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by Yawar Herekar, Cedric Rimaud and Fahad Asad

Can bonds only be vanilla or green?

Times have changed. The global effects of COVID-19 have also brought into the limelight the current and future effects of climate change. Capital markets have adapted and kept up with all the change occurring, evolving from a market where investors knew and cared little about what, where and how their investments were being used to one where now purpose matters more than ever.

Bonds (debt instruments) have been around for as long as people have borrowed money to finance their activities through capital markets. The most basic or standard version of bonds are known as plain vanilla bonds. Green bonds are a relatively recent innovation where debt instruments are fused together with environmental or climate change purpose through project selection, second party opinions and impact reporting to make these into an inherent part of the structure. Then there are social bonds that are designed with a mandate to impact society positively. This diversification in the various types of bonds continues to grow as the work of sustainable finance and its impacts on society becomes understood more clearly. Under this premise, there are now various new kinds of bonds – from blue bonds to microfinance to sustainability bonds and pandemic bonds to bonds that raise finance dedicated to a specific development purpose [1]. The reason for this being that the green bond market has seen the strongest growth over the last five years and other types of thematic bonds are trying to replicate this resounding success, based on a clear definition of assets and impact reporting. More than USD 890 billion in green bonds have been issued since 2008 with the market size expected to hit USD 1 trillion by 2021 [2].

[1] Escarus, Reports & Whitepapers [2] 10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets 2019

What about microfinance bonds?

Microfinance bonds are bonds issued by microfinance institutions, social businesses, or charities to finance their business op­erations and for social or environmental improvements. They can also be issued by sovereign issuers with the specific purpose of supporting microfinance or by multilateral development finance institutions (DFIs) targeting micro and small enterprises in emerging countries. Microfinance bonds that have been issued so far tend to have higher returns compared to the more traditional vanilla bonds or even green bonds [1]. As a subset of social bonds, they are used to correct income inequality or empower women by providing financing to Small and Medium Enterprises (SMEs) and local establishments for purposes ranging from increasing employment to providing access to basic services to installation of solar panels on rooftops of cottage industries.

The interest in this kind of bond class has grown because microfinance is a powerful instrument for reducing poverty.  It enables poor people to build assets, increase income, and reduce their vulnerability to economic stress. IFC, the private sector lending arm of the World Bank, has issued microfinance bonds with the private sector. One of the issuances involved Daiwa Securities Group, a Japanese wholesale securities firm. Daiwa Securities issued the microfinance bond to Japanese investors in a bid to contribute towards poverty reduction and expand access to finance for poor and low-income entrepreneurs in developing countries [2].

Cambodia is another good example. A country with no real financial markets, the first Cambodian corporate bond was issued in 2018 by Hattha Kaksekar Limited (HKL), the third largest microfinance institution in Cambodia, in the form of a Cambodian Riel (KHR) 120 billion (USD 30 million) 3-year bond with a coupon of 8.5%, with the support of the International Financial Corporation (IFC)[3]. In May 2020, PRASAC Microfinance Institution Limited issued a KHR 127 billion fixed rate 3-year bond, supported by the Credit Guarantee and Investment Facility (CGIF) [4]. While Cambodia is certainly identical in many aspects to Pakistan, it nevertheless demonstrates how a country with little financial markets can kickstart a corporate bond market of its own, starting with microfinance and can be used by Pakistan as a successful example.

[1] Balducci & Halleux, Sustainable Development Bonds [2] IFC, Daiwa Announce Second Bond to Support Microfinance in Emerging Markets 2010 [3] Kunmakara , HKL issues first-ever bond 2018 [4] PRASAC Officially Lists Bond on the Cambodia Securities Exchange 2020)

Why does microfinance get a bad rap including in Pakistan?

Microfinance has been a game-changer for financial inclusion but like everything in life that has a good side and a bad side, microfinance has not been devoid of criticism. One of the most profound criticisms has been about the exorbitant lending rates charged by microfinance institutions. One reason is that the operating costs associated with the monitoring of a large pool of micro-borrowers are extremely high. Microfinance institutions must also invest in areas that are rural and hard-to-get and which are primarily served poorly by the existing commercial banking infrastructure. This build-up of their own infrastructure and services from scratch all adds to costs [1].

A lot of people do not realize that higher lending rates correspond to the higher credit risk associated with microfinance lending, which in most cases offer very weak or non-existent collateral. Microfinance also serves a customer base most suspected to climate and environmental risks like floods, droughts, changing weather patterns and more recently locust attacks. Hence, the need to charge at a higher rate allows such institutions to build buffer in their equity reserves over the years in good times to brace for the shocks which are expected over the credit cycle of the microfinance sector.

Typically, microcredit officers must visit group borrowers once a week, establish an ongoing dialogue through grassroot engagement and collect cash in small amounts. In many rural geographies, this is made difficult due to the poor infrastructure, resulting in abnormal operational costs. Market players in the microfinance realms have also responded to this criticism by letting stakeholders know that the purpose of the industry and its aim is not only to provide financial services to the unbanked and predominantly lower income strata of the society but that these services are generally complemented with non-financial services provided to clients. This is done while helping customers invest in microenterprises, save, and maintain liquidity as well. Microfinance institutions also have higher overheads than traditional commercial banks and must factor these into their rates.

[1] Malik et al., COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan 2020

How has COVID-19 changed the Pakistani microfinance market?

According to the Pakistan Microfinance Network, at the beginning of this year Pakistan’s microfinance industry served twice the number of customers than those served by traditional commercial banks, about 7.3 million borrowers. The advent of COVID-19 however led to the microfinance industry in Pakistan to slow down, leading to it to eventually shrink. Halfway through the pandemic, the microfinance loan portfolio had grown smaller by 0.7% while active loans shrank by 4.9% [1].

Before the pandemic, the microfinance sector in Pakistan showed steady growth. Microfinance loans were paid back on time with a recovery rate of almost a 100%. The pandemic changed the business scenario as lockdowns were enforced especially in cities impacting economy and livelihood and leading to an increased risk of defaults occurring. To prevent this from happening, the banking regulator (State Bank of Pakistan) and companies regulator (Securities and Exchange Commission of Pakistan) issued timely regulations to allow for restructuring of loans for up to 1 year upon request by the borrowers. The microfinance sector stakeholders held regular meetings during the peak of pandemic to assess the situation on the ground and to share their experiences and issues. Certain key microfinance institutes also availed the relaxation/restructuring under the regulations from their lenders, which were accordingly passed on to the retail customers. Recovery trends from field were also keenly monitored. Government also distributed timely funds to the poorest of the poor under the EHSAAS Program (a social protection program which serves to provide a basic income to those in need). Economic activities were sustained by the government by opting for smart lockdowns and track and trace protocol instead of complete lockdowns. The microfinance sector accordingly was able to avoid large-scale defaults [2].

Overall, the state of the microfinance sector in the early months of the crisis now looks like a mixed bag. Outreach of microfinance has shrunk but on the other hand, deposits have grown. Targets for the financial year 2020 are expected to be missed but beyond this there has been less damage to clientele (mostly the rural poor) and the odds of loan recovery seem good [3]. The real challenge will be the year 2021, when one-year deferments for loans ends and when the default rate is expected to rise.

[1] (Jamal, Microfinance industry marginally shrank under Covid impact 2020) [2] (Jamal, Changing repayment behaviour of small borrowers 2020) [3] (Research, Microfinance during Covid 2020)

How can microfinance bonds help Pakistan?

The COVID-19 pandemic has caused a slowdown in the world economy, with in-country impacts ranging from mass unemployment to industry-wide shutdowns to a steep fall in stock market indices all the way to economic recessions. Pakistan has weathered the storm better than most but as per a report released by the Pakistan Microfinance Network, the next two years are expected to be a period of uncertainty. This might result in demand contraction and lower investments and this is expected to have implications on the broader microfinance sector. A difficult macroeconomic situation can also result in uncertainty within Pakistan government projects and initiatives and since the appetite for novel and innovative instruments is limited and development projects are the first to be reduced or cut when GDP falls, this includes projects in the microfinance sector.

For the Pakistani government to do something along the lines of this could turn out to be a big misstep. The microfinance sector plays a catalytic role in accomplishing the social and economic milestones set by the government; including initiatives of deepening financial inclusion; contributing to inclusive economic growth; and improving socio economic indicators leading to poverty reduction.

Microfinance bonds can provide relief [1]. Microfinance institutions have not only survived through the pandemic. Their hefty balance sheets and the way they maintain closer, more personalized relationships with their clients — has helped them absorb the shock in a better way than expected. Promoting microfinance and issuing a microfinance bond might just be the magic pill that is needed.

To be a success, microfinance bonds must be accompanied with a robust monitoring, reporting and verification framework. Many tools exist to correctly assess the impact on the ground. Investors in bonds with impact will demand that widely-used tools be chosen to ensure consistency across various locations. The default experience of the microfinance industry will eventually demonstrate that the micro-borrowers are an attractive value proposition for the banking system. As it grows, the industry will develop new products, such as thematic deposits (green or social), parametric insurance supporting farmers and communities in vulnerable contexts, as well as develop digitalized services to increase the financial awareness of their clients. Over time, microfinance institutions will look more like banks, and their clients will use more products, thus creating long-term economic benefits for the financial industry in the country. With the correct standards in place, it is an opportunity to transform the way underserved populations respect their environment and understand the social drivers of their activities.

The Government’s recent effort to allow overseas Pakistanis to open digital banking accounts in Pakistan is also a step in the right direction. The same mechanism can be used to channel funds from overseas Pakistani community into microfinance bonds offering profitable returns. Finance as a force for good: this lies at the heart of the Paris Agreement in 2015, when all nations signed a single document to work jointly on the reduction of global warming, using finance as a driving force.

[1] (Pakistan Microfinance Network Annual report 2019 2020)

Works Cited

10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets. (2019, March 18). Retrieved September 24, 2020, from https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets

Balducci, A., & Halleux, A. D. (n.d.). Sustainable Development Bonds. Retrieved September 24, 2020, from http://www.impact-investing.eu/

Escarus. Reports & Whitepapers. Retrieved September 24, 2020, from http://escarus.com/reports-whitepapers

IFC, Daiwa Announce Second Bond to Support Microfinance in Emerging Markets. (2010, September 1). Retrieved September 24, 2020, from https://ifcext.ifc.org/IFCExt/pressroom/IFCPressRoom.nsf/0/98A1607893F00883852577910072CD37?OpenDocument

Pakistan Microfinance Network Annual Report 2019. (2020, September 01). Retrieved September 26, 2020, from https://pmn.org.pk/publication/

Bağcı, K., & Türbedar, E. (2019, May). Financing for Development – Alternative Perspectives on Challenges and Opportunities for Financing Development. Retrieved September 27, 2020, from https://www.sesric.org/files/article/670.pdf

Malik, K., Meki, M., Morduch, J., Ogden, T., Quinn, S., & Said, F. (2020, July 09). COVID-19 and the Future of Microfinance: Evidence and Insights from Pakistan. Retrieved September 28, 2020, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3615077

Jamal, N. (2020, September 25). Microfinance industry marginally shrank under Covid impact. Retrieved September 28, 2020, from https://www.dawn.com/news/1581475/microfinance-industry-marginally-shrank-under-covid-impact

Research, B. (2020, September 22). Microfinance during Covid. Retrieved September 28, 2020, from https://www.brecorder.com/news/40020085

Kunmakara, M. (2018, December 05). HKL issues first-ever bond. Retrieved October 02, 2020, from https://www.khmertimeskh.com/556401/hkl-issues-first-ever-bond/

PRASAC Officially Lists Bond on the Cambodia Securities Exchange. (2020, May 5). Retrieved October 02, 2020, from https://www.prasac.com.kh/en/news-and-event/prasac-officially-lists-bond-on-the-cambodia-securities-exchange

By Cedric RIMAUD, Co-Founder of Earth Wake

Dear Charles de Quinsonas

Thank you for your excellent “Look beneath the surface” analysis of Suzano’s $750 million Jan-2031 bonds, whose coupon of 3.75% is subject to an increase of 25bps per annum from July 2026, should the issuer fail to meet its greenhouse gas (GHG) emission target in 2025. It is clearly a huge sigh of relief that sophisticated investors like yourselves act as the “vigilantes” and make sure that the company’s green credentials are indeed scrutinised and monitored.

We agree with you that there are some key areas that must be closely inspected, like: i. the proceeds will go to general corporate purposes, rather than specific green projects, which is excluded, for instance, by the Climate Bond Initiative in its screening of “climate-aligned” green bonds; ii. the issuer could have included water management and industrial waste as part of its key performance indicators, part of its sustainability-linked bond framework; iii. GHG emissions are calculated in terms of carbon intensity, rather than outright GHG emissions, leading to increased production resulting in more carbon emissions.

Now, you chose not to invest in this bond due to its unattractive pricing, which, you say, may be a result from the strong demand from ESG funds. As you rightly point out, the bond received $7 billion of orders for a $750 million bonds. Only in the last sentence of your review do you give credit to Suzano for having a gas emission target in the EM bond world. While I understand your skepticism, there are some positive signs, nevertheless.

Suzano, in their SLB framework, announce that “sustainability is an integral part of their strategy”, that it is “a global reference in the development of products made from renewable eucalyptus forests”. Given that it is a vertically integrated business, it is in the best position to control all steps of manufacturing and ensure that the whole production chain becomes greener. To point i. above, the counterargument to the general corporate purpose’s argument is that the company has announced a corporate strategy resolutely embarked on becoming a more sustainable business. To the point ii. above, the company’s priorities do include a reduction of industrial waste sent to landfills by 70% and reduce water withdrawal intensity by 15%. We fully agree with point iii., as carbon intensity is not a good measure of a business’ contribution to global warming: total carbon emissions are. However, Suzano itself has stated, again in its SLB framework, that it intends on becoming “even more climate positive” and removing “an additional 40 million tons of net carbon (carbon capture minus emissions scopes 1, 2 and 3) by 2030.’, the company is “committed to zero deforestation in their operations and supply chain”. They have policies in place to monitor their supply chain, with a “designated department with a rigorous and regular due diligence process that is responsible for ensuring that certified wood purchases follow the necessary guidelines”. We are far from “greenwashing”, something that we hear investors raise as a potential risk, when it comes to green.

We want to be slightly more optimistic than you are, however. The KPI is simple, measurable, attainable, relevant and time-bound (so called “SMART”), or, in SLB definitions, “measurable, quantifiable, externally verifiable and benchmarkable”. The starting point, 2015, was chosen in reference to the date of the Paris Agreement, which triggered the start of the move to market standards in the bond market. ISS ESG has provided a second party opinion on the transaction[1]. Rightly, ISS recognizes that “Suzano is one of the only eight companies in its industry to have concrete targets of GHG emissions reduction in line with the Paris Agreement”. Suzano also has got to improve: ISS indicates that “the company shows a moderate sustainability performance and has been given a rating of ‘C’, which classifies it as ‘Not Prime’ by the methodology of the ISS ESG Corporate Rating”. The population of firms to derive this assessment included 40 listed companies from the Paper & Forestry sector, in which Suzano ranks 16th, according to ISS.

To conclude, we agree that more ambitious targets would have been welcome. However, this is clearly a step in the right direction. The starting point is that Suzano is “average” in terms of emissions. It is signalling that it wants to do better. It has set factual targets, which it can refine in future bond issuances. It is a business that is a high contributor to the problems affecting our world: carbon emissions, water depletion and the creation of industrial waste. As such, we expect that the long-term prospects of Suzano as a better business are set on the right path. Other ESG funds seem to agree, as you rightly point out. The independent party opinion, which constitutes the core of the why investors feel they can trust the whole process, is a fair assessment. Overall, the foundations for a greener bond market are solid. As reported by the Climate Bonds Initiative[2], Suzano is the largest issuer of green bonds in Latin America, with $1.2 billion of green bonds outstanding as of 2019, with the first green bond issued in September 2016, only one year after the Paris Agreement, and Latin America’s first ABS green deal in 2019, while its competitor Klabin has issued $468 million. As such, we would like to welcome this SLB issue and congratulate Suzano on their SLB issuance. They set the stage for more similar companies to follow suit. The targets and ambitions will become more refined, higher and better calibrated, as the company understands the value of reducing energy intensity, waste and forest depletion.

Thank you for your analysis, it is great to see that global investors, like yourselves, do care about the fine print.

Earth Wake 


[1] https://www.isscorporatesolutions.com/file/documents/spo/spo-suzano-20200901.pdf?elqTrackId=37b45d505b89430b88acbfcad67edd4b&elq=a005e536daa14b32a0f4931e8ba170d3&elqaid=1335&elqat=1&elqCampaignId=&elqcst=272&elqcsid=253

[2] https://www.climatebonds.net/files/reports/cbi_lac_sotm_19_web_02.pdf

This is the second article on Pakistan and Green Bonds. This article is co-written by Cedric Rimaud (Earth Wake Co-Founder, Corporate Bonds and Green Finance Specialist), Yawar Arif Herekar (GCF Accreditation and ESS Policy Expert), Syeda Hadika Jamshaid (Climate Change Expert from the Ministry of Climate Change, Pakistan) on the role of China in the green bonds market and how Pakistan can benefit from this.

Why China?

Even as the COVID-19 pandemic looms large with thousands dead and millions infected the world over, many still consider climate change to be the greatest challenge of our times. The health crisis, which the WHO acknowledges is another piece of evidence that there is increasing pressure on our natural environment that causes disease to emerge, is a crude and real assessment of our everyday practices and of our lifestyles. Wuhan, the epicenter and thought to be the origin of the COVID-19 virus has not only recovered completely but bounced back stronger. With China’s ever-increasing role in global politics and as the second largest economy in the world, its efficient handling of the crisis is a testament on how to handle global catastrophes correctly and it is only apt that a closer look be taken at the role that China now plays in the climate crisis. It is known that China is firmly committed to tackling pollution and the reduction of carbon emissions. Having successfully reduced the role of fossil fuels in its own energy mix while becoming the world’s biggest investor in renewable energy, China is still considered to be the largest source of financing for fossil fuel projects in developing countries.

Why Pakistan?

Under China’s Belt and Road Initiative (BRI), the Chinese government is pouring money into the energy sector which is receiving the lion’s share of BRI investment. As one of the largest recipients of BRI funds, a quick look at the Government of Pakistan’s CPEC website paints a paradoxical picture: coal power plants being financed alongside wind energy projects and solar power (8 coal power plant vs. 7 renewable energy projects to be exact). The sheer magnitude of Chinese investments in coal fired generation also greatly surpasses that in the renewable energy space. This even after the argument that investing in fossil fuels is not just threatening for the environment and local ecology but it is also a bad bet economically as renewables such as solar and wind become cheaper and more popular.

Why green bonds?

Green bonds are a financial instrument in wide use for large-scale investments in clean energy. Some have hypothesized that green bonds will likely be one of the foremost channels that China will use to mobilize private capital with hopes to make the BRI into a ‘green’ initiative. The Chinese government and Chinese financial institutions remain a steady and growing proponent of them. With China having its own green bonds and taxonomy standards, which initially existed in several versions but have now been unified across regulatory agencies, rather than those accepted globally, it has led to skepticism in various quarters as to how China will identify BRI projects as being green when those considered green in one context would not be so in another. For example, retrofits of fossil fuel power stations, clean coal and coal efficiency improvements, and electricity grid transmission infrastructure carrying fossil fuel energy are permissible under China’s domestic green bond definitions; however, such guidelines are not in line with the expectations of international investors. To address concerns, Chinese banks and financial institutions have been working hard with other international investment players to mobilize capital through green bonds to gain acceptance. For instance, the Asian Infrastructure Investment Bank (AIIB), a development bank that was initially proposed and majority owned by China, assured participants at the Climate Bond Initiative conference held in September 2020, through its President Jin Liqun, that the AIIB would not finance any coal-fired power plant nor any project which is “functionally related” to coal going forward.  

How can Pakistan benefit from issuing a green bond given that it is now a part of China’s Belt Road Initiative (BRI)?

All-weather friends, Pakistan and China are collaborating on the China-Pakistan Economic Corridor (CPEC) which was valued at USD 72 billion as of 2017. Initially, it was feared that while undertaking these projects, environmental and social issues would not be factored in. This is not the case and has been denied vehemently by the offices of both countries who remain committed to sustainable development.

China on its part has stated that its goal remains committed to ensure clean energy provision and to make dirty projects cleaner, while taking into account the need and requirements of the Pakistani government. This might not fit a universal definition of ESG being factored into projects but this also means projects that might use “clean coal” — technologies such as coal washing and carbon capture that improve fossil fuel efficiency – would be counted. Chinese regulators recently proposed eliminating “clean coal” from the list of projects that can raise funds using green bonds, a step in the right direction. It is also pertinent to add that Chinese commitment to green projects has come from the highest levels of government with President Xi Jinping stressing the need to “green” the BRI.

The desire to attract more international investors is also leading Chinese market participants to adopt international practices more openly and incorporate them into the BRI. Casting apprehensions aside, one of the best ways that Pakistan can benefit from the green bonds experience is to launch such green bonds to finance projects under the China Pakistan Economic Corridor (CPEC). Not only is it a way for Pakistan to use this opportunity to meet its Sustainable Development Goals but green bonds are expected to be an indispensable financing instrument for development of infrastructure projects along the Belt and Road Initiative. To also improve the odds of these gaining international recognition and international investments, China can play its part by mandating environmental impact assessments for BRI investments which would make the initiatives more environmentally sustainable. While Pakistan on its part can slowly and gradually make a move towards this as well by asking its listed companies to disclose their ESG practices like China is asking those on the Shenzen and Shanghai stock exchanges to disclose their ESG practices to cater to the needs of international investors.

Will Pakistan align itself with China’s domestic green bonds principles or with international green bonds standards that are in place?

With China being the largest green bond market, it is only apt and justifiable that they have their own green bonds standards and guidelines. However, discrepancies still do exist between China’s local green bond guidelines and the international ones, especially when it comes to the eligibility of green projects and disclosures. Just to compare, it is known that international green bonds guidelines pay more attention to climate change mitigation and adaptation projects while China’s domestic guidelines emphasize environmental benefits such as pollution reduction, resource conservation and ecological protection, although the two sides are in the process of converging, with the Climate Bonds Initiative noting that “the proportion of green bonds that are in line with international green bond definitions has increased. In 2017, 38% of Chinese issuance failed to meet the international standards, which exclude coal and other fossil fuel-based technologies and limit the use of proceeds for working capital to 5%. In 2018, that figure fell to 26%.”.

As a close partner and with an ever-increasing relationship of trust and kinship with its larger neighbor, it would be wise for Pakistan to adopt Chinese green bonds guidelines as a start, but also encourage the adoption of international standards in order to maintain an open access to global investors. Some Chinese green bond issuers have themselves used offshore markets to raise financing, as in the case of ICBC Singapore issuing SGD 2.2 billion of green bonds in three currencies in Singapore, with an alignment with both international and domestic green standards and a second party opinion from CICERO. Exchange of information and expertise with China would help Pakistan in kick starting the process after which Pakistan can structure its own guidelines and taxonomy aligned with international best practices, while keeping the door open for an increased access to international green bond investors.

Works Cited

Goldfuss, C., & Podesta, J. (2019, October 10). A 100 Percent Clean Future. Retrieved September 18, 2020, From https://www.americanprogress.org/issues/green/reports/2019/10/10/475605/100-Percent-Clean-Future/

Ministry Of Planning, D. (N.D.). Energy: China-Pakistan Economic Corridor (CPEC) Official Website. Retrieved September 18, 2020, From http://cpec.gov.pk/energy

Xiangrui Meng, A. (2018, December 13). More Than Just A BRI Greenwash: Green Bonds Pushing Climate-Friendly Investment. Retrieved September 18, 2020, From Https://www.newsecuritybeat.org/2018/12/BRI-Greenwash-Green-Bonds-Pushing-Climate-Friendly-Investment/

Farand, C. (2020, September 14). Asian multilateral bank promises to end coal-related financing. Retrieved September 21, 2020, from https://www.climatechangenews.com/2020/09/11/asian-multilateral-bank-promises-end-coal-related-financing/

Shepherd, C. (2020, June 05). China Green Bonds On Slow Boat To Global Harmonisation. Retrieved September 19, 2020, From https://www.ft.com/Content/2694584e-9054-11ea-Bc44-Dbf6756c871a

Liu, S. (2020, July 29). Will China Finally Block “Clean Coal” from Green Bonds Market? Retrieved September 21, 2020, from https://www.wri.org/blog/2020/07/will-china-finally-block-clean-coal-receiving-green-bonds

Hale, T. (2020, June 05). Greater Disclosure To Open Doors For China Green Investors. Retrieved September 18, 2020, From https://www.ft.Com/Content/427c0d9a-8eab-11ea-Af59-5283fc4c0cb0

Xiangrui Meng, A. et. al (2018). China Green Bond Market. Retrieved September 17, 2020, from https://www.climatebonds.net/files/reports/china-sotm_cbi_ccdc_final_en260219.pdf

ICBC Successfully Issued the World’s First Green BRBR Bond. (2019, April 23). Retrieved September 15, 2020, from https://www.icbc.com.cn/icbc/en/newsupdates/icbc%20news/ICBCSuccessfullyIssuedtheWorldsFirstGreenBRBRBond.htm

‘Second Opinion’ on ICBC’s Green Bond Framework. (2017, September 22). Retrieved September 21, 2020, from http://v.icbc.com.cn/userfiles/Resources/ICBCLTD/download/2017/CICEROSecondOpiniononICBCsGreenBondFramework.pdf

 Jun, M., Jialong, L., Zhouyang, C., & Wenhong, X. (2019, March 13). Chapter 7 Green Bonds. Retrieved September 18, 2020, From https://www.elibrary.imf.org/View/IMF071/25402-9781484372142/25402-9781484372142/Ch07.Xml?Language=En

Escalante, D., Choi, J., Chin, N., Cui, Y., & Larsen, M. L. (2020, August 10). Green Bonds in China: The State and Effectiveness of the Market / 中国绿色债券市场:趋势与分析. Retrieved September 21, 2020, from https://www.climatepolicyinitiative.org/publication/green-bonds-in-china-the-state-and-effectiveness-of-the-market/

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 https://www.forbes.com/sites/emanuelabarbiroglio/2020/09/02/green-bond-market-wil 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 https://energy.economictimes.indiatimes.com/news/renewable/india-becomes-second -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 https://www.climatebonds.net/2020/06/china-green-bond-market-2019-report-china-c 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 http://www.xinhuanet.com/english/2020-08/18/c_139300230.htm 

Ahmad, M. (2019, April 27). Wapda plans $500 million green eurobonds in tranches by March 2020. Retrieved September 05, 2020, from https://www.thenews.com.pk/print/463892-wapda-plans-500-million-green-eurobonds -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 https://www.bis.org/publ/qtrpdf/r_qt1909f.htm 

Rosembuj, F., & Bottio, S. (2016, December 01). Mobilizing Private Climate Finance-Green Bonds and Beyond. Retrieved September 07, 2020, from https://openknowledge.worldbank.org/handle/10986/30351 

Green Bonds: Country Experiences, Barriers And Options – OECD. (n.d.). Retrieved September 7, 2020, from https://www.oecd.org/environment/cc/Green_Bonds_Country_Experiences_Barriers_a 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 

https://www.elibrary.imf.org/view/IMF071/25402-9781484372142/25402-97814843721 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 https://www.wri.org/blog/2020/07/will-china-finally-block-clean-coal-receiving-green-bonds 

Cedric RIMAUD, CFA

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.


[1] https://www.economist.com/finance-and-economics/2020/08/15/blended-finance-is-struggling-to-take-off

[2] https://www.fidelity.com.sg/articles/fidelity-insights/2019-07-23-how-to-allocate-for-income-in-emerging-market-debt-1563864215981

[3] http://www.cgif-abmi.org/wp-content/uploads/2020/04/RMAC_Press-Release.pdf

[4] http://www.cgif-abmi.org/

[5] https://www.unescap.org/resources/finance-climate-action-asia-and-pacific-regional-action-agenda-access-debt-capital-markets

[6] https://www.icfa.lu/2020-spring-cohort/