Green bonds are debt instruments whose proceeds are exclusively applied to finance or refinance, in part or in full, new and/or existing eligible climate and environmental-focused projects (“green projects”).
The European Union intends to issue a nominal value of approximately Euro 225 billion in green bonds as part of a targeted Euro 750 billion borrowing drive that will be used to fund its COVID-19 recovery plan.
In February 2021, the Malta Financial Services Authority approved the bye-laws for the green market (“the bye-laws”) on the Malta Stock Exchange (“MSE”). This would allow for the listing of green bonds on the MSE. The introduction of green bonds could increase the supply of corporate bonds in the local stock market, most of which have historically been over-subscribed.
Furthermore, the green market could encourage new issuers to carry out more “green projects” that could be financed through a lower cost of capital than a typical project.
The European Union issued plans for its Member States to become carbon neutral by the year 2050. This change would need to be driven through various green projects which could be financed through green bonds.
Requirements of green bonds
The green market is governed by the bye-laws issued by the MSE. A non-exhaustive list of green projects is set out in Section 5.02.13.01 of the bye-laws.
The bye-laws cover the following aspects:
- Additional conditions for admission to the MSE Green Bond List;
- Eligibility criteria (based on the project’s contribution to one of six environmental objectives);
- Utilisation of bond proceeds;
- Management of proceeds;
- Reporting and certification; and
- Additional disclosure requirements for admission to the MSE Green Bond List.
An issuer would need to engage an Accredited External Reviewer to provide the MSE with an Accredited External Reviewer’s report. This report would certify that the bonds are eligible for admission to the MSE Green Bond List as per:
- Sections – 5.02.13.01, 5.02.13.02 and 5.02.13.03 of the bye-laws; and
- the International Capital Market Association (“ICMA”) Green Bond Principles.
One of the requirements of an Accredited External Reviewer is the possession of a practising qualification in the rating, certification, attestation, energy, climate, or environment field granted by competent authorities.
The issuer would need to have in place an established formal internal process to track the funds allocated to the green project. This would also need to be verified by the Accredited External Reviewer.
On an annual basis, the issuer shall provide the MSE with an updated Accredited External Reviewer’s report. The updated Accredited External Reviewer’s report would also include various financial metrics as set out in the bye-laws. Qualitative performance measures may also be provided.
Eligibility for listing within the green market
All designated green projects should provide clear environmental benefits which will be assessed and, where feasible, quantified by the issuer.
Part of the proceeds may also be used for refinancing.
The ICMA Green Bond Principles set out a non-exhaustive list of green project categories which include:
- Renewable energy (including production, transmission appliances and products);
- Energy efficiency (such as energy-efficient buildings, energy storage and appliances);
- Pollution prevention and control;
- Environmentally sustainable management of living natural resources and land use;
- Terrestrial and aquatic biodiversity conservation;
- Clean transportation;
- Sustainable water and wastewater management;
- Climate change adaptation;
- Eco-efficient and/or circular economy adapted products, production technologies and processes; and
- Green buildings (the GoM recently announced schemes in this respect).
Benefits of listing on the green market
Some of the direct benefits to an issuer for listing green bonds would be:
- Added transparency through the preparation of Accredited External Reviewer reports;
- Increased press coverage and brand value;
- Access to new investors and new types of investors who are more environmentally conscious;
- Potentially favourable coupon rates based on the specific type of project; and
- Reduced listing fees.
Furthermore, early adopters could use a successful green bond issue to establish a leadership position in the green market, which would set the tone for future green bond issuances.
How can RSM help?
RSM Malta have assisted various clients with the issuance process of debt securities. The scope of our work primarily would incorporate:
- The preparation of the financial due diligence report;
- Financial projections including various sensitivity analyses; and
- The financial considerations within the Accredited External Reviewer report.