With targeted DFI support, entities in EMDEs could issue ERC debt instruments to mobilize more private sector finance for ERC activities. Multilaterals have demonstrated the potential for ERC bonds to raise debt funding from non-specialist investors for ERC activities in EMDEs. The prominent examples—IFC Forests Bond and WB ERLB—only used the value of the coupon to finance ERC activities while the principal was used for general financing by the issuing multilateral. To truly scale ERC financing, more of the bond or debt raise could be used to finance ERC activities.
Structuring the next generation of ERC-backed debt instruments can draw on recent experience with ERC financing—across debt, equity, and financial intermediation—that has demonstrated different structuring options to draw in a mixed base of financiers and align ERC risk with different financiers’ preferences. The ERC market exposure that investors face could be optimized through the ERC linkage (e.g., variable coupon linked to ERC-related metric; option of in-kind ERC coupon) and attracting a diversified investor base with different preferences (e.g., financial vs. in-kind ERC return). DFIs could provide credit enhancement through a credit guarantee or by providing concessional finance (e.g., investing in a subordinate note or blending capital into an SPV), which can be done broadly for the entire instrument or provided to only a tranche of the instrument.
Figure 13. Conceptual model of an ERC-backed debt structure.
A public sector ERC bond or public-sponsored ERC SPV (Figure 13) could leverage growing capital markets interest and EMDE capacity to issue sovereign thematic debt to finance emission reduction activities in line with national priorities. EMDE thematic bond issuance and global sovereign thematic bond issuance surged in 2021/2022.1 Sovereign EM issuance remains a small, but also fast-growing portion of the thematic bond market, with 18 EMs having issued a cumulative $70 billion in thematic bonds since as of September 2022, including six EAP countries (Table 3). Most have been hard currency, but a growing number are local currency; most are benchmark size; and most were issued internationally. At least two EM sovereign thematic bonds received an MDB guarantee. There is also growing interest in EM subnational thematic debt. Several EAP countries have thematic bond frameworks, thematic lending frameworks, or green taxonomies in place that could support leveraging the growing thematic debt segment of global capital markets to issue debt for climate action nationally or subnationally, via sovereigns, other government entities, or state-owned entities like utilities or development banks. Proceeds could be used to support emission reduction activities, at least some of which would generate ERCs that would be used to partially meet the debt service, and the rest could be NDC priorities that would not issue ERCs.2
Table 3. Cumulative sovereign thematic bond (and sukuk) issuance in EAP region.3
EAP Country | Issuance | Date | Market |
|---|---|---|---|
| Fiji | Initial: Fijian dollar 40 million ($28.9 million) green bond Reopening(s): Fijian dollar 60 million ($28.8 million) | Initial: November 2017 Reopening: December 2017 – July 2018 | Tranches both in the domestic and international markets. |
| Indonesia | $1.25 billion green sukuk | March 2018 | International market |
| $750 million green sukuk | June 2021 | International market | |
| $584 million sustainability bond | September 2021 | International market | |
| $1.5 billion green sukuk | May 2022 | International market | |
| Malaysia | $800 million sustainability sukuk | April 2021 | International market |
| Malaysian ringgit 4.5 billion ($970 million) sustainability sukuk | September 2022 | Domestic market | |
| Philippines | $1 billion sustainability bond | March 2022 | International market |
| Japanese yen 70.1 billion ($559 million) sustainability bond | April 2022 | International market | |
| Seychelles | $15 million blue bond | October 2018 | Private placement with international investors |
| Thailand | Initial: Thai baht 30 billion ($964 million) sustainability bond Reopening(s): Thai baht 20 billion ($660 million) | Initial: August 2020 Reopening: November 2020 | Domestic market |
| Thai baht 35 billion ($956 million) | September 2022 | Domestic market |
Footnote 1: World Bank, Sovereign Green, Social and Sustainability Bonds: Unlocking the Potential for Emerging Markets and Developing Economies, 2022.
Footnote 2: For a specific example of how such an approach could work for a sovereign-sponsored SPV for energy transition in India, see: Climate Policy Initiative, Recovery Bonds: Innovative Sovereign Bond Structures for Financing a Sustainable Recovery, 2021.
Footnote 3: World Bank, Sovereign Green, Social and Sustainability Bonds: Unlocking the Potential for Emerging Markets and Developing Economies, 2022, using Bloomberg data.
With targeted DFI support, entities in EMDEs could issue ERC debt instruments to mobilize more private sector finance for ERC activities. Multilaterals have demonstrated the potential for ERC bonds to raise debt funding from non-specialist investors for ERC activities in EMDEs. The prominent examples—IFC Forests Bond and WB ERLB—only used the value of the coupon to finance ERC activities while the principal was used for general financing by the issuing multilateral. To truly scale ERC financing, more of the bond or debt raise could be used to finance ERC activities.
Structuring the next generation of ERC-backed debt instruments can draw on recent experience with ERC financing—across debt, equity, and financial intermediation—that has demonstrated different structuring options to draw in a mixed base of financiers and align ERC risk with different financiers’ preferences. The ERC market exposure that investors face could be optimized through the ERC linkage (e.g., variable coupon linked to ERC-related metric; option of in-kind ERC coupon) and attracting a diversified investor base with different preferences (e.g., financial vs. in-kind ERC return). DFIs could provide credit enhancement through a credit guarantee or by providing concessional finance (e.g., investing in a subordinate note or blending capital into an SPV), which can be done broadly for the entire instrument or provided to only a tranche of the instrument.
Figure 13. Conceptual model of an ERC-backed debt structure.
A public sector ERC bond or public-sponsored ERC SPV (Figure 13) could leverage growing capital markets interest and EMDE capacity to issue sovereign thematic debt to finance emission reduction activities in line with national priorities. EMDE thematic bond issuance and global sovereign thematic bond issuance surged in 2021/2022.1 Sovereign EM issuance remains a small, but also fast-growing portion of the thematic bond market, with 18 EMs having issued a cumulative $70 billion in thematic bonds since as of September 2022, including six EAP countries (Table 3). Most have been hard currency, but a growing number are local currency; most are benchmark size; and most were issued internationally. At least two EM sovereign thematic bonds received an MDB guarantee. There is also growing interest in EM subnational thematic debt. Several EAP countries have thematic bond frameworks, thematic lending frameworks, or green taxonomies in place that could support leveraging the growing thematic debt segment of global capital markets to issue debt for climate action nationally or subnationally, via sovereigns, other government entities, or state-owned entities like utilities or development banks. Proceeds could be used to support emission reduction activities, at least some of which would generate ERCs that would be used to partially meet the debt service, and the rest could be NDC priorities that would not issue ERCs.2
Table 3. Cumulative sovereign thematic bond (and sukuk) issuance in EAP region.3
EAP Country | Issuance | Date | Market |
|---|---|---|---|
| Fiji | Initial: Fijian dollar 40 million ($28.9 million) green bond Reopening(s): Fijian dollar 60 million ($28.8 million) | Initial: November 2017 Reopening: December 2017 – July 2018 | Tranches both in the domestic and international markets. |
| Indonesia | $1.25 billion green sukuk | March 2018 | International market |
| $750 million green sukuk | June 2021 | International market | |
| $584 million sustainability bond | September 2021 | International market | |
| $1.5 billion green sukuk | May 2022 | International market | |
| Malaysia | $800 million sustainability sukuk | April 2021 | International market |
| Malaysian ringgit 4.5 billion ($970 million) sustainability sukuk | September 2022 | Domestic market | |
| Philippines | $1 billion sustainability bond | March 2022 | International market |
| Japanese yen 70.1 billion ($559 million) sustainability bond | April 2022 | International market | |
| Seychelles | $15 million blue bond | October 2018 | Private placement with international investors |
| Thailand | Initial: Thai baht 30 billion ($964 million) sustainability bond Reopening(s): Thai baht 20 billion ($660 million) | Initial: August 2020 Reopening: November 2020 | Domestic market |
| Thai baht 35 billion ($956 million) | September 2022 | Domestic market |
Footnote 1: World Bank, Sovereign Green, Social and Sustainability Bonds: Unlocking the Potential for Emerging Markets and Developing Economies, 2022.
Footnote 2: For a specific example of how such an approach could work for a sovereign-sponsored SPV for energy transition in India, see: Climate Policy Initiative, Recovery Bonds: Innovative Sovereign Bond Structures for Financing a Sustainable Recovery, 2021.
Footnote 3: World Bank, Sovereign Green, Social and Sustainability Bonds: Unlocking the Potential for Emerging Markets and Developing Economies, 2022, using Bloomberg data.