain uncertain, market participants globally are working toward building resilient economies and sustainable financial systems capable of addressing climate and environmental challenges. Financial markets are expected to play a key role toward addressing challenges that investors face in terms of climate risks and sustainable projects objectives. The fiscal policy efforts in emerging economies will bring forward recoveries, providing an opportunity to boost green investment in areas including renewable energy, green urban infrastructure, and climate-smart agriculture. Through this unique and innovative partnership with the IFC, Amundi remains committed to the development of the green bond market in emerging countries through vigorous and robust engagement efforts with different market participants to boost both supply Yerlan Syzdykov and demand of green bonds. This report highlights the key trends and outlook in green Global Head of Emerging Markets Amundi market segments of emerging market debt along with opportunities for financing climate commitments and sustainable development objectives in emerging countries. As compared to the last three years, the supply of green bonds in emerging markets is expected to double in the next three years. Similar to previous years, China was on the forefront of green bond issuance in emerging countries despite a decrease in 2019 and first half of 2020. This downturn is attributed to the decrease in domestic supply of green bonds, as the supply of USD- and EUR-denominated green bonds remained strong. There is a positive trend in green bonds issuance in other emerging countries highlighted ” by an increase in issuance by 21 percent in 2020. Several countries including Saudi Arabia, Egypt, and Kazakhstan issued green bonds for the first time in 2020. International Finance Corporation “ As green finance moves from niche to mainstream, momentum for green and sustainable investment in emerging markets is building. Despite unprecedented challenges in 2020, the green bond market remained resilient. Cumulative global green bond issuance reached the milestone of US$1 trillion since 2007, and 7 emerging markets issued green bonds for the first time. Robust investor appetite and more supportive policy environments will continue to support the growth of the green bond market in emerging markets. The devastating effects of the COVID-19 pandemic hit emerging markets especially hard in 2020 and are likely to continue having an impact at least in the near term. The social and economic consequences, including exacerbated poverty rates, reinforce the urgency of investment for sustainable development. Recovery measures that combine Jean Pierre Lacombe needed fiscal stimulus with a focus on green sectors and reinforce commitments to Director, Global Macroeconomics, the transition to low-carbon economies could create significant opportunities to invest Market and Portfolio Research in green and sustainability-related projects. IFC estimates that investment opportunities IFC in emerging markets have the potential to generate over US$10 trillion through 2030 and create over 200 million jobs in green sectors. International Finance Corporation is at the forefront of mobilizing private capital for sustainable development and climate change. The partnership with Amundi exemplifies IFC’s efforts to create new markets and align investor demand with supply. ” This report examines green bond market development in emerging markets and how it can be strengthened through green recovery efforts. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 6 ABBREVIATIONS AND ACRONYMS Amundi: Amundi Asset Management ASEAN: Association of Southeast Asian Nations COP26: 26th United Nations Climate Change Conference COVID-19: Coronavirus disease 2019 CO2: carbon dioxide EAP: East Asia and the Pacific ECA: Europe and Central Asia EM: emerging market ESG: environmental, social, and governance ESRM: environmental risk and social management EU: European Union GBS: Green Bond Standard GDP: gross domestic product GBP: Green Bond Principles ICMA: International Capital Markets Association IDA: International Development Association IFC: International Finance Corporation IMF: International Monetary Fund LAC: Latin America and the Caribbean MENA: Middle East and North Africa NDC: nationally determined contributions NGFS: Network of Central Banks and Supervisors for Greening the Financial System SA: South Asia SBN: Sustainable Banking Network SBP: Social Bond Principles SBTi: Science Based Targets Initiative SDGs: Sustainable Development Goals SEC: Securities and Exchange Commission SFDR: Sustainable Finance Disclosure Regulation SLBs: sustainability-linked bonds SSA: Sub-Saharan Africa SRI: Sustainable and responsible investment TCFD: Task Force on Climate-related Financial Disclosure UAE: United Arab Emirates UNEP FI: United Nations Environment Programme Finance Initiative Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 7 EXECUTIVE SUMMARY The third edition of the “Emerging Market Green Bonds Report” highlights the key trends in and outlook for green bond market developments in emerging markets (EMs) in the context of the COVID-19 crisis. The report also provides a broad overview of the policy and regulatory updates that could affect the green bond market. Key findings of this report • The economic fallout caused by COVID-19 has greatly affected EMs, which will experience widely divergent recovery paths. Recovery measures could create significant opportunities for green and sustainability-related projects by prioritizing large- scale public investment in green sectors and encouraging private sector investment through supportive policies. • Given the highly supportive market fundamentals for the EM green bond market, EM green bond issuance is expected to double in the next three years compared to the previous three and the market to cross the US$100 billion mark of annual issuance by 2023. • Key determinants of the potential for green bond markets include (a) sustainable finance policies and frameworks; (b) green bond issuance momentum; (c) capital market development; and (d) governance and political stability. Out of 57 EMs analyzed, 22 showed improvements from 2019 to 2020 on these measures. EM issuers that are able to demonstrate strong commitments to sustainable development objectives will benefit from strong and growing investor demand. • Despite the unprecedented challenges for the global economy and financial markets in 2020, the global green bond market proved resilient, achieving the key milestone of US$1 trillion in cumulative issuance since 2007, with issuance of US$280 billion in 2020. Since 2012, 43 emerging market economies have issued green bonds, registering cumulative issuance of US$226 billion. In terms of sectoral trends, robust issuance by nonfinancial corporates demonstrates increasing diversification of issuers. Financial institutions make up 50 percent of cumulative green bond issuance by volume in emerging markets. • EM green bond issuance outside China was resilient in 2020, increasing by 21 percent to US$22 billion. Debut issuances from Armenia, Egypt, Georgia, Hungary, Kazakhstan, Romania, and Saudi Arabia contributed to this increase. • China remained the largest green bond issuer in emerging markets in 2020 despite a fall in issuance as a result of lockdowns and project delays due to COVID-19 and a government push to issue pandemic-related bonds. Over half of China’s issuance occurred in the second half of the year, signaling a rebound in the green bond market. • Global green bonds outperformed the overall market, extending the cumulative performance since the end of 2017 to 311 basis points. EM green bonds outperformed conventional EM bonds in 2020 and demonstrated lower volatility. Based on secondary market data, the average EM “greenium” stands at -3.4 basis points, which represents 3.5 percent of the average spread of bonds in the sample. As the “greenium” becomes wider, EM issuers will have greater incentive to issue green bonds, which should support the “greening” of the EM debt market. • Sustainable financial policies and appropriate regulatory frameworks are necessary to encourage capital flows to green projects and sectors. A number of initiatives at the global level could further mobilize EM green bond market development. These include the development of benchmark green taxonomies, implementation of the Task Force on Climate-related Financial Disclosure’s recommendations, and efforts by central banks that focus on capacity building and technical assistance for EMs. Many EMs have made notable progress on launching and implementing sustainable finance policies and frameworks. Several countries also strengthened their commitments to achieve net-zero emissions in 2020. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 8 INTRODUCTION The pandemic and its multiple effects hit the global economy hard in 2020. Consecutive waves of infections and extended or renewed lockdowns and other social distancing measures not only depressed economic activity but also had profound social effects. Relative to pre-pandemic baseline forecasts, real gross domestic product (GDP) is projected to be 6 percent lower in 2022 in emerging markets (EMs) and 3 percent lower in developed economies. This growth shock is expected to reverse two decades of progress on poverty reduction worldwide, with 8 out of 10 of the “new poor” living in middle-income countries.1 Although the rapid development of COVID-19 vaccines and, more recently, the launch of widespread immmunization drives provide a clear path out of this unprecedented global crisis, the short-term outlook, especially in EMs, is still uncertain. What is certain is that EMs will experience widely divergent recovery paths and will require substantial fiscal policy support. In the short term, this fiscal support is likely to continue to focus on providing relief and mitigating the immediate effects of the pandemic. Once the focus shifts toward spurring long-term recovery, policy makers will have the choice to concentrate the stimulus on green investments, particularly in sectors such as renewable energy, distribution and storage, green urban infrastructure, and climate-smart agriculture. The International Monetary Fund (IMF) has called for policy makers to “green” their response to the crisis, promoting green investment alongside carbon pricing mechanisms to support the recovery efforts.2 This emphasis on green recovery will come into sharp focus at the upcoming 2021 United Nations Climate Change Conference (COP26) in November, where governments are expected to renew their climate commitments by submitting updated nationally determined contributions (NDC). Because EMs generally may have more limited scope for countercyclical fiscal and monetary policies than developed economies, incorporating green objectives to EM recovery efforts would be necessary not only to mitigate climate risks and environmental challenges but ultimately also to increase resilience to future shocks. Meeting global climate goals will require investment on an unprecedented scale across EMs. Fortunately, a wide range of opportunities exist to finance climate commitments and sustainable development objectives. The 2021 IFC report “A Green Reboot for Emerging Markets” identified 10 sectors across 21 EMs that can support job creation and sustainable growth going forward.3 These investment opportunities have the potential to generate over US$10 trillion through 2030 and create over 200 million jobs in sectors related to green infrastructure, climate-smart cities, and the transition to low-carbon economies. Seen in this light, the COVID-19 pandemic, notwithstanding its tragic human and economic cost, may come to be seen as a turning point for a significant increase in investment into green sectors. Financial markets have a key role to play in supporting sustainable growth and development, mobilizing capital for projects with environmental benefits on a large scale, and addressing climate risk. Despite the pandemic, investor appetite for green financing instruments remained robust in 2020. After a lackluster first half, global issuance of green bonds rebounded in mid-2020, reaching the key milestone of US$1 trillion in cumulative issuance since 2007.4 Investor interest was spread across different kinds of instruments in this space: “use of proceeds” green bonds, tied to the financing of well-defined green investment projects; “use of proceeds” issuances with social and sustainability objectives; and sustainability-linked bonds tied to sustainable performance indicators at the issuer level (see box 1). With EMs still offering yield pickup in the global context at a time when there is increased appetite for environmental, social, and governance (ESG) products, EM issuers that are able to demonstrate commitment to sustainable development objectives will benefit from strong and growing investor demand. The third edition of IFC and Amundi’s “Emerging Market Green Bonds Report” provides an overview of EM green bond developments over the past year and discusses policy and regulatory changes driving EM green bond issuance. Despite the challenges that remain with regard to data quality and availability, supply constraints, and overall macroeconomic and policy uncertainty, this report concludes with a positive outlook on the potential for green bond market growth across the EM world. Both government action and private sector investment will be needed to enable a green recovery at the scale and speed required. Although the economic fallout caused by COVID-19 has greatly affected EMs, recovery measures can create significant opportunities to invest in a green and sustainable recovery. Among EMs, China, Colombia, India, Indonesia, Nigeria, and South Africa have already integrated some green measures into their pandemic stimulus packages, including spending on solar systems, geothermal projects, afforestation, and electric vehicle infrastructure. Nevertheless, governments will need to concentrate more efforts toward incorporating environmental considerations into their fiscal responses. Enacting policies that support green and sustainable finance standards, data, and reporting would encourage more private sector investment. A substantial green recovery across emerging markets could bring about significant short- and medium-term benefits when it comes to job creation and investment opportunities. Ultimately, adopting a low-carbon pathway will offer a path toward achieving long-term sustainable growth and limit the rise in global temperatures to well below 2°C. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 9 Box 1: Labeled Bonds - Definitions and Guidelines 5 Although this report focuses on green bonds, the below Sustainability-linked bonds: Sustainability-linked bonds definitions are provided to clarify terminology and (SLBs) are performance-based non-earmarked bonds distinguish between the different types of labeled bonds. whose financial or structural characteristics (for example, The proliferation of labels requires vigilance from investors coupon rate) are adjusted depending on achievement on the actual project eligibility, allocation, and impact of predefined sustainability objectives. The objectives reporting commitments attached to labeled bonds. are measured through key performance indicators and assessed against sustainability performance targets. In Green bonds: Green bonds are fixed-income instruments June 2020, ICMA published the Sustainability-Linked with proceeds earmarked exclusively for new and existing Bond Principles, providing guidelines that recommend projects that have environmental benefits. The Green structuring features, disclosure, and reporting. Bond Principles (GBP) developed under the auspices of Climate transition bonds: Climate transition bonds the International Capital Markets Association (ICMA) have are new products that aim to finance the transition four components: use of proceeds, process for project to a low-carbon economy. ICMA has not published evaluation and selection, management of proceeds, and separate guidelines for transition-labeled bonds. The reporting. A number of countries and jurisdictions have Climate Transition Finance Handbook published by developed their own set of guidelines for green bond ICMA in December 2020 recommends disclosures for issuance, many of which align with the GBP. issuers labeling either use-of-proceeds or sustainability- Social bonds: The use of proceeds from social bonds linked instruments with a climate transition label. Four is directed toward projects that aim to achieve positive key elements of the recommended disclosures are the social outcomes especially, but not exclusively, for a issuer’s climate transition strategy and governance; business model environmental materiality; climate target population. ICMA’s Social Bond Principles (SBP) transition strategy that is science-based, including targets have four components analogous to the GBP: use of and pathways; and implementation transparency. proceeds, process for project evaluation and selection, management of proceeds, and reporting. The 2017 SBP Other labels: Some issuers have also used other were updated in June 2020 to reflect changes in the marketing labels for sustainable debt funding such as market, notably in the context of COVID-19. For example, blue, adaptation, or sustainable development goal (SDG) social project categories and target populations were bonds. In essence, most of these bonds remain use- expanded to encourage organizations to issue bonds in of-proceeds bonds aligned with ICMA principles, but line with the SBP in this unprecedented period. their branding has been adapted to single out a specific feature of their program. For instance, blue bonds are Sustainability bonds: Sustainability bonds are debt green bonds focused on the financing of water-related instruments whose proceeds will finance or refinance sustainable projects. Some bonds labeled “sustainable a combination of green and social projects. The development bonds” depart from ICMA principles Sustainability Bond Guidelines established by ICMA are though, as they are not “use-of-proceeds” bonds, but aligned with the four core components of both the rather are general purpose bonds from issuers who wish Green Bond Principles and Social Bond Principles. to flag that their mission is inherently sustainable. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 10 MARKET ANALYSIS: THE CURRENT STATE OF THE MARKET Despite unprecedented challenges in 2020, the green bond market proved resilient. The global green bond market achieved a key milestone of US$1 trillion in cumulative issuance since 2007, with issuance of US$280 billion in 2020. Overall, momentum for bonds with environmental, social, and governance (ESG) objectives accelerated, as other thematic bonds, namely social, sustainability, and sustainability-linked bonds, reached record levels of issuance (figure 1).6 Figure 1 - Global ESG Thematic Bond Issuance (US$ billion) 500 Sustainability-linked bonds 450 DM social bonds EM social bonds 400 EM sustainability bonds 350 DM sustainability bonds 300 Supranational green bonds 250 EM green bonds DM green bonds 200 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Turning to emerging market countries, the effects of the COVID-19 crisis on market conditions for EM debt varied from country to country, reflecting domestic factors and the extent of policy support, but spreads had generally returned to pre-crisis levels by the end of 2020 (figure 2). According to the IMF, at least 18 EM central banks used asset purchase programs to stabilize local currency bond markets and to stem large portfolio outflows, with some debt issuance postponed to the second half of the year. Nevertheless, the EM green bond market was also resilient with 174 green bonds amounting to US$40 billion in issuance from 101 issuers (figure 3).7 Figure 2 - EM Debt Spreads Figure 3 - EM ESG Thematic Bond Market Size (J.P. Morgan blended index, basis points) (US$ billion) 1,200 200 1,100 180 1,000 160 900 140 800 120 700 100 600 80 500 60 400 40 300 20 200 0 2016 2017 2018 2019 2020 0 0 0 0 0 0 0 0 0 0 0 0 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 01 02 03 04 05 06 07 08 09 10 11 12 EM sustainability-linked bonds Africa Asia Europe EM social bonds Latin America Middle East EM sustainability bonds EM green bonds ex-China China green bonds Source: J.P. Morgan. Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 11 Despite a decline in issuance relative to 2019, China remained the largest EM green bond issuer. China’s green bond issuance fell to US$18 billion after four consecutive years of issuance over US$30 billion (see box 2). Over half of China’s issuance occurred in the second half of 2020. On the other hand, EM ex-China green bond issuance rose 21 percent in 2020 to US$22 billion, an even more rapid growth than the 17 percent increase in global green bond issuance. The largest issuers were Chile, the Czech Republic, Hungary, Brazil, and Indonesia (figure 4). Among the new entrants to the EM green bond market were Egypt, with a sovereign green issue of US$750 million in September 2020, and Hungary, with sovereign green issues of US$1.9 billion, as well as another US$300 million in issuance from nonfinancial corporates. Other debut green bond issuers were financial sector institutions based in Armenia and Kazakhstan and nonfinancial corporates based in Georgia, Romania, and Saudi Arabia. Since 2012, 43 emerging market economies have issued green bonds, registering cumulative issuance of US$226 billion (figure 5). Excluding China, issuance has been almost equally split between the private and public sectors. Figure 4 - Emerging Market Green Bond Issuance, 2020 (US$ million) 2020 Emerging Market Issuance 18,076 1,860–18,075 750–1,859 200–749 0.5–199 No data Source: IBRD 45635. March 2021. Country Volume (US$ million) Country Volume (US$ million) China 18,076 Panama 289 Chile 3,811 Poland 255 Czech Republic 2,508 Uruguay 253 Hungary 2,192 Georgia 250 Brazil 1,913 Peru 200 Indonesia 1,860 South Africa 200 Saudi Arabia 1,300 Colombia 159 Mexico 1,239 Turkey 115 Romania 1,041 United Arab Emirates 97 Thailand 955 Malaysia 61 Philippines 919 Lithuania 53 India 916 Armenia 50 Egypt 750 Kazakhstan 0.5 Russia 357 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 12 Figure 5 - Cumulative Emerging Market Green Bond Issuance, 2012–2020 (US$ million) 12,000 Sovereigns and government agencies Corporate 10,000 8,000 6,000 4,000 2,000 0 China India Chile Brazil Poland Indonesia Czech Rep. Philippines Mexico South Africa Hungary UAE Thailand Malaysia Saudi Arabia Peru Romania Russia Lithuania Egypt Argentina Colombia Costa Rica Panama Uruguay Ukraine Morocco Georgia Turkey Ecuador Latvia Nigeria Slovenia Lebanon Estonia Armenia Fiji Kenya Vietnam Seychelles Namibia Barbados Kazakhstan Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. As a share of total bond issuance, green bonds in EMs ex-China held steady, averaging 3.8 percent in 2020 compared with 3.4 percent in developed markets (figure 6). Consistent with the global activity in ESG thematic bonds, the volume of outstanding social and sustainability bonds more than doubled with issuance of US$15 billion in emerging markets, including landmark sovereign sustainability issuances from Mexico and Thailand. Nonfinancial corporates in Brazil, Poland, and the United Arab Emirates were the first to issue sustainability-linked bonds in emerging markets. Figure 6 - Emerging Market Green Bond Issuance, Monthly, 2020 (US$ billion) % 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 0 0 0 0 0 20 0 0 20 0 0 0 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 / / 01 02 03 04 05 06 07 08 09 10 11 12 Market share ex China China issuance EM issuance (ex China) Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 13 A Regional View The East Asia and Pacific region maintained its leadership in EM green bond issuance, with 76 percent of the total EM cumulative green bond issuance since 2012. Latin America and the Caribbean increased its share of the cumulative issuance from 7 percent at end-2019 to 10 percent at end-2020 (figure 7). Figure 7 - Emerging Market Green Bond Issuance, by Region, 2012–2020 % (US$ billion) LAC 10% 25 SSA ECA 6% SA MENA SA 5% 20 LAC ECA EAP (ex China) 5% 15 EAP (ex China) Other 3% 10 SSA 1% 5 MENA 2% China 71% 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Region Number of countries Number of issuers Volume (US$ billion) East Asia and the Pacific (EAP) 7 262 172.0 Europe and Central Asia (ECA) 14 31 14.3 Latin America and the Caribbean (LAC) 11 51 21.3 Middle East and North Africa (MENA) 5 9 4.4 South Asia (SA) 1 22 11.8 Sub-Saharan Africa (SSA) 5 14 2.6 Total 43 389 226.4 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 14 East Asia and the Pacific: China has the third largest volume of green bonds globally, with US$115 billion in outstanding bonds, and led emerging markets in 2020 issuance. Association of Southeast Asian Nations (ASEAN) countries issued a combined US$3.8 billion in 2020, an 8.6 percent increase from 2019. A third sovereign green bond from Indonesia in June 2020 (US$750 million at five years) reinforced the government’s commitment to play a leadership role in greening the financial system and climate action. Renewable energy corporates based in Indonesia, Malaysia, the Philippines, and Thailand made up most of the rest of the region’s issuance. South Asia: Among emerging markets, India has the second largest volume of outstanding green bonds (US$10.8 billion) and has consistently been the second largest issuer after China. This past year, however, India’s green bond issuance dropped significantly, to US$916 million from US$3.2 billion in 2019. Data on green loan issuance, which more than doubled from US$1.5 billion in 2019 to US$3.6 billion in 2020, according to Bloomberg, suggest that bank financing was more attractive than bonds. Latin America and the Caribbean: In 2020, Chile led Latin America and the Caribbean as the largest issuer in the region (and the second largest among EMs) with taps and new issues of its sovereign bonds totaling US$3.8 billion, about half of the region’s issuance. Nonfinancial corporates in Brazil placed several issues amounting to US$1.6 billion, while financial institutions placed another US$150 million of green bonds. Green bonds in Mexico, Panama, Uruguay, Peru, and Colombia rounded out the region’s increasing share of emerging market issuance with US$2.1 billion of issues. Europe and Central Asia: Europe and Central Asia nearly doubled its total volume of green bonds in 2020 led by the Czech Republic (US$2.5 billion) and Hungary (US$2.2 billion). Of the seven countries issuing debut green bonds in 2020, five were from the region: Armenia, Georgia, Hungary, Romania, and Kazakhstan. Hungary’s inaugural sovereign bond was issued shortly before its net-zero emissions target by 2050 was set in legislation. Lithuania, Poland, Russia, and Turkey issued a combined US$1.8 billion in green bonds. Middle East and North Africa: Overall debt issuance in the Middle East and North Africa has been increasing due to declining oil revenues and increasing pressure on government finances. The region saw a substantial boost in green bond issuance with Egypt’s sovereign green bond—the first in the region. The US$750 billion bond was oversubscribed 5x and will finance a US$1.9 billion portfolio of green projects in pollution prevention and control, sustainable water and wastewater management, clean transportation, and renewable energy. Saudi Arabia came to the green bond market for the first time with a US$1.3 billion green sukuk from Saudi Electricity Co. The UAE-based First Abu Dhabi Bank placed its fourth green bond—this one the first Hong Kong dollar-denominated private placement green bond by an offshore financial institution. Sub-Saharan Africa: Financial institutions have accounted for 60 percent of the region’s cumulative green bond issuance. In February 2020, South Africa’s Standard Bank issued the region’s first offshore bond—a 10-year US$200 million issue. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 15 Box 2: China’s Green Bond Market China currently has the third largest volume of (especially between February and September 2020) outstanding green bonds in the world at about US$115 contributed to the lack of supply of green bonds by billion, after the United States and France (figures 8 and commercial banks. This box explores (1) why investors 9). This is despite a drop in issuance of China’s green are interested in China’s green bonds; (2) why issuers bonds in 2020 to US$18 billion from US$34 billon in have incentives to issue more green bonds; and (3) 2019, which was likely a result of the disruption of the scope for further developments. pandemic. The government’s push on pandemic bonds Figure 8 - Outstanding Green Bonds, Figure 9 - Market Share of Green Bonds Outstanding, by Country (US$ billion) by Currency (%) 140 60 120 50 100 40 80 30 60 20 40 8.6 20 10 0 0 Fr s ce Ge ina th any Sw ds en ain Ca n da t B ly No ain Au ay lia a a ro r bi a r r n d e c e lla lla lla e ut di re on an on on Ye un pa ea Ita in Eu at rw ra n an na ed Ch Sp rit So In Do Do Do Ko Ne rm la Fr nm Ja Kr Kr Kr Po St st se er iss h ne ish ian sh d S. an n Re sh ite lia U. Sw ni pa di ed iti eg e Gr ra Un Da na Br es Ja Sw rw st Ca in Au No Ch Source: Bloomberg. Source: Bloomberg. Why Investors Are Interested in China’s Green Bonds In the current low yield environment, China’s bond yields with China having the largest EM weight in the JP Morgan are generally attractive to global investors. The Barclays green bond index, which has a minimum issue size for Global Aggregate Index (market cap of around US$65 hard currency bonds of US$300 million, at 3.2 percent. trillion) illustrates the relative attractiveness of China’s President Xi’s commitment to achieving carbon neutrality bonds, which have the fourth largest weight by currency by 2060 at the UN General Assembly in September 2020 after USD, EUR, and JPY in the global fixed income market is a signal that developing the green market will remain a (figure 10). policy priority. Greater harmonization of China’s standards with international ones could boost investor demand for China has the largest EM green bond market in terms offshore issuance. of both issuance and outstanding amount. It therefore offers much better liquidity for investors than its EM peers Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 16 Why Issuers Have Incentives to Issue More Green Bonds The announcement of the goal of carbon neutrality billion, and US$2.5 billion for 2020 Q1, 2019 Q1, and 2018 by 2060 (see also carbon neutrality timeline in section Q1, respectively, based on Bloomberg data. on policy and regulatory developments) is likely to Commercial banks have been the largest source of incentivize issuers to re-focus on green bond issuance as issuance in China, while local government financing they did pre-COVID-19. The dip in green bond issuance vehicles or government agencies have been stepping in 2020 is likely to be temporary, and issuance could go up issuance (figure 11). Renewable energy and green back to pre-2020 levels relatively quickly. Indeed, as of buildings have provided many investment opportunities in early March 2021, China has already issued US$4 billion China, whereas transportation is another area of growth. of green bonds, compared with US$2.7 billion, US$2.7 Figure 10 - Global Bond Yields Figure 11 - China’s Green Bond Issuance, by Issuer (%) Sector, (US$ billion) 7 40 Yield of different currency denominated bonds 35 6 in Barclays Global Agg Index 5 30 4 25 3 20 2 15 1 10 0 5 -1 0 2016 2017 2018 2019 2020 DKK (0.2%) CHF (0.5%) EUR (24%) SEK (0.4%) JPY (13.8%) PLN (0.2%) ILS (0.1%) HKD (0%) NZD (0.2%) AUD (1.5%) NOK (0.1%) SGD (0.2%) CZK (0.1%) THB (0.3%) GBP (5.1%) KRW (1.1%) HUF (0.1%) USD (41.3%) CAD (2.7%) CLP (0.1%) RON (0.1%) MYR (0.3%) CNY (6.6%) PEN (0.1%) COP (0.1%) MXN (0.3%) RUB (0.2%) IDR (0.4%) Other Manufacturing Sovereign Construction and real estate Municipal Government agency Note: The x-axis includes reference to the weight of the currency Transportation Financial Institution within the Barclays Global Aggregate Index. Power and utilities Source: Bloomberg. Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Scope for Further Developments While the closer alignment of the Chinese green bond Since 2019, international rating agencies have been able standard to international standards (such as on the clean to obtain licenses to rate domestic Chinese bonds, and coal front) is welcomed by investors, further improvement there has been a gradual increase in international credit is needed in two areas: (a) credit rating and (b) market ratings. An additional challenge is that domestic bonds access. Currently, very few domestic bonds have require local settlement accounts, which means investors international credit ratings as they are relying on local would need to open and prefund a local account before credit rating agencies. This makes valuation and credit they could buy domestic bonds. assessment more difficult for international investors. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 17 Trends in Emerging Market Green Bond Issuance Issuing Sectors: Financial institutions in emerging markets make up 50 percent of cumulative green bond issuance by volume, which contrasts with 19 percent in developed markets (figures 12 and 13). Privately owned banks account for about 70 percent of the issuance by financial institutions outside of China. In 2020, the share of financial institutions declined somewhat due to the decrease in issuance by Chinese financial institutions. Sovereigns, nonfinancial corporates, and government agencies retained similar shares of issuance in 2020 as in 2019, while in developed markets, corporates and sovereigns increased their shares.8 Nearly half of nonfinancial corporate green bond issuance in EMs are in the power and utilities sector, while issuance in the construction and real estate sectors has also steadily increased (figure 14). Figure 12 - EM Green Bond Issuance, by Sector Figure 13 - Developed Market Green Bond (US$ billion) Issuance, by Sector (US$ billion) 60 Financial institution (EMs ex-China) 180 Financial institution Financial institution (China) 160 Nonfinancial corporate 50 Nonfinancial corporate Government agency Government agency 140 Municipal 40 Municipal 120 Sovereign Sovereign 100 30 80 20 60 40 10 20 0 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Use of Proceeds: Green bond issuers typically designate use of proceeds for specific projects that would contribute to environmental objectives. Cumulatively, the largest share of the use of proceeds has been designated for renewable energy, while transport projects were increasingly prevalent in 2020 (figure 15). Other categories for use-of-proceeds bonds include water, green buildings, waste, land, adaptation and resilience measures, information and communications technology, and industry. Figure 14 - EM Green Bond Nonfinancial Corporate Figure 15 - EM Green Bond Issuance, by Use of Issuing Sector, 2012–2020 (US$ billion) Proceeds, 2012–2020 (%) 15 Construction and real estate Energy Manufacturing Transport 3% Other services sectors Water 5% 1% Power and utilities 7% Telecom, media, and technologies Building 10 Transportation 9% Waste 35% Land  nallocated adaptation U 11% 5 and resilience Industry 29% 0 2016 2017 2018 2019 2020 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Source: Climate Bonds Initiative, IFC. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 18 Currency: Emerging market green bonds outside China have been mostly denominated in hard currency (figure 16). Hard currency issues accounted for 88 percent of the volume in 2020. An increasing share of Chinese green bonds are denominated in hard currency as well. Over 75 percent of the local currency bonds outside China were issued in Thai baht, Brazilian reals, Hungarian forints, or Polish zlotys (figure 17). Figure 16 - EM Green Bond Issuance, by Currency, Figure 17 - EM Local Currency Green Bond 2012–2020 (US$ billion) Issuance, ex-China, 2020 (%) 60 Local currency Thai baht Hard currency Brazilian real 3% 2% 50 Chinese yuan Hungarian forint 4% 2% Polish zloty 6% 40 Mexican peso 7% 30 Colombian peso 39% 10% Russian ruble 20 Malaysian ringgit 10 Philippine peso 12% Other 15% 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Issue Size: Issuance sizes of EM green bonds are gradually trending larger, with 54 percent of the 2020 issue sizes at least US$100 million (figure 18). About 25 percent of the bonds issued are benchmark-size of at least US$300 million and 16 percent are at least US$500 million. Benchmark-driven investments play a growing role in EM bond markets, as inclusion in major indices provides greater access to external financing.9 Ratings: The lack of internationally recognized credit ratings affixed to EM green bonds has been a limitation for investment because the ratings are key to assessing creditworthiness. Over half of the bonds without such ratings have been issued in China, where many issuers have relied on local credit rating agencies. In the past two years, however, an increasing percentage of issuers have obtained a credit rating from at least one major credit rating agency (figure 19). Of the total number of green bond issues in 2020, 23 percent were rated investment grade and another 12 percent were rated subinvestment grade. Figure 18 - EM Green Bond Issuance Size Figure 19 - EM Green Bond Issuance, Ratings (number of bonds) (%) 250 At least 500 million 100 300 million to 500 million 90 200 million to 300 million 200 80 100 million to 200 million 50 million to 100 million 70 150 0 to 50 million 60 50 100 40 30 50 20 10 0 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Withdrawn Rated - subinvestment grade Not rated Rated - investment grade Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Source: IFC, Bloomberg. Tenor: Emerging market green bonds have typically been medium-term instruments, with the majority of issuances having a 3- to 5-year tenor. In 2020, however, issues were longer dated, as 33 percent of issuances were in the range of 5 to 10 years and another 32 percent of issuances were over 10 years. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 19 MARKET PERFORMANCE Measured by the broad indexes, green bonds showed strong performance in 2020 Global green bonds outperformed the overall market again in 2020, extending the cumulative overperformance since the end of 2017 to 311 basis points (figure 20). This reflected in large part the continued depressed level of market policy rates that benefit the longer-duration bonds in the green bond index. EMs maintained a 9 percent weight in the global green bond index, thanks to the momentum of new deals. Figure 20 - Total Return Performance of Global Green Bonds vs. Global Aggregates (USD Hedged, base 100=Dec 2017) Basis points 125 Relative performance Global green bonds 500 120 Global aggregate 400 115 300 110 200 105 100 100 95 0 90 -100 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Dec-20 Source: Bloomberg. J.P. Morgan launched its first green bond index in November 2020,10 tracking US$400 billion in green bonds issued across hard currency credit (USD, EUR, and GBP denominated) and local currency government bonds across developed and emerging markets. In 2020, the EM subset of the J.P. Morgan Green Bond index outperformed the conventional J.P. Morgan EM index (6.6 percent vs 5.4 percent). Overall, the green sub-set demonstrates lower volatility for similar performance in EMs (figure 21). The “Greenium” in Emerging Markets As documented in last year’s report,11 green bonds generally trade in secondary markets at tighter spreads than comparable conventional bonds by very small margins. This is the so-called green bond premium or “greenium.” When the “greenium” widens (turns more negative), green bonds outperform conventional bonds. The recent Amundi study “Facts and Fantasies about the Green Bond Premium,”12 analyzed the “greenium” from two different perspectives: a reweighted “green adjusted index” comparable to a conventional index and a “curve greenium,” the discount in the specific green issues in the curve of an issuer. The study found that over the last four years, the former averaged -4.7 basis points, widening somewhat during the COVID-19 crisis in 2020. The “curve greenium,” on the other hand, averaged -2.2 basis points. It was more pronounced for supranational issuers and utilities and tended to be higher for issuers with higher ESG standards. The green bond premium does not hide a liquidity premium as the levels are even more negative with comparable bonds when accounting for liquidity factors. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 20 Figure 21 - Total Return Performance of J.P. Morgan EM Green Index vs. J.P. Morgan EM Aggregate (USD Hedged, base 100=Dec 2017) Basis points 120 Relative performance 1,000 900 EM green 800 115 EM aggregate 700 600 110 500 400 300 105 200 100 100 0 -100 -200 95 -300 -400 90 -500 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Source: J.P. Morgan. Based on secondary market data,13 the average EM “greenium” stands at -3.4 basis points, which represents 3.5 percent of the average spread of bonds in the sample (figure 22). These spreads are based on reference spreads between green bonds and comparable conventional bonds by the same issuer (figure 23). Figure 22 - EM Green Premium Statistics Median Average Average Average Premium Premium Premium Number of Average Modified Spread vs Average (basis point) (basis point) observations T statistic Duration (basis point) Spread (%) -2.4 -3.4 24 -1.9 5.8 97 -3.5 Source: Amundi, Bloomberg. Given the relatively small size of the EM green universe—and consequently the small number of observations in the sample—it would be premature to draw firm conclusions. Nevertheless, given the high yield nature of this segment of the market, there could be potential for the EM “greenium” to widen. The negative premium is mostly a result of the imbalance between the supply of green bonds and investors’ demand. As the “greenium” becomes wider, EM issuers will have greater incentive to issue green bonds, which should support the “greening” of the EM debt market. Furthemore, the “greenium” does not encompass the “green halo” effect, which is supposed to capture the wider benefits of green bond issuance for issuers, who may see overall increased access to debt capital markets. As green and sustainable finance markets grow, issuers and investors alike benefit from signaling a robust ESG strategy. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 21 Figure 23 - Curves of Select Green Bond EM Issuers Inversiones CMPC Indonesia Chile (USD) G-Spread G-Spread G-Spread 140 155 140 135 120 130 115 100 120 95 80 110 75 60 55 40 100 35 20 90 15 0 2 3 4 5 6 7 8 9 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 40 45 50 Modified Duration Modified Duration Modified Duration Green bond Conventional bond Green bond Conventional bond Green bond Conventional bond Republic of Poland NE Property BV Coca-Cola Femsa Z-Spread Z-Spread G-Spread 90 260 140 240 120 70 220 100 50 200 80 30 180 60 160 40 10 20 140 -10 120 0 0 5 10 15 20 25 30 35 0 1 2 3 4 5 6 7 8 8 10 12 14 16 18 20 22 24 Modified Duration Modified Duration Modified Duration Green bond Conventional bond Green bond Conventional bond Green bond Conventional bond Egypt Hungary China Construction Bank Corp/Hong Kong G-Spread Z-Spread G-Spread 600 160 100 550 140 90 500 120 450 80 100 400 70 350 80 60 60 300 250 40 50 0 5 10 15 20 25 30 35 40 4 9 14 19 24 29 34 1 1.5 2 2.5 3 3.5 4 4.5 5 Modified Duration Modified Duration Modified Duration Green bond Conventional bond Green bond Conventional bond Green bond Conventional bond Suzano Austria GmbH Qatar National Bank Power Finance Corp G-Spread G-Spread G-Spread 350 100 240 90 220 300 200 250 80 180 200 70 160 140 150 60 120 100 50 100 5 10 15 20 25 30 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 2 3 4 5 6 7 8 9 10 11 Modified Duration Modified Duration Modified Duration Green bond Conventional bond Green bond Conventional bond Green bond Conventional bond Sustainability-Linked Bonds CGNPC International G-Spread 250 200 150 Note: The Z-spread or zero volatility spread is the constant yield spread over the entirety of the swaps spot curve such that the present value of the cash flows matches the clean price 100 of the bond. The G-spread or nominal spread is defined as the difference between the yield 50 of the corporate bond and the interpolated yield of the treasury bond of the same time to 0 5 10 15 20 25 30 35 maturity. Depending on the type of issuer and currency of the issuance, both of them are Modified Duration used as a market standard for bond market pricing. Green bond Conventional bond Source: Amundi, Bloomberg. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 22 REGULATORY AND POLICY DEVELOPMENTS Sustainable financial policies and appropriate regulatory frameworks are necessary to encourage capital flows to green projects and sectors. Before discussing regulatory developments in EMs, a number of global policy and regulatory initiatives are covered, as these can have a significant impact on mobilizing capital for EM green bond markets. A fundamental concern for institutional investors relates to the reliabiilty and comparability of data used in their analysis. The implementation of global regulatory and policy initiatives, such as the ones mentioned below, will be key to strengthening investor confidence going forward. Global Initiatives Changes in U.S. Policy: In the United States, the new administration’s climate agenda marks a significant policy shift. As part of his Clean Energy Revolution, President Biden has committed to decarbonizing the U.S. power sector by 2035 and to achieving carbon neutrality by 2050. Alongside job creation and the modernization of critical infrastructure, supporting green technologies is a key priority for federal investments. President Biden also announced that the United States has rejoined the Paris Agreement, which means the country will have to submit its nationally determined contribution ahead of COP26 scheduled for November 2021. Although this announcement has symbolic significance, political hurdles still lie ahead, as congressional approval will be needed to enact climate-related legislation. Still, if successful, these policies could create positive spillovers for the green bond market, including in EMs. EU Taxonomy and Green Bond Standard: The EU Green Bond Standard (GBS) will establish a uniform, recognizable, and high-quality standard for green bonds across the European Union. It aims to increase transparency and comparability in the green bond market, as well as to provide clarity to issuers on the steps to follow for a green bond issuance. In 2020, the European Commission conducted a public consultation on the GBS and now has to decide how and in what legal form to take forward the new standard. The GBS will be a voluntary standard that would facilitate alignment with the EU Green Taxonomy, which provides a classification system for environmentally sustainable economic activities. In June 2020, the European Union published its Taxonomy Regulation setting out four overarching conditions that an economic activity has to meet to qualify as environmentally sustainable.14 Moreover, the United Nations Environment Programme Finance Initiative (UNEP FI) and the European Banking Federation launched a report aimed at assessing the applicability of the EU Taxonomy on Sustainable Activities to core banking products for labeling or disclosure purposes.15 The report put forward a set of recommendations to support banks in meeting their sustainabilty targets. Although these European policy developments are not applicable to EMs specifically, investors in emerging market economies can use the Green Taxonomy criteria and the future GBS as benchmarks for their own investments, regardless of the location of the underlying economic activity. As a result, these EU initiatives represent significant progress for the global green bond market and are likely to foster the further development of EM-specific taxonomies. Sustainable Finance Disclosure Regulation (SFDR): As part of its action plan on financing sustainable growth of March 2018, the European Commission introduced the SFDR, which aims to ensure transparency on sustainability across financial markets in a standardized manner and thus to enhance comparability. Most of these new disclosure obligations have been applicable since March 10, 2021. For example, in-scope financial products now have to disclose precontractual documents showing whether and how they integrate sustainability risks. The three European Supervisory Authorities recently published draft Regulatory Technical Standards, on the content, methodologies and presentation of disclosures under SFDR. This includes an updated list of environmental and social indicators for principal adverse impacts that financial actors will need to provide reporting on in the coming years. This should clarify reporting information for green bond issuers going forward. This new EU sustainable finance tool can help scale up the financing of sustainable projects and activities in emerging markets. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 23 Task Force on Climate-related Financial Disclosure (TCFD): The Task Force has received widespread support for its recommendations in 2020. Over the past year, the number of organizations supporting the TCFD grew more than 85 percent, reaching over 1,500 organizations across 25 developed countries and 20 emerging markets. In its review of company reports (conducted using artificial intelligence technology16), TCFD found that companies’ disclosure of their climate-related financial information—in alignment with the Task Force’s recommendations—has steadily increased since the recommendations were published in 2017. The largest increases relate to disclosure on how companies identify, assess, and manage climate-related risk. Industries considered the most exposed to material climate risk actually demonstrated the highest levels of TCFD disclosure. Paving the way, New Zealand announced in September 2020 that it will implement mandatory climate risk reporting in line with TCFD recommendations. The United Kingdom followed suit, signaling its intention to make TCFD- aligned disclosures mandatory by 2025, with a significant number of requirements to be in place by 2023. Network for Greening the Financial System: The membership of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) expanded significantly in the past year, including across emerging markets.17 In a 2020 report, the NGFS highlights that notable progress has been made by central banks worldwide. Institutions have increasingly taken steps to integrate sustainable and responsible investment (SRI) practices in their portfolios, motivated by a growing awareness of reputational risks and a desire to lead by example.18 NGFS efforts are particularly important insofar as they contribute to capacity building and technical assistance in EMs. UN Sustainable Development Goals: There is a growing momentum in global capital markets to establish a relationship between investments and the United Nations Sustainable Development Goals (UN SDGs). In response, a number of bodies and institutions have created frameworks for investors to adopt these goals as references for their investments. Most recently, the International Capital Markets Association published its “High-Level Mapping to the Sustainable Development Goals,” serving as a guide for public and private sector issuers and investors to review their green, social and sustainability bond issuances, and investments against the SDGs.19 This guide will be particularly useful for EM investors because delivering on the UN’s sustainable development agenda will require additional financing of US$2.1 trillion in emerging market economies alone (see figure 24).20 Science Based Targets Initiative (SBTi) for Financial Institutions: In 2018, the SBTi launched a project to encourage financial institutions to align their lending and investment portfolios with the objectives of the Paris Agreement. More than 55 financial institutions worldwide have publicly committed to setting emissions reduction targets that align with this initiative. In October 2020, the SBTi published a guidance document setting out target validation criteria and recommendations to help financial institutions determine their objectives.21 By encouraging more financial institutions to set ambitious objectives, this initiative can create incentives for financial actors across EMs to commit to substantial emissions reductions. An increasing number of governments worldwide are taking action to cut carbon emissions. In 2020, several countries made commitments to achieve net zero emissions by 2050, in line with the objectives set by the Paris Agreement. The following is a timeline of recent national net zero engagements: Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 24 COUNTRIES’ 2020 NET-ZERO COMMITMENTS TIMELINE Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Austria’s coalition Spain announced China announced its Joe Biden was government it is seeking to pass ambition to become elected president sworn in January a new climate law carbon neutral by 2060 of the United 2020 promised to ensure it can cut States on a to pursue its emissions to net South Africa’s climate platform climate neutrality zero by 2050 government unveiled to aim for net- by 2040 its Low Emission zero emissions Development Strategy, by 2050 outlining its aim of Hungary set a legally becoming a net-zero binding target to reach net- economy by 2050 zero emissions by 2050 In Ireland, in a coalition deal, Japan pledged to achieve net-zero three political parties agreed emissions by 2050 to set a 2050 net zero emissions target by law South Korean President Moon Jae-in pledged that his country will reach carbon neutrality by 2050 during a speech to the national assembly Argentina raised its climate ambition in an updated plan to the UN, pledging to achieve carbon neutrality by 2050 Brazil set an “indicative” goal of carbon neutrality by 2060 in its updated pledge to the Paris Agreement Colombia, Panama, and Nepal submitted their pledges to become carbon neutral by 2050 to the UN Regulatory and Policy Developments in Emerging Markets Many EMs have made notable progress on launching and implementing sustainable finance policies and frameworks. The IFC-initiated Sustainable Banking Network (SBN) enlarged its membership by three countries (Maldives, Serbia, and Ukraine) to 42 countries, representing US$43 trillion of total banking assets. Of these, 25 countries have national policies, guidelines, principles, or roadmaps focused on sustainable banking.22 New sustainable finance initiatives by SBN members in 2020 are described (in figure 25). In October 2020, the Association of Southeast Asian Nations set forth the ASEAN Central Banks’ Agenda on Sustainable Banking, which recommends the development of frameworks to encourage banks to embed sustainability into business practices. These could include an ASEAN-wide taxonomy, green lending principles, and supervisory guidelines and disclosure requirements to support banks in integrating climate- and environment-related risks into risk management. A proposed ASEAN Green Map would further strengthen efforts to green the financial system at the regional level. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 25 Figure 24 - Excerpt from ICMA High-Level Mapping for Green Bond Project Categories SDG Green Bond Project Category Example Indicators - Climate Change Adaptation Number of people benefiting from measures to mitigate the - consequences of climate change such as natural disasters - Climate Change Adaptation -Environmentally Sustainable Management of Living Natural Resources and Land Use - Pollution Prevention and Control Amount of wastewater treated, reused, or avoided before and - - Renewable Energy after the project Amount of raw/untreated sewage sludge that is treated and - disposed - Sustainable Water and Waste Water Management - Volume of water saved - Terrestrial and Aquatic Biodiversity Conservation -Volume of wastewater treated for reuse -Area covered by sustainable land and water resources management practices - Potable water produced - Energy Efficiency Renewable energy produced - - Renewable Energy Avoided greenhouse gas emissions (tons CO2eq) - Eco-efficient and/or Circular Economy Adapted Products, - Production Technologies, and Processes Energy Efficiency - Renewable Energy - Energy Efficiency - Renewable Energy - Clean Transportation - Floor space of green real estate - Eco-efficient and/or Circular Economy Adapted Products, - Waste that is prevented, minimized, reused, or recycled before - Production Technologies, and Processes and after the project Environmentally Sustainable Management of Living Natural - Number of electric vehicles deployed - Resources and Land Use Number of electric vehicle charging points installed - Green Buildings - Pollution Prevention and Control - Renewable Energy - Sustainable Water and Waste Water Management - Eco-efficient and/or Circular Economy Adapted Products, - Avoided resource waste - Production Technologies, and Processes Avoided emissions to air (other than greenhouse gases) - Environmentally Sustainable Management of Living Natural - Reduction of food losses - Resources and Land Use Materials sourced sustainably or recycled - Pollution Prevention and Control - Absolute or % reduction in local pollutants - Renewable Energy - Reduction of hazardous materials used - Sustainable Water and Waste Water Management - Climate Change Adaptation - Water storage capacity - Climate Change Mitigation - Reduction in weather-related disruption and/or risk frequency - (%) Flood-resilient floor space - High-risk assets with climate insurance cover - Greenhouse gas emissions reduced - Environmentally Sustainable Management of Living Natural - Avoided or reduced marine and fresh water pollution - Resources and Land Use (ecotoxicity, eutrophication) Terrestrial and Aquatic Biodiversity Conservation - Biodiversity loss avoided or reduced (# of species) - Environmentally Sustainable Management of Living Natural - Avoidance or reduction of land pollution (ecotoxicity, - Resources and Land Use acidification, salinization, transformation) Terrestrial and Aquatic Biodiversity Conservation - Avoidance or reduction of biodiversity loss (# of species) - Certified afforested or reforested land - Area covered by sustainable land and water resources - management practices Expenditure on conservation and sustainable use of biodiversity - and ecosystems Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 26 As EMs step up the issuance of green bonds and other sustainable finance instruments, the quality and availability of information to identify, measure, and track green investment are key building blocks to ensure investor confidence and scale markets. National, regional, and international green bond guidelines or frameworks are designed to guide issuers on how to improve transparency and fulfill disclosure and reporting requirements. These include specifying eligibility criteria prior to issuance; measuring; regularly reporting on the environmental impact post-issuance; and obtaining external reviews to provide pre- issuance opinions and post-issuance verification. Prior to 2020, national green bond guidelines had been established in 13 SBN countries.23 SBN member countries that issued taxonomies and guidelines in 2020 include Colombia, which issued a good practice guide for green bonds and Thailand, which released its sustainable financing framework in July 2020 with guidelines on eligible green project categories. Russia has circulated a consultative draft of green finance guidelines with a taxonomy. In recognition of the need to build resilient economies, some governments have already started including climate mitigation and adaptation measures and green investment targets in their national recovery plans. South Africa’s National Economic Reconstruction and Recovery Plan includes sustainability, resilience, and inclusion as key priorities. Specific green measures include improving energy efficiency and retrofitting buildings, diversifying energy sources, and supporting biodiversity. Indonesia’s 2020-2024 National Medium-Term Development Plan supports climate change mitigation and adaptation measures, environmental sustainability, and green recovery. Figure 25 - New Sustainable Finance Policies and Actions in 2020 Country Entity Action Description Central Bank Bangladesh Bangladesh Bank Sustainable Finance Policy and Rating Provide sustainable finance taxonomy, for Banks and Financial Institutions green taxonomy, and a sutainability rating system China People's Bank of Updated Green Bond Endorsed Outlines eligible use of green bond China Project Catalogue (draft consultation) proceeds China People's Bank of Notification on Evaluation of Green Extends green evaluation coverage from China Finance Performance of Deposit- green credit to include more financing Type FIs in the Banking Industry (draft tools, such as securities, investments, consultation) leasing, and trusts Georgia National Bank of ESG Reporting and Disclosure Provides guidance to banks in ESG Georgia Principles reporting and disclosure Mongolia Central Bank of Announced national Green Loan Calculates amount and ratio of green loans Mongolia Statistics based on Mongolia Green Taxonomy Nepal Nepal Rastra Bank Issued Unified Directive requiring Requires financial institutions to integrate financial institutions to integrate ESRM into credit risk process and formulate environmental risk and social ESRM policies management (ESRM) Philippines Bangko Sentral Issued Sustainable Finance Framework Requires banks to integrate ESRM ng Philipinas Other Regulatory Bodies Chile Pensions Passed new rule to require ESG and regulator climate risk be part of investment analysis of pension funds Colombia Superintendencia Good Practice Guide for Issuing Green Includes recommendations related to Financiera de Bonds; External Circular 028 of 2020 project selection and evaluation, fund Colombia management, and information disclosure; formally incorporates definition of a green bond Honduras National Banking Standard for the Management of Sets standards for financial institutions to and Insurance Environmental and Social Risk manage environmental and social risk Commission Stock Exchange Argentina Bolsas y Issued three guidelines and regulations Provides guidelines and regulations on Mercados on green, social, and sustainable issuance and listing of green, social, and Argentinos bonds and investment funds sustainable bonds, as well as funds Colombia Colombia Stock Issued Guide for the Preparation of Elaborates the contents and other details Exchange ESG Reports for Issuers in Colombia for ESG reports South Johannesburg Expanded Green Bond Segment to a Makes it easier to list and trade Africa Stock Exchange Sustainability segment sustainability-related instruments Source: Sustainable Banking Network. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 27 GREEN BOND OUTLOOK Fundamentals remain highly supportive for the EM green bond market. EMs ex-China have demonstrated steady increase in issuance the past two years, and after the downturn in 2020, the market in China is expected to recover. Projections for the green bond market must take into account that there are many factors underpinning its development that warrant further study and analysis. These include the green finance opportunities and overall capital market development in individual EMs. One approach is to assume that green bond issuance as a share of total bond issuance in EMs will continue to follow a similar trajectory to that of Western Europe, where the green bond market is the most mature. As awareness of the benefits of green bonds for both issuers and investors is rising, green bonds have moved from a niche segment to become mainsteam. Based on this approach, EM green bond issuance is estimated to double in the next three years compared to the previous three and the market to cross the US$100 billion mark of annual issuance by 2023 (figure 26). Overall, for the EM segment and based on the central scenario, about US$260 billion of green bond issuance is projected over the next three years (2021–2023). Figure 26 - Projections for EM Green Bond Figure 27 - EM ex-China: Market Share of the Green Issuance Format in Total Supply (US$ billion) % 120 7 6 100 5 4 80 3 60 2 1 40 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 20 W. Europe (proxy) EM ex-China - Central scenario 0 EM ex-China - Catch-up scenario 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F EM ex-China - Slow take-off Note: Y1 = 2014 for Western Europe and 2016 for EM ex-China, dashed lines indicate projections. Source: Amundi. Source: Bloomberg, Amundi. Green bond issuance from EMs ex-China appears strong Based on Bloomberg data, green bond issuance as a share of total bond issuance in EMs had been trailing the more mature European market by only two years. Although the overall share in EMs declined slightly in 2020, the renewed momentum for green bonds in the latter half of the year and the early part of 2021 indicates an upward trend. The central projection assumes that the green bond market share from EMs ex-China will trend toward 5 percent by 2023, a three-year timelag to the market development in Western Europe (figure 27). In a catch-up scenario, a faster recovery in 2021 would keep the EM ex-China segment only two years behind Europe. In a ‘slow take-off scenario,’ incremental market share gains would be similar to the average of the past two years. Regulatory clarification should stabilize and then propel China’s green issuance Green bond issuance trends have been more erratic in China (figure 28). The launch of a unique regulatory framework for issuing green bonds created a market boom in 2016 with green bonds quickly reaching 3 percent share in total bond issuance. After four years of steady issuance, green issuance aligned with international standards declined in 2020. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 28 Figure 28 - Annual Green Bond Issuance Figure 29 - China - Market Share of the Green in China Format in Total Supply (US$ billion) % 40 5 35 4 30 3 25 2 20 1 15 0 10 2015 2016 2017 2018 2019 2020 2021F 2022F 2023F 5 China - Central scenario China - Catch-up scenario 0 China - Slow take-off 2015 2016 2017 2018 2019 2020 Source: IFC, Bloomberg, Environmental Finance, Climate Bonds Initiative. Source: Amundi. Several factors, however, suggest that the the supply of green bonds will likely resume quickly. Once completed, the ongoing process of streamlining guidelines for issuing green bonds across the different Chinese regulatory authorities (including the People’s Bank of China and National Development and Reform Commission) and the adoption of the new Green Bond Catologue should faciliate issuance. These guidelines are expected to be closer to international norms (notably, clean coal is expected to no longer be eligible and there would no longer be flexibility in using proceeds for purposes other than green project funding). Although annual energy transition investments were down by 12 percent in China in 2020, they were still sizable at US$135 billion. Banks have implemented internal systems to tag their loans to green activities making it easier to identify pools of eligible assets for green bond funding. Moreover, green bonds are accepted as collateral, which could incentivize banks in China to buy domestic green bonds. In the central case projection for China, a firm rebound is expected as soon as 2021, followed by a steady recovery back to peak market penetration levels in 2022 (figure 29). The catch-up scenario reproduces the boom seen in 2016, and the slow take-off scenario assumes a slower adoption of international green bond standards. Opportunities for Green Bond Market Growth Each EM has unique characteristics that can influence the development of the green bond market. To look at these in-depth requires an understanding of the specific green finance opportunities, the debt financing conditions within the country, and the domestic and international investor demand for that country’s green debt. The key determinants of the potential for green bond markets include (a) sustainable finance policies and frameworks; (b) green bond issuance momentum; (c) capital market development; and (d) governance and political stability. Figure 30 lays out how individual EMs perform across these measures and indicates whether there has been a notable change from 2019 to 2020. Out of 57 EMs in the analysis, 22 showed improvements from 2019 to 2020 across the overall measures. Ongoing challenges to scaling green bond markets are described in box 3. East Asia and the Pacific: China is expected to regain momentum in the green bond market given its policy commitments and ongoing process to streamline guidelines. ASEAN continues to provide regional coordination on the development and implementation of sustainable finance strategies, which include scaling up green and sustainability bond markets. Structural reforms in Indonesia should enable increased infrastructure spending, which could extend to green infrastructure. In the Philippines, the central bank issued the country’s first sustainable finance framework, under which banks have three years to integrate transition plans integrating sustainability principles into corporate governance and risk management frameworks. Europe and Central Asia: Prospects for the growth of green bond markets in Europe and Central Asia are high given the significant momentum generated in the past year with the issuance of green bonds in four new markets along with efforts to create more supportive policy environments. To access the Recovery and Resilience Facility, member states of the European Union are submitting national recovery plans in April 2021, which are required to include a minimum 37 percent expenditure to support climate objectives. Hungary’s central bank introduced preferential prudential treatment for energy-efficient mortgage loans and is considering fiscal incentives for green bond issuers and investors. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 29 Latin America and the Caribbean: Planned sovereign issues are likely to generate considerable momentum for green bond markets in Latin America. Brazil, which seeks to finance railroad infrastructure, and Paraguay are the most recent countries to announce their intentions in this regard. Mexico successfully placed its sustainability bond in 2020, while green bond issuance plans in Colombia, Costa Rica, the Dominican Republic, and Peru were delayed, most likely due to the pandemic. Some efforts to strengthen the market infrastructure for green bonds through guidelines and frameworks that meet international standards gained traction. One notable example is Colombia’s banking regulator, which established a regulatory framework for issuing and investing in green bonds. Middle East and North Africa: The growth potential of green bond markets in the Middle East and North Africa is high as economic diversification and the transition to clean energy accelerates. Investment in renewable energy projects in the region has been robust, including several large-scale solar projects and water treatment and desalination projects. Debut green issuances in Egypt and Saudi Arabia generated considerable interest in the region. Additionally, the convergence between green finance and Islamic finance continues to attract interest from domestic institutional investors, given the focus on sustainable devleopment. The development of guidelines and standards for green finance can be adapted for Islamic finance instruments. South Asia: India, which had been the second-largest EM green bond issuer but saw weakened issuance in 2020, is already set to regain previous issuance volumes with early issuances in 2021 from renewable energy corporates. To meet its ambitious targets, India’s renewable energy capacity has been advancing, and bond issuance can meet capital requirements for some of the larger-scale projects. Elsewhere in South Asia, Pakistan announced plans to issue a euro-denominated green bond in 2021, which would be its first issuance. Bangladesh has developed green project definitions and created a green taxonomy to enable funds to be more easily directed toward green projects (see box 4). Sub-Saharan Africa: Green bond markets remain underdeveloped in Sub-Saharan Africa, where there are substantial green infrastructure development needs and opportunities for investment in renewable energy and climate-smart agriculture that will also support job creation. South Africa has led the region with issuance of green bonds by financial institutions and corporates and is planning to issue a sovereign green bond to finance green infrastructure. In June 2020, South Africa’s Treasury published recommendations to promote a more sustainable economy, including developing a green taxonomy, which has been taken up by a working group.24 Kenya and Nigeria have advanced some of the policy foundations to bolster green finance opportunities (see box 4). Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 30 Figure 30 - Determinants of Green Bond Market Potential SBN Score Green Bond Momentum Capital Market Development Governance Green Bond Sovereign Domestic Improvement Issuance/ Green Market Political Risk Regulatory Rule of Law Region Overall Credit to Capitalization from 2019 Total Bond Issuance: Total Private Rating Quality Index Sector Issuance & Planned Cambodia EAP China EAP Fiji EAP  Indonesia EAP Lao PDR EAP Malaysia EAP Mongolia EAP Philippines EAP Samoa EAP  Thailand1 EAP Vietnam EAP  Armenia ECA  Czech Republic ECA Estonia ECA  Georgia ECA  Hungary ECA  Kazakhstan ECA Kyrgyz Republic ECA Latvia ECA Lithuania ECA Poland ECA  Romania ECA Slovenia ECA  Turkey ECA  Ukraine ECA Argentina LAC Barbados LAC  Brazil LAC Chile LAC Colombia LAC Costa Rica LAC Dominican Republic LAC  Ecuador LAC Honduras LAC  Mexico1 LAC Panama LAC  Paraguay LAC Peru LAC  Uruguay LAC  Egypt MENA Iraq MENA Jordan MENA Lebanon MENA Morocco MENA  Saudi Arabia MENA United Arab Emirates MENA Bangladesh SA India SA  Nepal SA  Pakistan SA Sri Lanka SA  Ghana SSA  Kenya SSA Namibia SSA Nigeria SSA Seychelles SSA  South Africa SSA 1. Mexico and Thailand issued sovereign sustainability bonds in 2020. 0 Notes: Countries included are those that are SBN members and/or green bond issuers. Countries are scored from 0 to 5 on each of the 1 components, with 5 being the highest on a relative basis, according to available data. 2 The SBN Score is based on the Sustainable Banking Network (SBN) measurement framework assessing national sustainable finance policies. This score is from 2019, which is the latest available. Countries who were not SBN members as of 2019 are indicated as zero. 3 Green Bond Issuance/Total Bond Issuance is the percent of green bond issuance out of total bond issuance from 2017-2020. 4 Sovereign Green Bond Issuance is based on whether the sovereign has already issued green bonds and whether it has announced plans to do so. 5 Private Credit / GDP refers to financial resources provided to the private sector by financial institutions. The data source is the World Bank. Market Capitalization data are sourced from the World Bank, World Federation of Exchanges, Bloomberg, and individual stock exchanges. The Political Risk Rating is from the PRS Group. The Regulatory Quality and Rule of Law Index indicators are from the World Bank. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 31 Box 3: Scaling Up Green Bond Markets In the “Emerging Market Green Bonds Report 2019,” five been growing among both issuers and investors. In EMs, key challenges were identified that need to be addressed the availability of technical assistance for debut issuers, to enable more rapid expansion of the market. These including on disclosure and reporting requirements, as remain ongoing challenges, and some have indeed been well as working groups and task forces focused on green exacerbated by the pandemic and the global economic and sustainable finance have generated momentum for contraction in 2020. Nevertheless, some progress has green bond markets. Although international investors been made as the pandemic has highlighted the necessity demonstrate increasing appetite for green debt to channel finance toward sustainability objectives. instruments, awareness among domestic investors tends to be lower. Quality and availability of information According to most green bond frameworks or guidelines, Overall macroeconomic and policy instability as well as the issuer needs to specify eligibility criteria prior to challenges related to regulatory frameworks issuance, as well as measure and report regularly on Macroeconomic and policy stability were considerably the environmental impact post-issuance. The majority challenged in many EMs by the pandemic, the strain of labeled green bonds have been verified by an on health care systems, and unemployment. In some external reviewer prior to issuance. However, there countries, governments faced delays on their plans to is still considerable discrepancy in terms of the type transition to low-carbon. Nevertheless, as highlighted and detail of information provided. Regarding impact above, some countries have taken encouraging steps reporting, investors note the lack of standardization to develop sustainable finance policies and regulatory even for commonly reported metrics (such as, reduction frameworks, which are needed to encourage capital flow of greenhouse gases), and the need for greater to green projects and sectors. transparency.25 Underdeveloped capital markets with insufficient Supply constraints liquidity and high transaction costs In many emerging market economies, limited capital One major constraint for scaling up green finance has market depth and underdeveloped financial market been the lack of assets that are labeled as green. As policy infrastructure remain key hindrances to boosting green makers focus on green national recovery plans, green bond issuance. Such infrastructure includes exchanges industries are projected to grow, increasing the need for and trading platforms, clearing houses, credit risk identifying, measuring, and tracking green assets. Green assessment, custodians, and fiduciaries. Building resilient taxonomies will be particularly helpful in clarifying and economies includes developing local currency markets harmonizing definitions of green. that would reduce both exposure to exchange rate risk Lack of awareness and know-how about green debt and dependence on foreign currency borrowing. As instruments these capital markets are developed, countries have an As the global green market is reaching new records opportunity to simultaneously incorporate green and of issuance, overall awareness about green bonds has sustainable financial frameworks. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 32 Box 4: Spotlight on IDA Countries’ Support for Green Finance Opportunities Low-income countries classified by the World Bank as finance initiatives in IDA countries (see figure 24). Such International Development Association (IDA) countries initiatives serve as a pathway to de-risk investments and face unique constraints because of the size and maturity enable the financial flows needed to support climate of their markets, yet they have demonstrated high levels action and sustainable development. Efforts to develop of ambition and good progress in developing systems national enabling frameworks for sustainable finance are that support the adoption of sustainable finance. National typically initiated by either the regulator or the banking commitments and pressing environmental and social association. Over time, there tends to be a convergence challenges have been the key drivers for sustainable toward public-private partnership. Figure 31 - Select Sustainable Finance Initiatives in IDA Countries Cambodian Sustainable Finance Mongolia National Principles (2019) Sustainable Finance Implementation of these Roadmap (2018) principles specify that financial The roadmap specifies the smart institutions should consider the design and effective scaling National Green Growth strategies, of market innovations and policy potential access to international measures to advance green green finance lines, finance that are needed Kenya National and the development to meet Mongolia’s green Bangladesh of a Cambodian green Policy on Climate economy targets. Sustainable Finance finance fund. Finance (2016) Policy (2020) The policy includes attracting climate finance and promoting The Sustainable Finance Policy climate investment through incorporates targets for green financial and economic finance and sustainable finance instruments and cooperative in alignment with SDGs and approaches in which Bangladesh’s NDC. Nigerian Sustainable Ghana Sustainable benefits and risks are distributed equitably. Finance Roadmap Banking Principles (2018) (2019) This roadmap lays out the ways These principles include in which Nigeria can unlock identifying, measuring, mitigating, the investment needed to move and monitoring environmental onto a more sustainable growth and social risks trajectory that will benefit and opportunities in banks’ its people, its environment, business activities. and the economy. Source: Sustainable Banking Network. Of the 11 IDA countries that are SBN members, Green Bond Issuance in IDA Countries: Case Studies. Bangladesh, Cambodia, Ghana, Kenya, Mongolia, and Kenya’s Green Bond Program. Kenya’s program has Nigeria have identified green finance opportunities as focused on (a) technical support for potential issuers, (b) a high priority, most commonly identifying green bond training programs for issuers and verifiers, (c) regulation issuance as a primary financing mechanism. and policy research on demand for green finance, and Building the capacity of regulators and financial (d) green bond issuance for Kenya. Kenya issued Green institutions is cited by these countries as the critical and Bond Listing Rules in December 2018, and the Green ongoing challenge and is part of the broader issue of Bond Guidelines were published in early 2019. Enabled developing a supportive enabling environment and by such policy infrastructure, Acorn Holdings issued capacity building. Countries also highlight the challenge Kenya’s first corporate green bond of US$40 million in of developing specific regulations or tools to support October 2019. Through engagement with many different financial institutions. These include the development stakeholders, the Kenyan Banking Association addressed of green bond or other green asset guidelines and the issues of awareness and capacity and is working to development of a catalog or taxonomy of green projects create an enabling policy and regulatory environment to that meet eligibility criteria. encourage additional green bond issuances. Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 33 Nigeria’s Green Bond Guidelines. In 2017, Nigeria 2021, Bangladesh Bank issued an official circular asking developed guidelines for issuers as well as investors, all banks and financial institutions to ensure that 2-15 followed by the issuance of its first sovereign green percent of their loans meet broader sustainable finance bond with proceeds mostly going to solar projects at the requirements and to set targets at the beginning of each end of 2017. The Securities and Exchange Commission year.26 Per the green taxonomy, 5 percent of the portfolio (SEC) of Nigeria began development of a nonsovereign must also be green finance related. green bond market in Nigeria and developed guidelines Kenya’s Green Taxonomy. Kenya developed green based on international practices with the assistance project definitions as part of its green bond guidelines of the Climate Bonds Initiative. The Green Bond in 2019, building on the taxonomy developed by the Issuance Rules complement work already done by the Climate Bonds Initiative. The taxonomy contains both federal government and aim to create a nonsovereign eligible sectors and excluded sectors, making it easier green bond market. Access Bank issued Nigeria’s first to report and identify green assets. The Kenyan Banking corporate bond in 2019—a US$41 million five-year bond. Association worked closely with Climate Bonds Initiative Collaborating with international partners and leveraging to adapt the taxonomy to the Kenya context, for example, international guidelines have been critical to developing by including more water projects. From its experience, the Nigeria’s guidelines and facilitating its green bond association suggests that building on already established issuances. At end-2020, cumulative green bond issuance taxonomies can accelerate the process. in Nigeria amounted to US$103 million. Mongolia’s Green Taxonomy. The Mongolian Sustainable Development of Green Taxonomies in IDA Countries: Finance Association was established by Mongolian banks Case Studies. with a mandate to expand the sustainability agenda into Bangladesh’s Green Taxonomy. Bangladesh Bank all relevant economic sectors and become a sustainable published a detailed taxonomy in 2017, with 52 products finance regional knowledge center. With support from in eight sectors/categories that details which sectors Tsinghua University and IFC, the association developed and what products within the sector qualify as green. a green taxonomy approved in December 2019 to The central bank is slowly moving away from a more enable more consistent reporting and disclosure. This detailed taxonomy in favor of a broader green project taxonomy identifies 58 green activities in eight sectors. definition. On the basis of its experience, Bangladesh In the first quarter of 2020, banks began reporting the Bank recommends an approach of wide engagement green share of their lending portfolio to the central bank and tailoring the process to country specifics by in line with the taxonomy. Developing a tailored national consulting with banks and financial institutions to green taxonomy stressed the need for industry-specific gauge their knowledge about green finance and use guidelines, rating standards, labels, and local verification this data to create an appropriate strategy. In January capacity. Source: The text, figure, and case studies are drawn from the Sustainable Banking Network’s June 2020 publication "Necessary Ambition: How Low-Income Countries Are Adopting Sustainable Finance to Address Poverty, Climate Change, and Other Urgent Challenges." Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 34 ANNEX List of bonds included in the sample for figure 23 (Curves of Select Green Bond EM Issuers): Ticker Coupon Maturity Ticker Coupon Maturity CMPCCI 4.375 04/04/2027 KOF 1.850 09/01/2032 INDOIS 3.750 03/01/2023 EGYPT 5.250 10/06/2025 INDOIS 3.900 08/20/2024 REPHUN 1.750 06/05/2035 INDOIS 2.300 06/23/2025 CCB 1.000 08/04/2023 CHILE 2.550 01/27/2032 CCB 1.250 08/04/2025 CHILE 3.500 01/25/2050 SUZANO 5.750 07/14/2026 POLAND 1.125 08/07/2026 QNBK 1.625 09/22/2025 POLAND 1.000 03/07/2029 POWFIN 3.750 12/06/2027 POLAND 2.000 03/08/2049 CHGDNU 2.750 07/02/2024 NEPSJ 3.375 07/14/2027 Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 35 ENDNOTES 1. The World Bank (October 2020) Poverty and Shared Prosperity 2020 Reversals of Fortune, available at: https://www.worldbank.org/en/publication/poverty- and-shared-prosperity 2. IMF (October 2020) World Economic Outlook: A Long and Difficult Ascent, available at: https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/ world-economic-outlook-october-2020 3. IFC (January 2021) A Green Reboot for Emerging Markets, access at: https://www.ifc.org/wps/wcm/connect/79ef3830-ff20-4430-ad10-c0cf01e93a42/ IFC_GreenReport_FINAL_web_1-14-21.pdf?MOD=AJPERES&CVID=nslSBiN 4. Climate Bonds Initiative (December 2020) US$1Trillion Mark Reached in Global Cumulative Green Issuance, available at: https://www.climatebonds. net/2020/12/1trillion-mark-reached-global-cumulative-green-issuance-climate-bonds-data-intelligence 5. The principles and guidelines mentioned are available at the following: Green Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/ Social Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/social-bond-principles-sbp/ Sustainability Bond Guidelines: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/sustainability-bond-guidelines-sbg/ Sustainability-Linked Bond Principles: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/sustainability-linked-bond- principles-slbp/ Climate Transition Finance Handbook: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/climate-transition-finance- handbook/ 6. The Sustainability-Linked Bond Principles were published by ICMA in June 2020, providing guidance for the structuring, disclosure, and reporting of sustainability-linked bonds. 7. The dataset is based on consolidating available data from Bloomberg, Climate Bonds Initiative, and Environmental Finance. The definition of emerging markets/ economies/countries is based on Amundi Planet Emerging Green One’s investment universe. It consists of the Fund’s Target Countries, which are IFC member countries, including countries eligible to receive International Development Association’s (IDA) resources and countries eligible to receive Official Development Assistance (ODA) as defined by the Organisation for Economic Co-operation and Development’s (OECD) Development Assistance Committee (DAC), which qualify as Emerging Markets and are not excluded as per the Fund’s Investment Guidelines. While Russia is not included in the investment universe, it is included in this dataset. China bonds that do not meet international norms or standards as defined by Climate Bonds Initiative are excluded from the dataset. 8. Issuer categories are based on classifications from Bloomberg, Climate Bonds Initiative, and Environmental Finance. 9. Arslanalp, Drakopoulos, Goel, and Koepke (2020), Benchmark-Driven Investments in Emerging Market Bond Markets: Taking Stock, IMF Working Paper. 10. The index applies an ESG scoring and screening methodology, tilting toward green bond issuers ranked higher on ESG criteria and underweighting green bond issues that have not been reviewed independently. 11. IFC and Amundi (2020), Emerging Market Green Bonds Report 2019. 12. Ben Slimane, Da Fonseca, and Mahtani (2020), Facts and Fantasies about the Green Bond Premium, Amundi Working Paper, 103. 13. This data sample includes green and sustainability bonds from EM issuers. 14. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32020R0852 15. UNEP FI and European Banking Federation (January 2021) Testing the application of the EU Taxonomy to core banking products: High level recommendations, available at: https://www.unepfi.org/news/industries/banking/unep-fi-launches-new-report-which-tests-the-application-of-the-eu-taxonomy-to-core-banking- products-with-26-major-banks/ 16. The artificial intelligence technology is based on a set of statistical language models trained to identify responses to questions tied to the recommended disclosures. The approach is designed to provide an indication of alignment with the disclosures but not to assess the quality of the disclosures. 17. The US Federal Reserve System joined the network, together with seven other new members: Central Bank of Paraguay, Financial Regulatory Authority of Egypt, Financial Services Authority of Indonesia, Central Bank of Iceland, Polish Financial Supervision Authority, Central Bank of Uruguay, and the European Securities and Markets Authority. 18. NGFS (December 2020) Progress report on the implementation of sustainable and responsible investment practices in central banks’ portfolio management, available at: https://www.ngfs.net/node/332005 19. ICMA (June 2019) Green, Social and Sustainability Bonds: A High-Level Mapping to the Sustainable Development Goals, available at: https://www.icmagroup. org/sustainable-finance/the-principles-guidelines-and-handbooks/mapping-to-the-sustainable-development-goals/ 20. IMF Staff Discussion Note (2019), Fiscal Policy and Development: Human, Social, and Physical Investment for the SDGs, available at: https://www.imf. org/en/Publications/Staff-Discussion-Notes/Issues/2019/01/18/Fiscal-Policy-and-Development-Human-Social-and-Physical-Investments-for-the-SDGs-46444 21. Science Based Targets Initiative (October 2020) Sector Science-Based Targets Guidance, available at: https://sciencebasedtargets.org/sectors/financial- institutions#resources 22. Sustainable Banking Network countries with national policies and guidelines focused on sustainable banking include Bangladesh, Brazil, Cambodia, China, Colombia, Ecuador, Georgia, Ghana, Indonesia, Kenya, Mexico, Mongolia, Morocco, Nepal, Nigeria, Pakistan, Panama, Paraguay, Peru, Philippines, South Africa, Sri Lanka, Thailand, Turkey, and Vietnam. 23. These include: Argentina, Brazil, Chile, China, Ecuador, India, Indonesia, Kenya, Mexico, Morocco, Nigeria, Peru, and South Africa. 24. South Africa National Treasury (2020), Financing a Sustainable Recovery, available at: http://www.treasury.gov.za/publications/other/Sustainability%20 technical%20paper%202020.pdf; South Africa National Treasury (2020), Green Finance Taxonomy Project Briefing Report, available at: http:// sustainablefinanceinitiative.org.za/wp-content/downloads/Stakeholder_Briefing_Document_9_October_2020.pdf 25. Environmental Finance (2020, Green Bond Funds - Impact Reporting Practices 2020, available at: https://www.environmental-finance.com/assets/files/ reports/Green%20Bond%20Funds%20-%20Impact%20Reporting%20Practices%202020.pdf 26. This mandate was issued in January 2021 after the original case study. Download the Circular (in Bengali): https://www.bb.org.bd/mediaroom/circulars/ gbcrd/jan112021sfd01.pdf. Read more (in English) at https://www.pv-magazine.com/2021/01/14/bangladesh-mandates-2-of-loans-issued-must-be-for-green- projects/#:~:text=Bangladesh's%20central%20bank%20has,projects%2C%20including%20renewable%20 energy%20facilities. 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Emerging Market Green Bonds Report 2020 On the Road to Green Recovery 37 CONTACT DETAILS Timothée Jaulin Jean Pierre Lacombe timothee.jaulin@amundi.com jlacombe@ifc.org Head of ESG Development & Advocacy, Director, Global Macroeconomics, Special Operations Market and Portfolio Research Amundi International Finance Corporation Jean Marie Masse Tobias Hessenberger jmasse@ifc.org tobias.hessenberger@amundi.com Chief Investment Officer, Financial Business Solutions and Innovation Institutions Group Amundi International Finance Corporation Jessica Stallings Erwan Crehalet jstallings1@ifc.org erwan.crehalet@amundi.com Sustainable Finance Consultant, ESG Analyst Global Macroeconomics, Climate Change Market and Portfolio Research Amundi International Finance Corporation Amundi Asset Management, French “Société par Actions Simplifiée”- SAS with a registered capital of € 1 086 262 605 and regulated by the French Securities Regulator (Autorité des Marchés Financiers- AMF) under number GP 04000036 as a portfolio management company. 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