The global market for sustainable debt financing has grown rapidly in recent years, nearing USD320 billion in new issuance in the first 10 months of 2019. That’s about three times more issuance than in all of 2016 and some eight times more than in 2014, according to BloombergNEF data. Sustainable finance is dominated by green bonds, but also includes sustainable bonds, sustainability-linked bonds and loans, and social bonds.
Despite the rapid expansion of green bond issuance, investors’ appetite for the instruments remains unsated, particularly on the corporate bond side. A supply and demand mismatch exists, with investors wanting more corporate issuance, while bonds issued by companies represent less than half of current outstanding green bonds; most green bonds are issued by governments, municipalities and other state-backed entities.
Russia catching up
Like many emerging markets, Russia has lagged a year or two behind its developed-market peers in terms of green finance. But that is rapidly changing.
In recent months Moscow Exchange – Russia’s main capital raising and trading platform across fixed income, equities, derivatives, FX and money markets – has joined the global green bond boom. In July, the exchange created a Sustainability Sector for financing environmental and social sustainability projects. To be admitted, an issuer must establish the specific purpose of their offering in the prospectus, report the bona fide use of the funds on an annual basis, and submit an external review confirming that the bond complies with standards for green or social issuance. Debt will be issued in accordance with principles of the International Capital Market Association (ICMA) and verified by a second-party opinion firm based outside of Russia.
The first issue on the Sustainability Sector came in November – a green bond issued by Center-invest Bank. Proceeds from the RUB 250 million one-year bond are being used to finance and refinance outstanding loans given to promote energy-saving initiatives, renewable energy sources and green transport. The bond issue is compliant with the Green Bond Principles 2018 generated by the ICMA.
Two bonds are currently trading in the sector with another 10 in the pipeline.
There are a range of reasons why the Russian market is turning to green finance. One rationale is a desire by both the exchange and issuers to attract new types of investors. Though foreign investors own about 30% of Russia’s on-exchange traded ruble sovereign bonds, known as OFZs, they account for only a tiny sliver of the corporate ruble bond market. At the same time investor interest in green bonds by Russian companies is significant, as illustrated by the fact that more than 70% of Russia’s first and only hard-currency green bond -- sold by Russian Railways in May -- went to investors from Europe, Asia and the U.S., according to VTB Capital.
Another driving force behind the green bond wave is a recognition – from the state, issuers and the Exchange – that Russia has a special role to play given our status as the world’s largest exporter of hydrocarbons. Half the market cap of the benchmark MOEX Index are companies in the oil and gas industry, and overall 64% of the index is accounted for by companies from the extractive sectors. In a sense, Russia has a special responsibility to be environmentally conscious and promote sustainability given the structure of our economy and markets.
Finally, Russian corporates are rapidly becoming more attuned to environmental, social and governance (ESG) issues. Issuers are driving the growth of the green bond market as well.
EM green bonds on the rise
Russia is hardly alone in the EM universe in rapidly establishing a foothold in the green bond market. Emerging market green bonds account for more than one-fifth of the global green bond market at USD 121 billion, according to UBS.
Despite its short track record, the EM green bond market is coming of age and has an appeal for investors. Over half of EM issuance last year was benchmark sized, at USD 500 billion or more, UBS said in a note published in July. And the EM green bond asset class offers more attractive yields compared to developed market green bonds.