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Green Bond Round-up, March 1: Hong Kong plans to become biggest sovereign issuer

Key developments in the global green bond market

Hong Kong will issue up to HK$100bn ($12.8bn) of sovereign green bonds, it has announced, alongside a ‘green bond grant scheme’ to subsidise non-government issuance.

In his budget speech, delivered yesterday, Financial Secretary Paul Chan said the government would demonstrate its “commitment to promoting green finance” by proposing the creation of a green bond programme “with a borrowing ceiling of HK$100bn”.

The inaugural deal would come in 2018/19, on the back of the approval of a resolution by Government to the Legislative Council.

“The sums borrowed will be credited to the Capital Works Reserve Fund to provide funding for green public works projects for the Government,” it explained, adding that it would “encourage more issuers to arrange financing for their green projects through our capital markets”.

The Climate Bonds Initiative says the plans will knock France off the top spot as the biggest sovereign issuer and support Hong Kong’s play to become a green financial centre.

The move comes just weeks after Hong Kong launched a Green Finance Certification Scheme which will provide a third-party certification service to green bond issuers. It has now said that qualified issuers using the scheme will be entitled to subsidies via a new Green Bond Grant Scheme. It will be a three-year pilot, seeking to attract local, mainland and international issuers to the Hong Kong green bond market.

“The amount of grant for each bond issuance is equivalent to half of the issue expenses, capped at HK$2.5m,” Chan explained. “Each enterprise can apply for a grant for two bond issuances at most.”

CBI’s Sean Kidney said the combination of the grant scheme and sovereign offering would motivate domestic issuers to finance new green projects and prompt investors to look into further green investment.

“Besides raising capital, a sovereign green bond can attract new investors, improve collaboration with government to attract new investors and provide policy certainty,” he said.

And Hong Kong is not the only government to see the appeal in recent weeks. RI reported earlier this week that Belgium sold its €4.5bn debut green bond, with buyers including Dutch pension giant ABP, which took €360m of the offering. Indonesia completed its $1.25bn, dollar-denominated, five-year green sukuk with a coupon of 3.75%. It is being widely reported as the first green sukuk, but it is actually the first sovereign green sukuk – according to S&P, there are four other green sukuk from the following issuers: Mudajaya Group Berhad (Sinar Kamiri), Permodalan Nasional Berhad (PNB), Quantum Solar Park (Semenanjung Sdn Bhd) and Tadau Energy (Edra Power).

Ghana has also stepped up its interest. According to local media this week, Finance Minister, Ken Ofori-Atta, said the country was “a lot more positive about maybe issuing a green bond, and we got some keen interest from that,” in no-deal roadshows as part of a wider fundraising initiative by the country.The Climate Bonds Initiative has released research on green bond pricing in the primary market, analysing performance of $15.4bn deals issued between July and September last year. Half the green bonds assessed priced on of inside their secondary curves, and on average most achieved better spread tightening than vanilla equivalents, according to the findings. RI today published findings from NN Investment Partners on green bond performance on the secondary market, which suggests yields are lower than the average, but this is balanced out by lower volatility.

HSBC has predicted green bonds funds will have around $500bn under management by the end of the year. In its latest report on the topic, Michael Ridley says clients should ask 12 “key questions”, including whether sustainability bonds should eligible as well as green notes. “We suggest that green bond funds should be global and active,” the report states. On the topic of sustainability, HSBC says it expects significant growth in ‘purpose’ bonds aligned with the UN Sustainable Development Goals, mainly from banks and European sub-sovereigns.

HSBC also forecasts that – as part of its work on sustainability, kick-started by the High-Level Expert Group on Sustainable Finance – the EU will “make verification mandatory” for green bonds. The EU has said it will throw its weight behind the creation of a regional green bond label, starting with the appointment of a technical working group of experts to devise the criteria. However, at an event on EU sustainability policy in Berlin last week, Olivier Guersent, Director-General for Financial Stability, Financial Services and Capital Markets at the European Commission, was very clear that any green bond standard “should be voluntary”.

The German state of North Rhine-Westphalia (NRW) has issued its fourth sustainability bond. It has secured an updated review from oekom, and aims to align the use of proceeds will the region’s needs under the UN Sustainable Development Goals.
China’s Modern Land is returning to market with a $350m green bond to finance environmentally certified buildings in the country. The issuer has used S&P to assess the bond.

US renewables vehicle Brookfield Infrastructure Fund III Holtwood has issued $350m of green bonds to refinance existing hydro portfolios and pay its predecessor (Brookfield Infrasture Fund II) for capital expenditure on global renewables projects. The assessment was completed by S&P.