The Sustainable Debt Market: lessons for planned debut

The Sustainable Debt Market
Godsway Kofi AMETORWOBLA & Enoch Ofori KWARTENG  

It is a norm for governments all over the globe to seek extra funding from the international capital market to finance their budgets and execute earmarked infrastructural projects. OECD nations, a united front for mostly developed countries who share their common eco-social problems and collaborate on finding solutions, are on record to have borrowed some US$18trillion from the capital market in 2020 alone: US$6.8trillion more than the amount borrowed in the previous year, all thanks to the COVID-19 pandemic. The surge in borrowing for 2020 stands as the biggest year-on-year increase in absolute and relative terms in the 21st century, enveloping the level of debt issuance witnessed during the 2008 financial crunch.

The sovereign bond market, comprising a variety of debt securities, has the capacity to provide resources in local and foreign-denominated currencies for both developed markets that harbour established issuers with investment-grade ratings, and more unstable emerging markets issuers. One significant development in the capital market is the rise in innovative debt instruments other than plain vanilla bonds, triggered by the surging demand for debt financing.

The past decade has seen the issuance of bonds that fall into a category termed ‘sustainable bonds’. These comprise, but are not limited to, social bonds, green bonds, blue bonds, sustainability-linked bonds and ESG bonds. These securities are important in facilitating the huge investment needed to attain the objectives outlined in the 2016 Paris Agreement on Climate Change and the 2015 UN Sustainable Development Goals.

Indeed, Ghana’s Finance Minister, Ken Ofori-Atta, has hinted at government’s efforts to initially sell green and social bonds for up to US$2billion by the end of 2021 – a programme now rescheduled to start after 2021. This will make Ghana the first African country to sell a social bond. The proposed issuance comes after Ghana successfully issued a 4-year, zero-coupon bond in 2021 as part of a US$3.025billion Eurobond sale that also included 20-year, 12-year and 7-year instruments. As the nation mulls the idea of issuing green and social bonds, it becomes imperative to deepen the conversation around sustainable bonds: the evolution, the variety, the pros and cons, and the way forward.

Evolution of Sustainable Bonds

In response to heightened concerns of the impact of human activities on global warming, the U.N. Inter-governmental Panel for Climate Change issued a report in 2007, which added extra essence to a mounting body of data on matters related to climate change. Armed with knowledge of the risks presented by climate change, relevant institutions comprising the World Bank, Pension funds and their banks, Centre for International Climate and Environmental Research (CICERO) and climate change professionals teamed up to craft a solution from the bond market.

A framework for the green bond market was agreed, setting out criteria for issuer eligibility, geared toward ensuring that borrowing for sustainable finance substantially promoted positive environmental and social results. Subsequently, the European Investment Bank and World Bank pioneered the successful issuance of the foremost green bonds in 2007 and 2008. Since then, the market has evolved to further enhance transparent guidelines for investors to promote climate products and broaden the bond types in the market to include other classes of sustainable bond.

The market for green, social and sustainability bonds (GSS) touched US$1.7trillion by the close of 2020, with about 10,000 issuances. Twenty-two (22) sovereign issuers were active in the GSS market at the end of 2020 and accounted for US$97.70billion worth of debt issued.

Green bonds continue to dominate the market and African countries that have successfully accessed the sustainable bond market include Benin (SDG bond in 2021), Nigeria (Green bond in 2019), Egypt (Green bond in 2020) and Seychelles (Blue bond in 2018).

The diversification of the market in terms of issuer and bond label is expected to gather momentum even as sovereigns continue to explore options to fund capital expenditure in critical sectors of their economies: agriculture, water, health, housing, education, low-carbon energy and biodiversity, among others.

Sustainable Bond Labels

(Picture credit: Morgan Stanley Institute for sustainable investing)

Sustainable debt instruments are differentiated by the purpose of issuance and use of proceeds.

Unlike vanilla bonds where issuing governments freely apply funds to any expenditure of choice, sustainable bonds are based on the primary objective of the underlying activity and investors closely monitor the manner in which funds raised are applied.

The five main categories dominant in the sustainable bond market are green bonds, social bonds, blue bonds, sustainability/ESG bonds and sustainability-linked bonds.

Green Bonds

(Picture credit: Reuters)

Proceeds from the issuance of green bonds are dedicated to fund fresh and ongoing projects with positive environmental impact.

Expenditures that fall within this label include renewable energy, energy efficiency, clean transportation, green buildings, wastewater management and climate change adaption, among others.

Social Bonds

(Picture credit: Bank of America)

Social bonds are geared toward financing or refinancing projects with favourable social impact and/or activities that seek to offer solutions to social problems. Some of these social issues are poverty and hunger, immigration, unemployment, gender and gender-based bias, people living with disability, natural disasters, lack of essential but basic amenities, epidemics and pandemics.

A fresh addition to the social bond label is COVID-19 related bonds designed to mitigate social issues born out of the COVID-19 pandemic, with specific emphasis on the segment of population who are mostly affected.

In April 2020, Guatemala became the first sovereign to issue a COVID-related social bond to improve health infrastructure and food security. The issuance was 7.7 times oversubscribed. Earlier in January 2020, Ecuador had issued the world’s first sovereign social bond worth US$400m to provide affordable housing.

Sustainability Bonds

Eligible projects under this label fall under the categories of both green bonds and social bonds. Here, funds raised are directed toward projects that are environmentally friendly and also address pertinent social issues. In August 2020, Alphabet – Google’s parent company – issued a US$5.75billion sustainability bond, the largest-ever by a company. The bond was intended to, among other things, finance projects in green energy, energy efficiency, affordable housing and support for small businesses and Black businesses.

Blue bonds

The objective of issuing a blue bond is to source investment to fund water-related and marine-based projects and activities with verifiable proof of positive impact as determined by the UN Sustainable Development Goals.

This type of sustainable bond is the most recent innovation in the green debt market, and presents opportunities for island and coastal countries to conserve and protect their marine resources, manage plastic waste, promote marine biodiversity and maximise their tourism potential.

In 2018, Seychelles became the first sovereign issuer of blue bonds after the World Bank provided a partial guarantee for the US$15million bond. The issuance served both an economic and environmental purpose.

The Sustainable Debt Market
(Picture credit:

Sustainability-linked Bonds

Sustainability-linked bonds are KPI-linked bonds used to finance general sustainable projects instead of targetting specific projects. The covenant of the bond, however, spells out clearly the sustainable performance objectives that the issuer must achieve; failure of which may lead to an upward adjustment in the finance cost in the form of increase in coupon rate. Sustainability-linked bonds are considered more accountability based and performance driven.

Any Gains for Ghana?

Discovering innovative ways of SDGs funding within the integrated national financing framework, developed in collaboration with United Nations Development Programme (UNDP) and the Ministry of Finance, highlights the benefits of opting for green and social bonds. Ghana stands to unlock significant resources to support social and environmental investment that hitherto were not available. A successful issuance of a social bond will not only unlock the budding potential of the Ghana Fixed Income Market but also allow the country emerge as a leader in the sustainable growth and finance space in sub-Saharan Africa.

Ghana will be able to make good use of innovative debt instruments that have boomed ever since COVID-19 struck. More so, the country will attract new investors and take advantage of the increasing demand for social and green bonds that have a good history of investor oversubscription at auctions. A survey by Climate Bonds Initiative in 2020 revealed that most governments (79%) believe sovereign GSS bonds broadened and diversified their investor base; a key motivation for issuing. A wider investor base promotes competitive pricing while enhancing investor initiative and strategies tailored toward deepening the sustainable bond market.

Further, Ghana stands to alter its sustainability story and shape its development finance strategy. The country is set to enjoy a positive reputation and visibility as a nation that is committed to addressing social and climate-related issues. This means Ghana will be well positioned to attract offshore investors who want to assist countries achieve sustainability targets, be it through debt or FDI and private shareholding. The benefit of transparency in the use of bond proceeds cannot be overemphasised.

As is the case with many emerging market issuances, it is sometimes difficult to match government capital expenditure with proceeds from borrowing. The framework for selling sovereign sustainable bonds ordinarily involves meeting eligibility criteria including budget-tagging exercises and commitments to report on the allocation of proceeds and their impact.  These processes will positively affect transparency for ministries, legislatures, citizens and investors.

Potential Downsides

The surge in sustainable bond market instrument has brought to the fore relevant questions that ought to be taken into consideration by governments contemplating entering this market.  First and foremost, the issuance of green and social bonds does not guarantee cheaper cost of debt finance. In fact, sustainable bonds can be more expensive than the ordinary bond. Although empirical evidence signalled the existence of a premium in the secondary market for green bonds relative to their plain vanilla counterparts of the same seller, this does not benefit the seller who desires the discount at the primary issuance in order to make some marginal gains.

The absence of clear price differential is a disincentive to new issuers like Ghana, who will have to face a challenging and novel process of issuance notwithstanding the involvement of various external collaborators and cumbersome documentation in addition to all associated costs. The variability in issuance expense and transaction fees, especially for low volume deals in emerging and frontier markets, may cause the issuance of green and social bonds to be an unattractive finance mechanism.

Another concern is the risk of greenwashing: a notion that denotes the deliberate misrepresentation and promotion of the perception that an organisation’s activities and goals are environmentally-friendly.  Issuers in their desperate attempt to secure resources may mislead the sustainable investing public about the positive environmental and social effects of their activities to be funded by bond issuance.

In April 2019, the head of the International Accounting Standards Board declared openly that “greenwashing is rampant” – and though this comment refers to the business environment generally, green bonds are potentially stained by this. Greenwashing may arise because of the comparatively broad criteria for green bond eligibility and the absence of a formalised issuance path in many developing markets. Ghana’s reputation may be tainted and investors will lose trust and confidence in the government if bonds tagged as green/social are found not to be.

Since the budding sustainable debt market accounts for only a small portion of the entire fixed income space, these securities are likely to harbour more liquidity risks; the possibility that the bonds may not be easily and quickly traded for cash in the secondary market. Sovereign green/social bonds, issued in foreign currencies and in foreign markets, may present extra risks like capital flow controls, exchange rate volatility and the adverse impact of sudden capital flight from the local economy. Again, sustainable bonds – just as other debt securities – can suffer credit or default risk: the likelihood that the issuer is unable to pay loan coupons or principals either entirely or according to payment schedule.

Way Forward for Ghana’s Debut

The evolving sustainable debt market undeniably offers Ghana an opportunity to fund the execution of SDGs and other environmental and social projects, including government’s flagship Free SHS programme. Ghana must therefore make the right moves to ensure a successful entry into this market.

For starters, Ghana must continue to work with the UNDP, IMF, IFC, ICMA and other well-meaning international institutions to establish a sustainable finance framework for debt issuance that serves the interests of the Ghanaian economy.  With a history of good economic policies and indication of robustness in times of severe crises like the COVID-19 pandemic, Ghana will need to clearly demonstrate that its objectives will enhance environmental and social output.  Thus, government must align bond issuance with tangible sustainable expenditures by integrating ecological and social elements into the project design.

The state can also opt for public-private partnerships to issue proposed green/social bonds in order to stimulate the local corporate bond market. According to the GFIM status report for December 2021, there are only 8 existing corporate bond issuers in the market (including two government SPVs; ESLA Ltd. and GETFUND’s Daakye Trust Plc) and corporate securities (mostly issued by ESLA and Daakye) account for 11% of market activities on the secondary market for 2021.

The Bank of Ghana, Security and Exchange Commission, Central Securities Depository and other stakeholders of the Ghana Fixed Income Market must therefore take steps to further deepen the domestic bond market to be able to trade upcoming sustainable bonds.

Ghana must also learn from the successful narratives of its African colleagues like Egypt and Benin. Egypt issued a 5-year, US$-denominated green bond – the first of its kind in Africa – worth US$750million at a coupon of 5.25% in 2020. Benin also raised EUR500 million (XOF328 billion) through a 12.5-year SDG Bond at a yield of 4.95% in 2021, setting the pace for SDG instruments in Africa.

Finally, as the social/green bond market grows, Ghanaian authorities can boost the country’s market image through strategic branding; positioning it as an innovative and sustainable investment destination, while strengthening transparency and accurate reporting in the use of bond proceeds to help attract more competitive yields.

About the writers

The writers are financial market dealers. They have expertise in the currency and securities market, as well as a deep interest in the commodities market – most notably gold, oil and cocoa. They can be reached via the contacts below:

[email protected]        +233 24 2757286   

[email protected]     +233501409759             

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