Poland broke new ground when it sold the world’s first ever sovereign green bond in December 2016. Yet strong interest from ESG investors for the €750m five year trade did not appear to turn other CEE borrowers green with envy.
It was not until Hungary raised €1.5bn of 15 year green funding in June this year that another CEE sovereign managed a green benchmark. Hungary followed this with another world first, becoming the only sovereign to have sold a green Samurai when it returned to Japan for the first time in two years in September.
Hungary initially contemplated green bonds to attract more interest from Asia, according to Zoltán Kurali, CEO of AKK, Hungary’s debt management office. And the government’s environmental protection plan provided ample use of proceeds.
Therefore, when Covid-19 pressures saw the country’s 2020 funding needs in international bond markets increase from €1bn to €4bn, there was “space to issue both a green euro benchmark and a green Samurai”, says Kurali.
Maryam Khosrowshahi, head of CEEMEA sovereign DCM at Deutsche Bank, says that she sees CEE governments “listening and watching how Hungary has very successfully just issued a green bond”.
“There is more and more consciousness about ESG issues on both the issuer and investor side,” she says.
Beyond the repeat issues from Poland and Hungary, however, the CEE green bond market has remained muted. Lithuania, with a small €20m green bond in May 2018, is the only sovereign from the region to have issued, while only a handful of deals have emerged from corporates and banks.
Yet there may be reason for optimism.
“Until recently, the topic of climate finance remained relatively low on the agenda of policymakers [in CEE],” says Zofia Wetmańska, analyst at WiseEuropa, a think-tank in Warsaw. But she expects developments at the EU level to both “fast-track and scale up” national efforts.
Governments in the region are “starting to slowly embrace this change in dynamics”, says Wetmańska.
“This is partly to do with the European sustainable finance agenda, but more so due to the climate conditionalities associated with the next MFF [multiannual fiscal framework] and the EU Recovery Fund,” says the analyst. “There’s an increasing understanding that low-carbon investments may… support the process of economic recovery from the Covid-19 crisis.”
Beyond bonds
Indeed, European Commission president Ursula von der Leyen has set a target for 30% of the €750m Next Generation EU plan to be funded by green bonds. But this does not necessarily mean more green bonds from CEE sovereigns.
“The big question mark for green bond issuance in the future is that EU funding will cover a lot of green projects, and you cannot double count expenditure,” says AKK’s Kurali.
Bankers and issuers are still trying to understand the impact of the EU’s funding programmes on bond market needs, and Kurali says that “ideally, the EU funding should be incremental”, which “may leave space for more green issuance”.
Another obstacle to issuance is size.
“For some smaller sovereigns, it may be a challenge to come up with a benchmark size green or sustainable use of proceeds,” says Khosrowshahi at Deutsche Bank. “But as they begin to understand the frameworks, I think more will be encouraged to issue.”
Marjan Divjak, director general of the treasury at Slovenia’s ministry of finance, acknowledges that the economy’s important long-term challenges include “the green transition” and achievement of green targets.
And Divjak adds that he sees “advantages” in issuing green or other thematic bonds.
However, as a small issuer, “Slovenia faces certain limitations as thematic issues could lead to excessive bond fragmentation”, says Divjak.
Elsewhere, in September Slovakia’s debt management agency told GlobalCapital, GlobalMarkets’ sister paper, it saw few benefits but “a lot of hurdles and costs” to issuing green bonds.
Slovakia’s DMO said it remained committed to supporting the green economy, even though it will not issue green bonds. And governments have alternative ways to support climate investment beyond benchmark bond issues.
Indeed, Wetmańska says that a more stable regulatory environment is a key way to attract green investment, highlighting that unclear state policy in Poland between 2015 and 2017 continues to discourage investors in the wind energy sector.
“Frequent changes in the design of public support systems made clean investments unattractive for investors when comparing to investments in other segments of the economy,” she says.
In any case, for CEE’s larger sovereign issuers, international markets are only a small component of their funding.
Poland’s finance minister, Tadeusz Kościński, tells GlobalMarkets that the country keeps green bonds [and Panda bonds] “in the bottom draw for when an opportunity arises”, but has no pressure to access international markets.
Similarly, Hungary mostly finances itself in local currency, so the government will “look at whether it makes sense to introduce an ESG instrument in the domestic markets”, says Kurali.
“We would love to help the market evolve, but it needs to be justified and should be driven by the buyside. For now, ESG interest among Hungarian investors remains limited.”