The Green Bond Dialogue

While a financial expert is pessimistic about Green Bonds, another says that Green Bonds are highly sought after due to increased world-wide emphasis on conservation, CSR, and sustainability

While the government is considering Green Bonds to encourage and attract Bhutanese living abroad to invest in Bhutan, financial experts are skeptical about it, due to reasons like the interest rate on Green Bonds, the rigorous certification required from a Third Party, the lack of competent framework and infrastructure and strict review and monitoring conducted annually.

      However, there are also experts saying that Bhutan has always doubled down on environmental conservation, and sustainable  development, due to which the concept of a Green Bond has strong  alignment with what Bhutan stands for and that Green Bonds are   highly sought after due to the increased world-wide emphasis on conservation, Corporate Social Responsibility (CSR), and sustainability.

Speaking about it, a financial expert in Thimphu said Green Bond is not a suitable investment for individuals since the interest rate or the coupon rate for Green Bond is generally lower than the non-green bonds. “Usually retail investors will not be much interested in investing in Green Bond unless there is a high coupon rate. Otherwise, it is rather better to invest in other financial instruments which offers higher yield.”

“The country needs to come up with green taxanomy,” he said, which refers to a classification system that sets out criteria for determining whether economic activities are environmentally sustainable. It provides a standardized and science-based classification of activities that can be considered environmentally sustainable and contribute to climate change mitigation, adaptation, and other environmental objectives,” he added. According to him, a country must have a taxanomy defined first, like other countries do to support sustainable finance and guide investment decisions. 

In addition, he said that a country must also develop a robust Green Bond framework in line with Green Bond Principles (GBP) issued by international capital market association (ICMA) which outlines the use of proceeds, the project evaluation process, and the reporting and monitoring mechanisms for the environmental impact. He also shared that it is a good initiative by the government to consider issuing such instruments. “Impact Investors and institutional investors who follow good ESG standards would want to project themselves as champions of green and certainly they would want to have such asset class in their investment portfolio.”.

Nonetheless, he said that it may not be attractive for the retail investors or individuals to invest in such Bonds as the return on investment may not be high as compared to other class of assets.

Touching on the same topic, chief executive officer (CEO) of Druk Holdings Investment (DHI), Ujjwal Deep Dahal said that a financial bond is a fixed-income instrument that represents a loan made by an investor to a corporate or governmental borrower. The borrower will repay the loan at a fixed date as well as interest, which is known as a coupon. “Green Bonds are a specialized type of bond which can be used to fund climate and environment-related projects and are highly sought after due to the increased world-wide emphasis on conservation, CSR, and sustainability. Bhutan has always doubled down on environmental conservation, and sustainable development, so the concept of a green bond has strong alignment with what Bhutan stands for,” DHI’s CEO said. .

Going beyond individuals, DHI’s CEO said that Bhutan could technically try to finance Solar Power Projects with Green Bonds. “This is because the availability of an alternate energy source would mean the nation would be less affected by the volatility of Hydropower energy due to climate change. A 150MW Solar Power Plant could power almost twice the energy needs of Thimphu, the largest city in Bhutan. This has huge implications for the nation. However, it’s not as simple as Bhutan issuing a Green Bond and people purchasing them,” he added.

Similar to what the financial expert said about  GBP, he further clarified that all Bond Issuance requires the issuing company or country to be rated by established crediting agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings, and Bhutan is not rated by any of the agencies. “Secondly Green Bonds have an additional, separate qualification process and follow the four principles of Use of Proceeds, Process of Project Evaluation, Management of Proceeds and Reporting, which are then audited to accredit the bond, and meeting stipulated requirements are further difficult,” he added. Finally, a bond is a debt instrument so there is a repayment obligation built into the instrument, which means that whatever Bhutan tries to finance with a Green Bond, it needs to be able to generate revenue for the repayment of the bond and may even require the revenue to be generated in currency that can be easily exchanged into other types of currencies.

This was also reflected by the financial expert, who said that only after Bhutan fulfils the criteria mentioned about, and is certified or approved by a competitive agency as per the Climate Bond Standards or other such standards will we able to issue the bonds in the international markets.

“Therefore, Green Bonds are something that must be carefully explored, understood, and then utilized to impact Bhutan in the most meaningful way possible,” Ujjwal Deep Dahal added. He also said that DHI is exploring multiple financial instruments for investing in areas of Technologies, Digital Asset and Energy and Resources to accelerate projects and investments and Green Bonds is also something that we are studying very closely”.

 Meanwhile, the financial expert  said that if the government’s intention is to raise funds from Bhutanese living abroad, the government can go with other bonds. “Why would Bhutanese living abroad invest where the return is less unless the government issues the green bond with a high interest rate,” he questioned.

“When you say Green Bond, we are talking about an instrument for those investors who value green,” the expert said, adding that he feels Green Bond may not be ideal or an appropriate instrument to attract investors as the label itself is wrong.

He added that proceeds from Green Bonds will only be allowed for channeling into green projects and if not used for the intended purpose, Bhutan may loose credibility for such instruments in the market. “Green Washing is a big concern and it will be very difficult for us to get access to such markets in the future if we happen to deviate from intended purpose,” he said.  

He also shared that Green Bonds can attract capital inflow if the government marks a green project especially to attract investments from foreign institutional investors and other Impact Investors. Otherwise, the government must issue high interest rate in order to attract individual investor.”

Meanwhile, an official from the ministry of finance (MoF) said that the ministry in coordination with the Royal Monetary Authority (RMA) is working on the structure and institutional arrangement required for the issuance of Green Bond.

“The RMA is working on the conceptualization of taxonomy while the MoF is working on the possibility of carrying out a sovereign credit rating,” the official said, adding that only after the institutional arrangements are in place, the structure of pricing can be explored. 

“The idea of the Green Bond is to keep the international Green Bond Coupon rates above the interest rates in countries where we have Bhutanese diasporas to encourage them to invest in Green Bond,” the official said. 

According to the International Finance Corporation, Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP, which are use of proceeds, process for project evaluation and selection, management of proceeds and reporting in a Green Bond Framework or in their legal documentation. The IFC also says that it is important to note that Green Bonds should not be considered fungible with bonds that are not aligned with the four core components of the GBP.

Bonds issued under earlier Green Bond Guidance released prior to this version are deemed consistent with the GBP.

Sherab Dorji from Thimphu