Rising demand for green bonds, despite ‘bleaching’

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• Saudi Arabia’s issuance of $3bn of green bonds oversubscribed
• Accusations of greenwashing lead to ‘green bleaching’
• Green bleaching describes reluctance to broadcast climate investments
• Projects such as Egypt’s monorail qualify for green financing

Global issuance of green bonds has increased by an average of 70 percent each year between 2016 and 2021.

The market for environmental, social and corporate (ESG) governance finance in the Middle East and North Africa (Mena) region remains small compared to elsewhere, but it is growing quickly.

Saudi Arabia’s Public Investment Fund issued $3 billion of green bonds in October, and its debut offering was eight times oversubscribed, leaving the prospect of future issuances likely.

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Industry insiders predict that the market will continue to grow, but fears of greenwashing accusations may deter some investors.

Egypt became the first country in Mena to issue sovereign green bonds back in September 2020.

Initially, it offered $500 million of bonds with an interest rate of 5.75 percent. But the huge demand led its finance ministry to increase the issuance to $750 million and reduce the interest rate to 5.25 percent.

The largest portion of this money was earmarked for the Cairo monorail, a grand infrastructure project that will be the longest of its kind in the world.

Powered by electricity, the government projects that it will carry 45,000 passengers an hour in each direction, thereby attracting people out of their cars and reducing vehicle emissions.

“The inaugural Egyptian sovereign green bond was a great success,” said London-based Sean Kidney, CEO of Climate Bonds Initiative. “They didn’t get a huge pricing benefit at primary, but they got a lot of oversubscription.” 

While the initial green bond issuance was relatively small, the real significance of the sale was to attract finance from elsewhere.

With investors increasingly concerned with ESG and climate considerations, green bond issuances can reassure the market of a borrower’s climate credentials, similar to how an International Monetary Fund loan can signal a borrower’s fiscal responsibility.

“Once people are interested, they start piling in,” Kidney said. “That’s what’s been happening in the Egyptian secondary market, which bodes well for any future green bond issuance that Egypt is able to do.” 

For countries like Egypt that are struggling to borrow as much as they would like, particularly in the current financial climate, it has become crucial to telegraph its climate commitments to lenders. 

Faisal Siddique, an executive in Saudi Arabia, said that green finance has never been more central to the global money market.

“The popularity right now is due to the fact that there is a big push from the leadership of the countries in the EU and others to go green, so the push is right from the top and the leadership is aligned,” Siddique said. 

“A lot of the countries are aligning themselves, so obviously it’s in the interests of everyone to go green.”

But as the pressure to invest in environmentally responsible borrowers has increased, so have accusations of greenwashing.

And according to a director from one of Europe’s leading sustainability indices, who asked to remain anonymous: “Companies are so scared to be accused of greenwashing that it has led to the reverse phenomenon of ‘green bleaching’.” 

Green bleaching is a relatively new term to describe companies’ reluctance to broadcast their climate investments for fear of greenwashing accusations. 

“One of our biggest clients has a team that investigates companies’ ESG and gives them a rating. They cut the environmental rating by half before they publish it so nobody can accuse them of greenwashing,” the director said.

For a region so reliant on the fossil fuel industry, the increasing scrutiny of the environmental commitments of borrowers bodes badly.

For the time being, lenders say that they are willing to overlook borrowers’ other misgivings so long as the projects on which their money is being spent are sound. 

On this matter things have changed greatly in recent years. Just a few years ago investors were expected to do their own research into ESG borrowers, with little way of knowing if they were being told the truth about where their money was going or recourse if it turned out that borrowers were cooking the books. 

Since then, more resources have opened up for investors to hold green finance borrowers to account.

Climate Bonds Initiative is just one company that offers a taxonomy on what projects can be considered to contribute to a low-carbon economy. 

Siddique said that while there was little scrutiny of environmental commitments just a few years ago, investors have started looking a lot closer at the projects in which they invest.

“In the last couple of years, we have got questionnaires from our investors who said that: ‘You guys are not in alignment with this; we won’t be able to invest in your company’,” he said.

This extra scrutiny, Kidney said, is the key to green bonds’ power to encourage a more low-carbon economy by forcing governments and companies to adjust their working practices in order to qualify.

“Once they’ve got one bond away and the treasury has got enthusiastic, as it has in Egypt, they start hunting around for all things that they can assign the money to to get a green bond,” Kidney said.

“And they come up against this problem that, actually, there’s not enough stuff around.

“From my point of view, that’s the benefit of green bonds. Climate change ministries typically never get a meeting with the debt management office, but if the debt management office starts phoning up people and saying, ‘What have you got?’ it turns the tables.”

But the biggest loophole that the industry has struggled to close is whether projects need to be built at all. A sustainable, but unnecessary project, is often bad for the environment.

It is a problem to which the industry is yet to find a solution: should green financing be allocated to such projects? Kidney conceded that this is a big issue, but that it is not the investors’ place to tell countries how to spend their money. 

“But, if you are going to build it,” he said, “then at least let’s make it green.”