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by Cedric Rimaud and Yawar Arif Herekar

What are green bonds? 

Climate finance is ramping up around Asia. Countries are spending on ways in which they can accelerate climate actions while meeting their sustainable development goals (SDGs) and their carbon emissions reduction targets. The COVID-19 pandemic is adding to the urgency with large stimulus packages the world over. Multilaterals such as the World Bank and Asian Development Bank are gearing up as well and have set ambitious targets to help emerging economies meet their emissions reduction goals. 

It is widely acknowledged that green financial instruments are necessary for a rapid transition to a low carbon and climate resilient economy as companies and countries seek to live up to their Paris Accord targets and investor demand grows for environmentally and socially-responsible investments. One way to do this is to tap the $100 trillion debt capital markets, a necessary means to access sources of long-term funding to close gaps in the availability of capital for sustainable development. One of the more popular financial instruments used for climate finance and one of the easier and practical solutions to climate change is using green bonds. Also known as climate bonds when they are aligned with the Climate Bonds Standard, these are used to mobilize capital to fund projects that can lower global carbon emissions and were first introduced more than a decade ago by the World Bank. Since then, the green bonds market has grown in leaps and bounds: with USD 200 billion expected to be issued in 2020 and as per the latest estimates, the market size is expected to hit USD 1 trillion by 20211.

1. Barbiroglio, Green Bond Market Will Reach $1 Trillion With German New Issuance 2020

Why has Pakistan not issued a green bond yet? 

Like many countries with underdeveloped bond markets, Pakistan’s response to climate finance has been lacking and its ability to capture funds dedicated for this purpose has been uninspiring to say the least. Successive governments have recognized and written on this but so far, little action has taken place. Forums and working groups have been created but they have been unable to provide consistent and credible policy signals that would enable the sustained and systematic growth of climate finance in Pakistan. 

This is surprising and one might wonder why Pakistan has been unable to take advantage of climate finance to the scale that its neighboring countries have, namely India and China. Both countries are now acknowledged as the second largest and largest market globally for green bonds. In a recent article in the Economic Times (India)2, it was noted that India as of 2019 had USD 10.3 billion worth of green bond transactions. The Indian public and private sectors are both involved in issuing green bonds with issuances coming from organizations such as Indian Renewable Energy Development Agency (IREDA), Indian Railway Finance Corporation (IRFC) and the State Bank of India.

As for China which is the largest green bonds market, Climate Bonds Initiative (CBI) in its report on China’s Bond Market stated that “by the end of 2019, the total outstanding amount of China’s domestic green bond market stood at USD 140 billion”3. Just recently, China Construction Bank (CCB) listed two green bonds of USD 700 million and USD 500 million dollars on Nasdaq Dubai4

2. Joshi, India Becomes Second-Largest Market For Green Bonds With $10.3 Billion Transactions – ET Energyworld 2020
3. China Green Bond Market 2019 Report: China Cements Position As Leading Market With USD55.8bn Issued In 2019: Joint Climate Bonds & CCDC Publication – Supported By HSBC 2020.
4. Huaxia, China Construction Bank Celebrates Listing 2 Green Bonds On Nasdaq Dubai 2020

What are the challenges facing the Pakistani market in issuing a green bond? 

The potential for scaling-up the green bond market in Pakistan is tremendous. It is not without its challenges, however. As described in an OECD report on country experiences with green bonds5, some of the challenges described are applicable in Pakistan as well. They are as follows: 

1. The overarching constraint for green bonds is the low pace of development of projects that qualify as climate change mitigation and adaptation investments in Pakistan. This means that there is a severe lack of bankable green projects in the Pakistani market that can be financed or re-financed through green bonds. Identifying projects and assets as ‘green’ constitute a major part of the challenge. This focuses attention on the condition that having robust and enabling policies and procedures are necessary for pipelines of green projects to emerge at scale.

2. There is a lack of understanding and awareness of the potential benefits of the green bond market in Pakistan. This is not only amongst policy makers and regulators but also with potential bond issuers (banks, non-banking financial institutions and non-financial corporates) and investors. The lack of depth and underdevelopment of financial market infrastructure is also a key impediment in green bonds issuance. Factors such as a sound banking sector, supportive legal and regulatory frameworks, credit risk assessment institutions, stable exchanges and secure trading platforms are needed to provide the foundation for green bonds to gain a foothold.

3. Green bonds are mostly backed by the full balance sheet of the issuer, and not only by the cash flows related to the climate-friendly project financed from the proceeds. Very few financial institutions in Pakistan are ready to take this risk given that the green bond market is still a relatively nascent market and because of the lack of understanding and awareness.

4. Even if understanding and awareness is created, another barrier in Pakistan and other emerging economies is the verification of the “green bond” status and the monitoring of use of proceeds by issuers for green purposes. These services are performed mainly by second opinion or third party assurance providers (such as accountancy firms and specialized ESG research agencies) but the relatively high cost of obtaining a second opinion or third party assurance (ranging from anywhere between USD 10 upto 100 K and more) is a major stumbling block. Given the dollar-rupee parity, many would-be issuers are deterred by the high cost required for this verification.

5. Green bonds serve both local and global markets, but ease of access is a burning issue. The difficulty created here is that green bond definitions and disclosure requirements differ across markets. Different measurement standards, varying reporting requirements and the lack of harmonized taxonomies is an obstacle. The Climate Bond Standard or the ICMA Green Bond Principles are available as widely adopted standards for international investors.

6. The differences highlighted above increase transaction costs as bonds recognized as green in one market need to be re-labelled or re-certified in another market. Another barrier to cross-border green bond investing is the lack of risk hedging products (e.g., against currency devaluation) available to emerging economies.

7. Many emerging economies like Pakistan have hydropower projects that fit into the criteria of bankable projects that could be funded via green bonds. However, the long gestation period makes these projects unattractive since globally, financial corporations usually issue bonds with terms of up to 5 years and non-financial corporates issue bonds with tenors from 5 – 10 years6.

8. Along the same lines, the lack of disclosure requirements for institutional investors to reveal environmental information of their asset holdings and the lack of capacity to quantify the environmental costs and benefits of their investments leave many investors shaking their heads trying to distinguish between green and non-green assets. The Climate Bond Standard, by requiring an annual reporting by climate bond issuers, as well as the Green Bond Principles support an additional level of disclosure. 

5. Green Bonds: Country Experiences, Barriers And Options – OECD
6. China Green Bond Market 2019 Report

How would Pakistan benefit from issuing a green bond?

Green bonds have many benefits. Some of their benefits are as follows: 

1. Green bonds would drive down the cost of capital for large-scale climate and infrastructure projects and support not only governments but the private sector as well where it seeks to increase capital market investment to meet climate goals. There have been talks that Pakistan’s Water and Power Development Authority (WAPDA) was aiming to issue up to USD 500 million of long-term dollar-denominated green bonds by 2020. The advent of COVID-19 has delayed this but green bonds are still being looked at as viable alternatives to fund long-stalled mega-projects such as the Mohmand Dam and the Diamer-Basha Dam7.

2. The largest themes amongst green bonds are low-carbon transport, energy (renewable and energy efficiency) and water infrastructure. All three areas are areas where Pakistan lacks funding and where fresh funding sources would allow the government to finance projects in areas such as clean energy, green buildings and sustainable transportation.

3. Green bond issuance would push lending institutions for stricter and more stringent standards such as improving environmental and social risk management systems, incorporate environmental, social, and governance (ESG) requirements into their entire credit granting process, and strengthen ESG-related information disclosure, reporting and interaction with stakeholders. It would also lead to financial institutions and firms strengthening their due diligence efforts in verifying the environmental performance of portfolio companies and projects. Issuers, especially banks, would disclose sufficient relevant environmental information, on the flow of funding, to avoid reactions from the market that are based on inadequate or incorrect information8.

4. According to a study conducted by the Bank for International Settlements9, focusing on green bonds allows regulators to finance environmental projects while staying within the fixed income asset class that is the core of their reserve portfolios. While central banks are playing an increasingly active role in promoting green finance, comparatively little attention has been paid to how they might integrate sustainability into their policy frameworks – specifically for their foreign exchange reserves. It allows central banks the opportunity to develop standards and practices for this.

Given the State Bank of Pakistan’s (SBP) recent explicit push in the direction of sustainability and that investment in green bonds does not seem to subject reserve managers to higher risk than their conventional alternative, this is a good area to explore. The BIS study also found that sustainability objectives can be integrated into reserve management frameworks without forgoing safety and return and that adding both green and conventional bonds can help generate diversification benefits improving the risk-adjusted returns of traditional government bond portfolios.

7. Ahmad, Wapda Plans $500 Million Green Eurobonds In Tranches by March 2020
8. Shipke, Rodlauer, & Zhang, Chapter 7 Green Bonds 2019
9. Fender, Mcmorrow, Sahakyan, & Zulaica, Green Bonds: The Reserve Management Perspective 2019

Will a green bond bring foreign investment into Pakistan?  

Pakistan is looking to attract foreign investment to not only shore up its foreign exchange reserves but also to establish itself as a good foreign investment destination. As international investors search for areas in which they can invest using ESG guidelines, green bonds can play their part. To create a green bonds market, the Pakistani government can do the following: 

Policy Measures: Government can help spur green bond issuance through a combination of policy and regulatory support and fiscal and financial measures. Some of the more substantive policy measures include policy incentives (i.e. interest rate subsidies, cash subsidies) and a fast-track approval process for green bonds issuances. A better regulatory framework would also help Pakistan as it would increase recognition and help local companies, power plants, and infrastructure projects tap the growing pool of investment capital that now favors the “green” label10

Sovereign Green Bond: If Pakistan issues a green sovereign bond, it will signal that the country is committed to a low-carbon, green-growth strategy. This can also have a positive effect on private sector involvement in funding of green projects. Not only that, issuing a green sovereign bond can also set up a benchmark price for the domestic green bond market and help it grow11. It has been shown that the momentum generated by existing green bond issuances help to develop and spur capital markets and market development. The Republic of Indonesia, by issuing two Sovereign Green Sukuk in 2018 and 2019, has attracted new investors that would not usually invest in Indonesia. 

Higher Yields: The low-yield environment internationally has encouraged investors to look towards emerging markets with their higher yields. Pakistan with its high benchmark interest rate, best practices and an internationally recognized regulatory framework can serve as an attractive destination. 

Transparency: Green bonds contribute to fill an environmental, social, and governance (ESG) transparency gap in emerging markets and provide investors with confidence over the positive green impacts of the projects financed along with the proper management of associated environmental and social risks. The entry of second party opinions will help bring transparency to financial instruments in Pakistan because it will bring with it better information disclosure and opinions from reputed firms. 

10. Liu, Will China Finally Block “Clean Coal” From Green Bonds Market? 2020
11. China Green Bond Market 2019 Report.

What is the way forward for Pakistan in creating a green bonds market? 

The rapid growth of the international green bonds market is demonstrative of how capital market mechanisms can enlist private capital to address global climate change action and channel private sector funds to developed and emerging economies. As an emerging nation, Pakistan can take advantage of this by using green bonds as a fresh funding source that will allow the government to finance projects in areas such as clean energy, green buildings, and sustainable transportation. The introduction of green bonds in Pakistan can also allow for a structural change towards a more sustainable and climate-friendly economy. 

One of the ways Pakistani authorities can do this is by approaching multilateral development banks (MDBs) and development financial institutions (DFIs) for help in the development of such a market. MDBs and DFIs will be able to leverage their experiences in green bond issuances and can help in other ways such as providing credit enhancements and serving as anchor investors for green bonds. Once this is set up, it is hoped that private capital will also find its way. 

The creation of a green bonds market needs to be done as soon as possible so that the country can catch up with its neighbors lest it is left behind in this important area for promotion of sustainable development. Global investors are looking for new investment opportunities, the window for accessing new forms of capital is open. 

Works Cited: 

Barbiroglio, E. (2020, September 02). Green Bond Market Will Reach $1 Trillion With German New Issuance. Retrieved September 05, 2020, from l-reach-1-trillion-with-german-new-issuance/ 

Joshi, A. (2020, February 03). India becomes second-largest market for green bonds with $10.3 billion transactions – ET EnergyWorld. Retrieved September 05, 2020, from -largest-market-for-green-bonds-with-10-3-billion-transactions/73898149 

China green Bond Market 2019 Report: China cements position as leading market with USD55.8bn issued in 2019: Joint Climate bonds & CCDC publication – Supported by HSBC. (2020, June 29). Retrieved September 05, 2020, from ements-position-leading-market-usd558bn-issued 

H. (n.d.). China Construction Bank celebrates listing 2 green bonds on Nasdaq Dubai. Retrieved September 05, 2020, from 

Ahmad, M. (2019, April 27). Wapda plans $500 million green eurobonds in tranches by March 2020. Retrieved September 05, 2020, from -in-tranches-by-march-2020 

Fender, I., McMorrow, M., Sahakyan, V., & Zulaica, O. (2019, September 22). Green Bonds: The Reserve Management Perspective. Retrieved September 07, 2020, from 

Rosembuj, F., & Bottio, S. (2016, December 01). Mobilizing Private Climate Finance-Green Bonds and Beyond. Retrieved September 07, 2020, from 

Green Bonds: Country Experiences, Barriers And Options – OECD. (n.d.). Retrieved September 7, 2020, from nd_Options.pdf 

Shipke, A., Rodlauer, M., & Zhang, L. (2019, March). Chapter 7 Green Bonds. Retrieved September 07, 2020, from

Yawar Herekar Pakistan and Green Bonds: A Case Study 42/ch07.xml?language=en 

Liu, S. (2020, July 29). Will China Finally Block “Clean Coal” from Green Bonds Market? Retrieved September 07, 2020, from 


Under the assertive title of “Blended finance is struggling to take off”[1], The Economist magazine, in its 15th August edition, points to an area that we, at Earth Wake, are all too familiar with. According to convergence, the Economist argues, blended finance is a small $20 billion a year -which is well below the need of spending required to support a more equal and climate-resilient society in low and middle-income economies. They also argue that this is caused by “financial wizardry”, “lack of transparency” or because the “internal workings [of multilateral development banks] incentivise grant-making over blending.”.

Over the past four years, Earth Wake’s internal research as well as participation in conferences, workshops and other thematic gatherings has shown us that there is definitely interest from both the private sector (e.g. banks and investment managers) and the public (UN agencies, multilateral development banks) on this topic. However, bridging the two sides remains a key challenge. Very often public experts call for “greater participation from the private sector”, as a lack of communication between the two sides remains problematic. 

What are the true barriers to blended finance taking off?

1. Skewed perceptions of risk

First, the perception of risk by investors is skewed. Investors tend to believe that it is safer to allocate a large portion of their portfolio to negative-yielding public bonds rather than seeking higher yielding investment opportunities in markets where the strong rate of growth gives them a long-term return. Less than 4% of global bonds yield more than 5% globally and 20% of them are negative yielding at the present time.

Investors argue that the risk is too high, as they only expect to suffer minimal losses in a small portion of their portfolio. However, by limiting individual exposure, higher returns on the diversified portfolio will counter this risk. Portfolio theory has shown that, when 20 uncorrelated investments or more are pooled together, the risk is diversified away. Investors should therefore consider allocating a small portion of their portfolios to an investment that consists of 30 to 50 different projects from various corners of the EM world. Fidelity Investments, a large US asset manager with $2.5 trillion of assets under management, argues[2] that “rotating from developed market to emerging market debt can reduce risk in a portfolio” and “EM hard currency debt has historically exhibited lower spreads and slightly lower volatility than high yield”.

2. A lack of liquidity

Secondly, investors are concerned with the lack of liquidity when it comes to blended finance investments. Large asset managers have specific guidelines to invest only in “benchmark” deals. A large bond issue, bought by a large number of investors, is more likely to have secondary liquidity than a small bond placed with a few investors. Investors expect that they will need to find someone to buy the investment from them at some point in the future, should they have a redemption that forces them to sell down their holdings. Their prudent risk management policies force them to wait for the large deals, rather than accumulate small transactions. Yet, anyone trading in the Emerging Markets corporate bond market knows that liquidity is relative. “Benchmark” deals are very often parked into “buy and hold” portfolios with very little secondary market activity. It can be challenging to find a buyer at the prevailing market price, and buying them in size after the issuance is difficult.

In stark contrast, the appetite for new green bond offerings is very real, with books several times oversubscribed in a typical offering. Investors have come to know that if they do not get their hands on green bonds at issuance, it is difficult to subsequently buy them in secondary markets. We would argue that there is some room for both types of investments. In a global portfolio, there are different layers of investments, with a portion being liquid. This ensures that the fund manager can quickly raise cash if its client wishes to redeem their investment. However, a large portion is not immediately available. Therefore, opting for short-dated instruments (such as 3- to 5-year corporate bonds) bought at different times will ensure that there is some liquidity coming into the portfolio on a regular basis.

3. Smaller investment projects

Investors voice concern over the size of blended finance projects. Indeed, the projects are usually much smaller than large “benchmark” deals. However, there are many opportunities to find attractive credit borrowers and combine them into a diversified portfolio that will yield attractive returns and there are solutions that enhance the credit of issuers. In one of our recent articles on “Small and Medium-sized Enterprises” Financing in Singapore”, we highlighted the importance of guarantee schemes to allow SMEs to better access financing. The efforts of the Asian Development Bank and others to allow bond issuers to benefit from their guarantee for debt raising purposes is a very good, long-term solution to support development. The recent opening of the Cambodian corporate bond markets[3], with several issues guaranteed by Credit Guarantee & Investment Facility[4], is an excellent demonstration of this, and more such efforts should be encouraged.

We at Earth Wake want to support these efforts and be part of the “financial wizardry” that is combatting the obstacles of blended finance deals. The field is endless for financing smaller projects in the Emerging Markets, and in Asia Pacific specifically, the region is awash with opportunities.

As we argued in our report titled “Finance for Climate Action in Asia and the Pacific: Regional Action Agenda to Access Debt Capital Markets”[5] in December 2017, there are solutions to use the power of a regional financial center, like Singapore, to redirect capital towards green and social projects in the region. The recognition we received from the Luxembourg International Climate Finance Accelerator[6] is a demonstration that we are not alone in our belief that this is possible.

Much remains to be done and working to show the potential of the blended finance model is a complex and often time-consuming process. However, the growth of the green, social and sustainability bond markets globally, now exceeding $1 trillion USD globally, is a demonstration that thematic instruments are attractive to global investors. It is true that this is only 1% of the global bond markets, but this has been achieved in roughly 5 years, with an incredibly strong rate of growth. The strength of this rise shows that the instrument is intrinsically no different from traditional bonds. With refined environmental and social objectives, and standards in place to govern these markets, the foundations are solid for strong growth in the future.