Finland’s First Green Bond Highlights Growing Demand

Shanny Basar

Municipality Finance, which provides financial services to Finland’s local government and public housing sectors, has issued the country’s green bond due to requests from investors for green financing.

Munifin’s $500m green bond was sold on September 27 and the book was oversubscribed by the afternoon.

Pekka Averio, president and chief executive of MuniFin, told Markets Media: “We have been active in capital markets for more than 20 years and investors have increasingly been asking us about green financing. Our peer issuer, Kommuninvest in Sweden, issued a green bond earlier this year and we set up a framework which is very similar to their framework.”

In order to be eligible projects have to meet MuniFin’s Green Framework, which was drafted in accordance with the Green Bond Principles and the Centre for International Climate and Environmental Research, Oslo and in collaboration with the Stockholm Environment Institute. MuniFin will use the proceeds of greens bond to invest in projects that promote the transition to low carbon and climate resilient growth across Finland, by lending at slightly cheaper rates than standard loans.

Munifin’s green bond, led by Bank of America Merrill Lynch, Credit Agricole, HSBC and SEB, had 50 investors, including 20 new dark green investors according to Kontio. The issue was priced at 33 basis points over the 5-year USD mid-swap and pays a fixed coupon of 1.375%.

Antti Kontio, manager, funding at MuniFin, told Markets Media: “There was no pricing advantage in issuing a green bond and one way of growing the market may be to change the tax treatments for investors.”

Kontio added that in an ideal world Munifin would only invest in renewable energy but there are not enough projects so the lender has a broader mandate including public transport, sustainable buildings, water and waste water management, energy efficiency, waste treatment, and environmental management and conservation. “We have set up an external committee to monitor the impact of the projects,” he said.

Kontio said MuniFin has funded €400m of projects since launching the green financing portfolio in April.

Jyrki Katainen, vice president of the European Commission, said in a statement: “This development is yet another example that sustainable financing is growing fast. Through the Capital Markets Union Action Plan we are aiming at facilitating investment in green technologies and ensuring that the financial system can finance growth in a way that is sustainable.”

MuniFin is planning to issue a green bond every 18 months or two years.

Hannele Pokka, Permanent Secretary in Finland’s Ministry of the Environment, told Markets Media: “The Finnish government believes that greening our economy is the only hope of new growth and jobs. We are very glad that MuniFin had taken this initiative and we hope it will be a forerunner for other issuers.”

MuniFin’s green bond was listed yesterday on the London Stock Exchange’s green bond segment, which launched last year. The exchange said 37 green bonds have listed on the segment in seven currencies and raised more than $9.3bn. So far this year 11 new green bonds in six different currencies have raised $3.6bn.

Last month the Luxembourg Stock Exchange launched a platform for green financial instruments called the Luxembourg Green Exchange (LGX), which became home to the majority of the 114 green bonds listed on the exchange, worth over $45bn. Issuers have to comply with eligibility criteria including a statement that the proceeds are exclusively used for financing or refinancing projects that are 100% green.

Robert Scharfe, chief executive of the Luxembourg Stock Exchange, said in a statement: “It’s not enough to say ‘green is green’. Investors are becoming more sophisticated and are demanding more granular information. Equally, issuers must be convinced of the benefits a truly green bond market can provide.”

Last year $42.2bn was issued in green bonds according to the Climate Bonds Initiative, and $54.4bn has been issued so far this year.

Mark Carney, governor of the Bank of England and chair of the Financial Stability Board, said at the Arthur Burns Memorial Lecture last month that green bond issuance could double this year from 2015 but still accounts for less than 1% of the holdings of global institutional investors.

He said international collaboration is needed to facilitate cross-border investment in green bonds.

“For investors, green bond markets offer a stable, rated and liquid investment with long duration,” Carney added. “For issuers, green bonds are a way to tap the huge $100 trillion pool of patient private capital managed by global institutional fixed income investors. The shift to the capital markets from banks will also free up limited bank balance sheet capacity for early-stage project financing and other important infrastructure lending.”

He suggested that specific measures to encourage green bond issuance could include developing a ‘term sheet’ of internationally recognised standardised terms and conditions; creating voluntary definitional frameworks; certification and validation to ensure that the project being financed is ‘green’; integrating environmental risk and green certification into credit ratings; developing green bond indices; and assessing the scope for standardisation and harmonisation of principles for green bond listings.

“Authorities are now working with the private sector to develop a green bond term sheet with standardised terms and conditions,” said Carney. “This should significantly improve the ease and efficiency of green bond issuance and simplify investor access to green bond markets in multiple currencies, thereby moving them into the mainstream of finance.”

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