Mobilising capital for ESG projects through certified green bonds

In the ever-evolving landscape of global project finance, Environmental, Social and Governance (ESG)-themed transactions have emerged as a critical instrument driving sustainable development and responsible investment practices. At the heart of this paradigm shift, lies a profound recognition that financial success must be intertwined with positive societal and environmental impacts.

A significant component of ESG-themed transactions is green bonds which are debt securities issued to fund projects with positive environmental benefits. According to the Climate Bonds Initiative, the global green bond market reached a record USD 570 billion in 2021^[1] which was around 54 percent of total sustainable issuances, indicating strong demand for sustainable investment vehicles. This momentum is mainly driven by institutional investors, governments and development banks seeking to align their portfolios with ESG principles thereby addressing climate change and fostering a more sustainable economy.

The importance of green bonds lies in their ability to mobilise capital for environmental projects at scale. By providing a transparent and attractive investment option, they encourage both institutional investors (financial institutions, pension funds and insurance companies) and family offices to direct their resources towards sustainability. This contributes to a broader shift towards ESG goals, crucial for addressing climate change and achieving a sustainable future. Green bonds also help diversify the investor base, drawing interest from those who prioritise ethical and sustainable investment opportunities.

GuarantCo, part of the Private Infrastructure Development Group (PIDG), demonstrates its strategic focus on green bonds by providing local currency credit guarantees that enhance the creditworthiness of these and similarly thematic financial instruments. For example, GuarantCo played a significant role in facilitating innovative green bond issuances in lower income countries in Africa and Asia, where more traditional financial institutions might perceive higher risk. In Vietnam, GuarantCo provided EVN Finance with a VND 1,150 billion (c. USD 50 million) partial credit guarantee to support the issuance of Vietnam’s inaugural internationally verified green bond alongside the Global Green Growth Institute (GGGI^[2]), an inter-governmental international development agency, which provided EVNFinance with technical assistance structuring the green bond and assisted in the third-party verification of the Green Bond Framework (). Earlier, GuarantCo provided a partial credit guarantee to investors in Acorn Holding’s first certified KES 5 billion green note programme to fund the construction of accommodation for 5,000 students in Nairobi which was followed by a second guarantee of KES 1.4 billion (c. USD 12.9 million) to support the upsizing of a Medium-Term Note (MTN) programme to finance the construction of two additional green-certified student accommodation sites in Nairobi. The funds enabled the construction of green-certified student properties developed by Acorn, creating clean, safe and affordable accommodation for students in Nairobi. Last year, GuarantCo provided Runner Automobiles Limited with a guarantee for BDT 2.67 billion (c. USD 27 million) to support the first internationally certified sustainability bond in Bangladesh, part of which is directed towards green investments through installation of solar rooftop systems in their existing factories. More recently, GuarantCo provided a USD 70 million guarantee to CamGSM PLC (Cellcard) to finance energy efficient telecom infrastructure in Cambodia.

GuarantCo’s support for entities issuing green bonds has been instrumental in promoting sustainable infrastructure projects. Through its engagement, GuarantCo helps reduce risks, improving the attractiveness of green bonds for a broader range of investors and acting as a catalyst for further issuances of green bonds. The second transaction with Acorn exemplified the establishment of a model for replicable green issuances, earning additional recognition from Nairobi Securities Exchange and the London Stock Exchange. This was achieved through the cross issuance of Acorn’s KES 4.3 billion green bond programme on both stock exchanges.

Bringing companies on the ESG journey is crucial for several reasons. Firstly, it aligns business objectives with global sustainability goals, encouraging companies to consider their environmental impact. This fosters a culture of corporate responsibility where businesses are accountable for their environmental footprint. By involving companies in the ESG journey, GuarantCo and similar organisations help create a demonstration effect, encouraging more businesses to adopt sustainable practices.

Secondly, external validation and certification by independent providers are critical for green bonds. This validation ensures that the funds raised from these bonds are indeed used for environmental purposes, providing investors with confidence that their investment contributes to positive environmental outcomes. External certification also helps establish a standard for what qualifies as a green bond, reducing the risk of greenwashing where companies claim to be environmentally friendly without substantive proof. GuarantCo ensures that all the green issuances that it provides guarantees for obtain explicit validation from the external verifiers or second party opinion providers including Moody’s Investor Services, Sustainalytics, Global Green Growth Institute, Climate Bond Initiative, etc.

In addition, PIDG Technical Assistance (TA) has played a critical role in supporting early-stage green transactions. PIDG TA provides grants and technical assistance to companies and projects, facilitating the uplifting of standards including inter alia ensuring best practice is adopted for the development of frameworks and facilitating external validation for green bonds. This support helps cover the costs associated with certification and other initial hurdles, allowing more entities to enter the green bond market. As a result, early transactions become a blueprint for subsequent issuances, demonstrating the feasibility and benefits of green bonds to other market participants. For example, PIDG TA provided grant facilities to Runner Automobiles in Bangladesh to cover expenses of green verification by Moody’s Investor Services. Also, In July 2021, GuarantCo, through the PIDG Institute, organised a two-day virtual Vietnam green capital market event, which was funded by PIDG TA.

The issuance of green bonds has paved the way for other market players, both governmental and private, to follow suit. In Vietnam, the Just Energy Transition Partnership (JETP) exemplifies how government-led initiatives can embrace the green bond model to fund sustainable energy projects. GuarantCo and PIDG play a key role in these efforts by providing frameworks and technical assistance that guide the development of green bond programmes. Standard Chartered Bank has also contributed to this trend by signing a framework arrangement with GuarantCo that encourages the growth of green transactions, thereby enabling more private companies to tap into this market. The framework will focus on transactions related to climate change, climate mitigation, energy transition, climate adaptation and climate resilience. Accordingly, Standard Chartered will mobilise between USD 200 million and USD 300 million of financing by leveraging the USD 150 million of guarantee capacity (VND equivalent) provided by GuarantCo.

The green features of these bonds have attracted new investors and unlocked new asset classes, creating additional opportunities for capital deployment in sustainable projects. For example, Deutsche Bank had never invested in Cambodia prior to last year when it invested in GuarantCo’s transaction with CamGSM PLC (Cellcard). The green nature of the transaction was a key factor in Deutsche Bank agreeing to invest in this market for the first time. The Runner Automobiles transaction in Bangladesh crowded in the country’s largest non-life insurance company, Green Delta, to its first ever certified ESG investment. With an increasing number of investors giving priority to Environmental, Social, and Governance (ESG) criteria, green bonds present a transparent route for socially responsible investment. This trend broadens the investor spectrum, attracting those keen on impact-investing and ESG-oriented funds. The rising demand for green bonds also encourages companies and governments to issue them, leading to a positive cycle of investment focused on sustainability and project development.

In summary, the evolution of global project finance towards ESG themes has revolutionised sustainable development and responsible investment. Central to this shift are green bonds which mobilise substantial capital for environmental projects and attract a diverse investor base prioritising ethical investment. GuarantCo plays a catalytic role by providing credit guarantees that enhance the credibility of green bonds, particularly in higher risk markets across Africa and Asia. Our support has facilitated significant green bond issuances, fostered sustainable infrastructure and demonstrated the viability of these financial instruments. Furthermore, GuarantCo’s collaboration with external validators ensures transparency and accountability, reducing greenwashing risks and setting standards for future green bond issuances. Through technical assistance and strategic partnerships, GuarantCo and PIDG not only support early-stage transactions but also pave the way for broader market participation, contributing to a sustainable and responsible investment ecosystem.

[1] https://www.icmagroup.org/sustainable-finance/sustainable-bonds-database/
[2] https://gggi.org/