The GBPs are voluntary processes that outline best practices when issuing bonds for social and/or environmental purposes through global guidelines and recommendations that promote transparency and disclosure, thereby supporting market integrity. The GBP emphasizes the necessary transparency, accuracy and integrity of information to be disclosed and communicated by issuers to stakeholders through the core components and key recommendations. Four main components to be aligned with the GBP:

• use of proceeds – how the proceeds of the issue are used should be documented in the legal documents of the bond;
• project evaluation and selection process – the issuer must describe the decision-making process to assess whether a project can use green bond capital;
• management of proceeds – the issued proceeds should be placed in a separate account or managed in such a way that it is clear that the money from the bonds is going to the specified projects; and
• reporting – the issuer must provide investors with a list of projects financed by the bond at least once a year.

The GBP recommends using an external party to confirm that the bond meets the four principles. They also call for an independent audit, primarily of how the issuer monitors payment processing and tracking. However, the GBPs are voluntary guidelines that recommend transparency and disclosure and promote honesty in the development of green bonds. Most importantly, they are not regulations.

The GBPs have been used to form the Swedish sovereign green bond system, which contains the four aforementioned main GBP components. The aim of the Swedish sovereign green bonds is to finance a spending portfolio that meets the highest environmental ambitions and is in line with the goal of carbon neutrality by 2045.

Even if sterling constitutes the market standard, Swedish parties are free to choose contractual obligations in civil and commercial matters and thus the provisions relating to green bonds. Issuers typically refer to their own “green bond framework” as set out in their Medium Term Note (MTN) program, with a caveat in the bond terms that their green bond framework may be updated from time to time to reflect, among other things, the EU taxonomy regulation, the EU green bond standard, sterling and best practices in the market.

It should be noted that the EU Taxonomy Regulation does not apply directly to bond issuers; however, it does have an indirect impact on issuers, as the regulation imposes requirements that covered participants, for example, be able to indicate how their portfolios are compliant with the EU Taxonomy Regulation.

Today, the GBP and other existing forms of self-regulation pose various challenges, especially for investors. The main challenge from an ESG perspective is greenwashing. If companies participate in green bonds and issue green bonds whose proceeds are used for projects that are not really green, this can damage the credibility of both the individual company and the green bond market. In addition, there is a risk that the issuer’s own framework does not meet all the requirements, wishes or specific investment mandates of investors. Given that the issuer reserves the right to change the green terms and conditions, and that market practices may evolve after the date of issuance for a particular MTN, there is a risk that such MTN will not meet future regulations, principles or standards.

On June 18, 2019, the European Commission’s Technical Expert Group (TEG) on Sustainable Finance published the group’s final report on the EU Green Bond Standard. The report proposes that the European Commission introduce a voluntary EU standard for green bonds. The main goal of the proposal, which is currently being discussed by the European Parliament, is to create a new “gold standard” for green bonds that will raise the level of environmental ambition. The Swedish government has clearly welcomed the proposal for a voluntary EU standard, and once the EU standard is adopted in Sweden, the regulation will set a new standard for how companies and public authorities can use green bonds in Sweden to raise funds on the capital markets to finance such ambitious large-scale investments.

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“Sustainable finance” refers to the process of incorporating environmental, social and governance (ESG) considerations into investment decisions in the financial sector. To facilitate ESG investments, the implementation of new sustainable investment rules has been increased, introduced through amendments to existing legislation and through entirely new rules and guidelines. Most of the regulations have already entered into force. Despite the recent development and strengthening of regulation within sustainable finance, there is no regulation of green bonds in Sweden yet.

The Swedish green bond market emerged as a result of demand from Swedish institutional investors, who entered into a dialogue with the Swedish bank, resulting in the World Bank issuing the first green bonds for institutional investors in 2008. The international green bond market has grown dramatically in recent years, but still represents a small part of the overall bond market. Sweden is far ahead in the development of green bonds, and in 2019, green bonds accounted for 20% of the country’s total bonds. This is a very large share compared to other currencies such as the euro, pound sterling, yuan, Australian dollar, Norwegian krone, and US dollar, for which green bonds accounted for between 0.8 and 5% of bonds issued. However, this form of financing is becoming increasingly common around the world, and its use is expected to grow. “Green bonds allow raising capital and investing in new and existing projects with environmental benefits. Green bonds are an important part of sustainable finance and thus play a crucial role in the fight against the climate crisis.

What is a green bond?

Market participants should be aware that there is currently no clear definition of what a green bond is. However, the general perception is that green bonds are any type of bond instrument whose proceeds or equivalent amount will be used exclusively to finance or refinance, in part or in full, new and/or existing eligible green projects.

It should be noted that green bonds can be distinguished from climate bonds, which focus on projects that address climate issues, such as renewable energy or climate-smart infrastructure. The concept of green bonds is broader; bonds can also finance environmental projects that are not directly related to climate. Thus, climate bonds are a kind of green bonds. The concept of “climate bonds” is more common internationally, while in Sweden the term “green bonds” is more commonly used, even for purely climate bonds.

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Key facts

• Kommuninvest has provided funds for more than 130 investment projects in more than 75 Swedish municipalities and county councils/regions;
• The issuance of green bonds was made possible by an increasing portfolio of green loan projects approaching SEK 25 billion (USD 3.1 billion);
• Commitments totaling SEK 8.6 billion (USD 1.1 billion) for 27 renewable energy projects are expected to avoid 395,730 tons of annual CO2 emissions, equivalent to 85,000 cars taken off the road.

Challenge.

Access to climate finance to finance green projects has proven to be one of the main obstacles to achieving climate neutrality. Smaller local and regional governments found it difficult to find sources of financing, as their demand for loans was relatively small and not large enough to interest large commercial banks.

Solution
Kommuninvest introduced green bonds and green loans to support climate action in local and regional governments in Sweden. By combining individual green loans into a common portfolio, Kommuninvest offers small municipalities green financing opportunities to further diversify and increase the sustainability of Kommuninvest’s financing.

Green bonds are a cost-effective way to raise capital to combat climate change, where the funds raised by the issuer are used to finance environmental projects. For example, green bonds have financed one of Europe’s largest onshore wind farms, which includes 99 wind turbines with an installed capacity of 247.5 MW, as well as a fleet of electric buses for local transportation. All projects must meet predefined sustainability criteria and are reviewed by an independent environmental committee.

Helping the planet
A project provides green bonds and green loans to finance or mitigate climate change, adaptation to climate change, or can be a project related to environmental management. For example, a mitigation project financed by green bonds reduces carbon dioxide emissions by increasing the supply of renewable energy and reducing the need to use fossil fuels.

Helping people
Swedish local and regional governments can now easily access cost-effective environmental financing. Funding from green bonds will allow them to successfully achieve the transition to a carbon-neutral society, which will help reduce the effects of climate change. Environmental projects will allow future generations to benefit from a society in which Sweden’s major environmental challenges have been addressed.

Spillover effect
The activities are easily scalable as they are integrated into the day-to-day operations of Communinvest in terms of lending, financing and investor relations. Due to the projected increase in green loans, the bank expects to add additional resources to support the verification and approval of green investment projects and impact reporting. Replicability has been demonstrated by the fact that local public debt services such as Kommuninvest have already been established in other Scandinavian countries (Denmark, Finland and Norway). Kommuninvest works closely with these agencies and is eager to share knowledge and experience. In Finland, municipal finance issued its first green bond in September 2017 and drew inspiration from Kommuninvest in its green bond management model.

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