Country: Global / Non-Specific
Keywords: Asset Recycling, Climate Finance
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.
IFC: Washington, D.C. 2021. Accessed November 7, 2022. https://www.ifc.org/wps/wcm/connect/0fab2dcd-25c9-48cd-b9a8-d6cc4901066e/2021.04+-+Emerging+Market+Green+Bonds+Report+2020+-+EN.pdf?MOD=AJPERES&CVID=nBW.6AT.
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 largescale 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.
Updated: April 24, 2023