A New Green Revolution: The Green Bonds Part 2

Christian G. Lauron and Abner E. Serania

(Second of two parts)

In the first part of this article, we discussed some of the environmental consequences brought on by the rapid increase of infrastructure and economic development in the country. Although the Philippines maintains the lowest ecological footprint in ASEAN, growing overconsumption, unregulated production, and waste mismanagement all contribute to the environmental burden on the land.

One method to increase the impact of environmental protection and sustainability involves grassroots efforts not just from private citizens, but from organizations, local communities, and Local Government Units (LGUs). Although there is a lack of funding on this front, the Department of Finance (DoF) has begun urging its Bureau of Local Government Finance to strengthening LGU fiscal autonomy.

To be discussed further are the use of green bonds as an alternative funding source, which can encourage self-reliance and project autonomy, how green bonds are structured, and how they can be adopted for local implementation.

Like conventional bonds, green bond prices are also driven by interest rates, credit risk, foreign exchange markets, market perceptions of liquidity, and supply and demand. As interest rates increase, bond prices decrease. Moreover, the required return for investors tends to increase as the credit risk assessed to the issuer increases. Also affecting bond pricing are the anticipation of the project’s success and backup plans for future business opportunities. All of these are taken into consideration in calculating bond return.

Slightly deviating from a conventional bond, other additional terms and characteristics of a green bond — whether it is a floating rate, cancellable or callable — also affect its price. Further studies from Harvard Business School show that most US municipal green bonds are issued at a premium, where after-tax yields are six basis points lower than a conventional municipal bond. It makes sense to encourage more investors to invest, although most green bonds are generally oversubscribed.

Since the first green bond issuance in 2007, investments in green bonds have increased in recent years, with the International Finance Corp. (IFC) a unit of the World Bank Group, reporting an annual additional $1-trillion investment. While the creation of the green bond seems to follow conventional bond creation, evolving guidelines have been published across different markets around the globe to guide the creation and issuance of these bonds. It also provides a clear distinction for green bonds since investors demand identification.

Under the Climate Bonds Initiative, a four-stage bond certification process needs to be passed: project identification, bond structuring, transparency on use of proceeds, and screening of credentials. Furthermore, the International Capital Market Association has issued green bond principles aimed at streamlining voluntary guidelines in creating and issuing a ‘credible’ green bond.

In the Philippines, the Securities and Exchange Commission (SEC) has adopted guidelines from the ASEAN Green Bond Standards (AGBS) to improve an awareness and appetite in capital funding for green projects in the ASEAN region. It outlines rules and procedures for issuing ASEAN Green Bonds in the country starting with:

– The identification of eligible green projects, excluding fossil fuel power generation from the list;

– Clear documentation of the utilization of proceeds; and

– Proper establishment and disclosure of project selection and evaluation.

Management of proceeds must also be disclosed, where net proceeds must be tracked and adjusted periodically to match allocations required. Lastly, there should be an annual report on the projects done with their corresponding resource allocation.


In the Philippines, the first green bond was issued in 2016 by Aboitiz Power Corp. Banco de Oro Unibank followed in December 2017. In 2018, a locally denominated green bond emerged through the $90-million loan issued by the IFC for Energy Development Corp.’s (EDC) geothermal energy generation output. This is just a piece of the $30-billion funding requirement for the energy sector in the Philippines.

Both public and private sectors have already begun gently nudging investors and issuers towards the green bonds market, as can be observed with the SEC’s recent adaptation of the AGBS, and the 2018 Philippine Investment Forum’s discourse on the future of green bonds. However, though the returns are fairly comparable to that of a conventional bond, issuers hesitate at the cost of additional requirements of the “green” label. Thus, where investors seek to ensure they invest in truly green projects, issuers look at it as a burden to consider.

In the Philippines where the preliminary and strongest of impacts of climate change can be felt through intensifying typhoons and unusual flooding brought by rising sea levels, green bonds can be a way for the national government and the LGUs to raise funding for climate change mitigation and resiliency projects through proper waste management, waste-to-energy, and resilient infrastructure initiatives. This is the case in the US where municipal bonds were expected to increase to $15 billion in 2018, up 43% from 2017 based on S&P Global Ratings report.

Given that the country requires much financing for its programs, green bonds can potentially tap into the $36-trillion market. After the SEC adopted AGBS, green bonds are now being seen as potential investment vehicles that can ease the flow of funds between needing LGUs and willing investors. They may be viewed as alternatives to the typical fund-raising avenues of the LGUs such as loan applications to Government Financial Institutions that are backed by their respective Internal Revenue Allotments to augment their income.

Given that such bond issuances have additional (and more tedious) requirements, the national government must also be able to extend technical assistance to such LGUs willing to explore this fund-raising track, through the BLGF. Strides can be taken to foster widespread awareness of the key role green bonds can play in securing the sustainable development in support of the country’s economic and social growth. However, as in all worthwhile initiatives, it will require close and intense collaboration among the government, the private sector, and the country’s banking and capital markets.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Christian G. Lauron is a Partner and Abner E. Serania is a Senior Associate of SGV & Co., respectively.

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