The green transition in emerging economies: green bond issuance in Brazil and China

ABSTRACT

Green bonds have emerged as an innovative financial instrument that may be used to mobilise incremental resources for long-term financing projects focused on building sustainable infrastructure. In this regard, this article advances research on green bond markets in emerging economies (EEs) by comparing the evolution of the certified green bonds markets in Brazil and China. For this purpose, a mixed analysis was applied. The qualitative analysis is based on a literature review to contextualise the main drivers and barriers to the evolution of the green bond market in light of national policies and features of the financial system in each country. For the quantitative analysis, the certified green bond markets are assessed in terms of the amounts issued as a percentage of the debt securities markets, considering the participation of each issuer type and the allocation of revenue across eligible sectors. Information on certified green bond amounts issued and on debt securities’ markets was obtained from the Climate Bonds Initiative and BIS databases. The results show that the evolution of the Chinese and Brazilian certified green bonds markets remains negligible, in terms of the whole debt securities market. Although green bonds may be considered an important market solution, they still do not provide sufficient resources necessary for a meaningful green transition, especially in EEs. However, findings also show that in China, compared to Brazil, features of the financial system combine with more consolidated green policies to act in favour of scaling up and distributing revenue to crucial sectors to green transition.

Key policy insights

• Without well-coordinated national green policies and appropriated institutional arrangements, the growth of the debt securities market in emerging economies (EEs) will not boost the certified green bond market.

• In EEs, notably in Brazil and China, the central government’s influence on the policy coordination and the financial system is fundamental in achieving green goals.

• Greater participation of state-owned financial institutions in EEs could improve the access to finance more emergent solutions (e.g. low carbon transport, water infrastructure, etc.) beyond more mature ones (the usual solar and wind energy) to promote the green transition.

KEYWORDS:

• Green bonds market
• emerging economies
• policy coordination
• financial system
• Brazil
• China

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The financial system has the potential to expand the investment – which is not enough yet – made by the State in sustainable practices, bringing environmental benefits through access to other sources of funding (Borges, 2019).

2 Greenwashing is a practice that involves misleading or unfounded company claims as to the benefits of its products, processes, technologies, among others, to the environment. It also refers to when greater time and money is spent on green advertisements than on the effective adoption of sustainable practices (Deschryver & Mariz, 2020).

3 This definition refers only to instruments classified as securities, given that there are other financial mechanisms aiming to mitigate impacts caused by climate and environmental changes. An example is the ‘Debit for Nature Swap’, which has returned to the debate due to the growing debt of developing countries, exacerbated by the Covid-19 pandemic (Steele & Patel, 2020).

4 Figures for China include only emissions in line with international definitions – Climate Bond Standards or Green Bond Principles (CBI, 2020a).

5 Second opinion agents are specific institutions that evaluate and certify if the projects are in fact aligned with sustainable objectives and also provide investors with details about the projects in order to increase the reliability of the security issued (Febraban, 2015). The cost of these agents can be from US$10 thousand to US$100 thousand (Ketterer et al., 2019).

6 Taxonomy is a complementary system to the sustainable finance definition that aims to identify through a defined measure a list of projects and activities aligned with social, environmental, and economic objectives (FiBraS, 2021).

7 The EU Taxonomy came into effect in June 2020, and it is characterised by large economic coverage, all the investment market, and is different from the Chinese Taxonomy which only covers the green financial products, such as bonds and credits (FiBraS, 2021).

8 Underwriters are institutions chosen by issuers to act as the leading coordinator of the bond issue operation, being responsible for developing the structure (characteristics of the bonds, such as maturity and payment coupon), price and issue of the bonds on the market (FEBRABAN, 2015).

Additional information

Funding

This work was supported by Fundação de Amparo à Pesquisa do Estado de Minas Gerais (FAPEMIG) [grant number 5.18/2022].