Swedish Public Report: “To Promote Green Bonds”

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Stockholm (NordSIP) – Statens Offtentliga Utredningar (SOU), the Swedish state public reports agency from committees appointed and convened by the Government of Sweden for analysis of issues in anticipation of proposed legislation before the Swedish Riksdag, submitted a report a last week (January 10) suggesting how to develop the green bond market and a sustainable financial market.

The report, At främja gröna obligationer, is the outcome of an assignment commissioned in December 2016 to investigate the promotion of a green bond market and to develop examples of projects that could be suitable to fund this objective, alongside considerations relevant to investors. Former AP4 Chief Mats Andersson led the research.

Citing concerns that green bonds remain a niche market despite considerable growth in the past decade and that the financing to meet the Paris agreement objectives will have to accelerate to an almost inconceivable degree if these are to be met by 2030, the report identifies green bonds as an important potential source of this financing and recommends measures to make these more attractive to investors and issuers.

One root issue that is addressed is the transition from green bonds as something providing chiefly symbolic value to the issuer or investor, which has limited or even negative economic effects, to something more normative based on the empirical research available so far on their precise effects on both sustainability and financial returns.

Green bonds possess characteristics that distinguish them from traditional bonds. For example, an issuer is required to report back to investors on how returns on the issue are invested, creating a basis for dialogue between these and additional scrutiny between different branches of the issuing authority, raising sustainability issues and awareness further.

Simultaneously, the report acknowledges that green bonds have not so far been shown to entail lower funding costs for the issuer or lower risk for the investor. Additional costs in certification and reporting can make green bonds a more expensive source of funding than ordinary bonds from the same issuer, and liquidity in the secondary market has so far been worse for green bonds. Regulations in the form of definitions and measurability can be perceived as unclear, and it can be difficult to find purely economic reasons for issuing or owning green bonds.

The focus of the report, therefore, is to identify how a green bond market can be promoted to meet the Paris objectives, and not to assess whether green bonds are effective financial instruments in themselves. Action is required if the growth of the green bond market is to increase, thereby making it an important source of funding for the transition to sustainability, which can be divided into three categories:

  • The objective to improve the existing market, taking into account how the rapid growth over the past decade has been achieved;
  • The attempt to create green bonds with partially new features such as lower credit risk, thus offering a lower funding cost;
  • The elimination some of the additional costs and barriers that discourage issuers from issuing green bonds, even if requirements are met

While there is no one-size-fits-all solution to the challenges, the reports suggests a multitude of areas in which the green bond market can be promoted and improved, proposing changes to regulations and mandates where necessary. Recommendations are made, however, with practical feasibility in the near future in mind.

Download the report here.

Update: Initial Reactions

In a press release addressing the SOU investigation, Alecta Managing Director Magnus Billing suggested that green government bonds can be an excellent way for pension fund capital to finance climate transition, allowing pension funds to contribute even more to the transition to a sustainable society without sacrificing any part of the responsibility for a sustainable pension system. Billing pointed towards the recently issued green government bond in France as a good precursor that should stand a good chance of being successful in Sweden. He called for the implementation of a Green Treasury Bill to be launched as soon as possible, citing time concerns.

On LinkedIn, however, Senior Portfolio Manager at Strukturinvest Ulf Erlandsson took issue with the SOU leaning on a study from the the Banken för internationell betalningsutjämning (BIS), which he suggested provided incorrect interest rate calculations for whether green bonds can be more attractive for issuers than ordinary bonds, and also what he said was the SOU’s failure to cite which emissions it had studied. He otherwise called the investigation “an interesting qualitative market review, especially in Swedish kronor.”

Image: (c) WDG Photo-shutterstock

 

 

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