Sovereign debt greens yet net-zero pledges darken

Participants attend the Saudi Green Initiative Forum to discuss efforts by the world's top oil exporter to tackle climate change, in Riyadh, Saudi Arabia, October 23, 2021. REUTERS/Ahmed Yosri

LONDON, Oct 13 (Reuters Breakingviews) - Governments are increasingly getting into green bonds. Saudi Arabia’s state-owned Public Investment Fund last week issued its first one, earmarking proceeds for zero-carbon projects like energy efficiency. That’s nice, but the boom in such securities doesn’t seem to be helping the world avoid harmful global warming.

Investors’ rapturous demand for PIF’s $3 billion issue, which included a hundred-year tranche and garnered over $20 billion of orders, might sound odd. Buyers may be drawn to the near-7% yield on offer, but are still taking a punt that the kingdom’s hydrocarbon-dependent economy can successfully transition to a zero-carbon society while keeping its mostly young, 35 million-strong population on side.

Yet Saudi’s move highlights a trend. Nearly 40 sovereigns as well as other local public entities have issued green bonds in recent years. While corporate issuance has accounted for most of the $2.9 trillion in outstanding green bonds between 2017 and the end of June, government issuers jumped from 4.2% of the total in 2019 to 7.5%, according to the Bank for International Settlements. And they are also issuing green debt at increasingly longer tenors: in August the Monetary Authority of Singapore raised $2.4 billion via a 50-year green bond.

Hard logic explains why. As interest rates rise around the globe, debt with a green tinge is extra-appealing to investors, who are otherwise becoming choosier over who they lend to. Both buyer and issuer can flag how focused they are on cutting greenhouse gas emissions.

Still, the boom in sovereign green bonds has not been accompanied by much progress towards net zero. Despite committing at last year’s COP26 to improve inadequate national emission-reduction targets that would see a damaging 2.4 degrees Celsius of global warming, hardly any of the world’s near-200 countries are being meaningfully more ambitious, according to Climate Action Tracker.

The disconnect highlights what green bonds can and can’t do. An insistence that the instruments’ proceeds focus only on green projects, as seen in the PIF bond, sounds like the opposite of greenwashing. But merely setting aside funds for specific investments does not prod an issuer, let alone a heavy polluter like Saudi, to decarbonise more quickly. That’s problematic, given the kingdom is rated “highly insufficient” in terms of progress to hit its own pledge to be net zero by 2060.

So-called sustainability-linked bonds, where coupons get more expensive if issuers miss milestones to decarbonise, are better bets. Although Chile is the only country to have issued one, they may actually incentivise tough action. For financial innovation to really help fight global warming, bankers and issuers may need to do more.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


Saudi Arabia’s Public Investment Fund faced little scrutiny over its green credentials when it sold $3 billion in so-called green bonds last week in its maiden debt issue, people familiar with the transaction told Reuters in an article published on Oct. 12.

The debt issue was the first green bond by a sovereign wealth fund, and the first to include securities with a 100-year tenor. The bonds’ proceeds will be earmarked for environmental investments, such as energy efficiency projects.

While the region’s other issuers remain wary of market volatility, the sale went smoothly with little pushback from investors over its environmental, social and governance (ESG) credentials, two bankers told Reuters.

Investors placed some $25 billion of orders for the bonds, said Abdeslam Alaoui, Deutsche Bank’s capital markets head for the region and one of the deal’s leads.

He said that PIF’s issuance showed investor confidence in its credit strength and Saudi Arabia’s long-term commitment to the energy transition. The world’s top oil exporter last year pledged that its economy would be carbon neutral by 2060.

PIF sold $500 million of the 100-year bonds, which were priced to yield 6.70%. It also sold $1.25 billion of both five- and 10-year notes.

The bonds saw the highest placement in Britain, followed by the Middle East and North Africa, then U.S. offshore investors, Europe and Asia, according to a bank document seen by Reuters.

Editing by Neil Unmack and Oliver Taslic

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