Creation of a green bond market can be a significant step for Ukraine to implement European standards for the development of green energy, energy independence and environmental protection. In addition, the appearance of a new financial instrument that meets the principles and requirements of the global capital market will allow to direct and accumulate financial flows for the development and financing of domestic environmental projects.
Anna Perelygina-Kovalchuk,lawer of ESQUIRES spoke for LIGA ZAKON about green projects and their financing, their development prospects in Ukraine .
Anna reviewed the world experience in financing environmental projects, in particular, the Green Bonds market, analyzed the prospects for introducing such a market in Ukraine and the necessary steps for its legal regulation and development.
The article is available in Ukrainian.
Green projects and their financing
The desire for energy independence and saving the planet from environmental disasters stimulates the world to invest in the development and improvement of environmental projects: the use of renewable energy sources for generating electricity, environmental transport, preventing environmental pollution, controlling climate change, etc.
In Ukraine, the development and implementation of green projects is rather slow. For comparison, the use of alternative energy sources (excluding hydropower) in the total electricity production in Ukraine is 1.5%, the same indicator in Germany exceeds 33%. The situation is the same with other green projects. The main obstacle to the effective development of this industry in Ukraine is the high cost of projects and their low investment attractiveness due to a number of negative factors: low sovereign rating, imperfect legislative regulation of the industry, insufficient number of financial investment tools.
There are several ways to attract financing for green projects: lending to Ukrainian banks and international financial institutions (IFC, EBRD, EIB, World Bank), participating in international donor programs and grants, combining them in energy cooperatives, through issuing green Green bonds. Moreover, most financial instruments are not used in Ukraine through the problems described above.
Global green bond market
In recent years, the market of green bonds has reached a rapid development in the world. Raising funds for “environmental” projects through specialized financial instruments is a convenient and technological way of investing. Green bonds are debt financial instruments (securities), the proceeds of which are used exclusively to finance green projects. The largest issuers of these bonds are the World Bank and the International Finance Corporation (IFC). Green bonds are issued by about 40 countries of the world, the leaders among which are the USA, China and France, and the volume of world issuance in 2018 reached USD 167.6 billion . The raised funds are contributed to projects in the field of environmental transport (low-carbon transport), clean energy generated with the usage of renewable energy sources, climate control, pollution prevention, etc.
The government, represented by its authorities, banks, international financial organizations and enterprises, can issue green bonds. Given the high cost of securities, usually large companies and institutional investors (non-state pension, investment, insurance funds) invest in them.
The main document that establishes the rules for issuing and placing green bonds is the Green Bond Principles, developed by the International Association of Capital Markets (ICMA) (hereinafter, the “Principles”). In order for green bonds to comply with these Principles, issuers must comply with four basic elements: the use of funds, the process for evaluating and selecting projects, the management of funds and reporting.
The use of funds raised from the placement of bonds should be directed exclusively to financing (refinancing) of green projects. The list, description and evaluation of such projects should be reflected in detail in the informational note on the issue of bonds (issue prospectus). Recommended projects include alternative energy sources, energy efficiency, prevention and control of environmental pollution, environmentally sustainable management of living natural resources and land use, environmentally friendly transport, adaptation to climate change, etc.
To implement the principle of evaluation and selection of projects by the issuer, the objectives should be clearly stated and a procedure should be defined by which the issuer determines the compliance of projects with categories of green projects, qualification criteria, including criteria for exclusion, prevention or management of potential risks associated with projects. The principles declare a high level of transparency and it is recommended that issuers conduct an independent external evaluation of their own processes for evaluating and selecting projects.
The principle of asset management provides a way to separately account for net profit from the placement of bonds by crediting funds to separate accounts or portfolio. The Principles recommend engaging an auditor or other third party to verify the method of internal accounting and use of funds from issuing green bonds.
The issuer’s reporting should reflect current information on the use of funds, a list and a brief description of the projects for which the funds were directed, indicating the amounts and expected impact of the projects. The principles recommend the use of qualitative and quantitative indicators of project performance, and also, whenever possible, track the results achieved by these projects.
In the future, the European Union plans to introduce common standards for the issuance and placement of green bonds, which will be developed on the basis of principles and existing market practices, and can be used by issuers in any country in the world to confirm the liquidity of these financial instruments.
Prospects for the development of the green bond market in Ukraine
For Ukraine, the creation of a green bond market is an important step towards the implementation of European standards for the development of green energy, energy independence and environmental protection. In addition, the emergence of a new financial instrument that meets the principles and requirements of the global capital market will allow to direct and accumulate financial flows for the development and financing of domestic environmental projects.
It should be noted that Ukraine is only planning to introduce such financial instruments as green bonds. In early 2018, the State Agency of Energy Efficiency and Energy Saving announced the start of work together with the UNIDO project on the development of a Concept for creating a green bond market in Ukraine and an Action Plan for its implementation, as well as a package of necessary primary and secondary legislation. Since then, the only reminder of the creation of the green bond market is Bill No. 9035 of September 3, 2018, “On Amending Certain Legislative Acts of Ukraine to Simplify Attracting Investments and Implementing New Financial Instruments” (hereinafter – Bill No. 9035). The bill, amongst others, introduced into the Law of Ukraine “On Capital Markets” (the current name of the law “On Securities and the Stock Market”) a new subtype of a financial instrument – interest-bearing bonds of environmental investments (“green” bonds) – bonds issued by a person selling and / or finances a project of environmental (“green”) investments. Funds from the placement of interest-bearing bonds of environmental investments (“green” bonds) are allocated for financing and / or refinancing of the costs of the project of environmental (“green”) investments.
The issue of interest-bearing bonds of environmental investments (“green” bonds) can be carried out by a person who implements and / or finances a project of environmental (“green”) investments, in the manner determined by the current legislation of Ukraine. The bill distinguishes between the concepts of “the person implements” and the “person financing” the project of environmental (“green”) investments. The first may be: the Council of the Autonomous Republic of Crimea or the city council, the state of Ukraine represented by authorized bodies, a legal entity of private law, and the second: a specialized financial institution created by the government of Ukraine or another specially authorized body or legal entity of private law, in particular a bank, financial institution and international financial organizations.
A person who implements and / or finances a project of environmental (“green”) investments is obliged to ensure the targeted use of income that will be engaged from investors by opening the separate account to raise funds from the placement of interest-bearing bonds of environmental investments (“green” bonds).
Draft Law No. 9035 does not provide for special procedures and requirements for the issue of green bonds, it only refers to the provisions of the law governing the issue of bonds of local loans, bonds of internal and external government loans (government bonds), bonds of international financial organizations if the issuer of green bonds is The Verkhovna Rada of the Autonomous Republic of Crimea or the city council, the state of Ukraine represented by authorized bodies, and the international financial organization, respectively.
So, Bill No. 9035 plans to create a financial instrument that, by definition and purpose, partially meets the requirements of the global green bond market. But, referring to the Principles, the correspondence of which is the basis for the recognition of bonds on the international capital market, it should be noted that Bill No. 9035 does not pay enough attention to such basic requirements for the issue of use and management of funds, as well as transparency of reporting.
Given that environmental bonds are a fairly specific financial instrument, for their implementation and use by the National Securities and Stock Market Commission, it is necessary to develop subordinate legislation that will take into account the requirements of the Principles and other generally accepted standards for the issue and placement of green bonds. Particular attention should be paid to the requirements for transparency of information on the issue (prospectus) and the issuer’s reporting, which should be specific and reflect the purpose of the funds raised from the placement of this type of bonds.
Bill No. 9035 is only a small step towards creation of a green bond market. For the effective implementation of a new financial instrument and gaining the confidence of domestic and world investors, it is necessary to analyze the world practice of using this type of bonds, the principles and rules for their issuance and placement, which are declared by international associations, and on this basis to develop and implement a number of subordinate legislation, guarantee purpose and transparency of engaging investments in green projects.
 According to the report of the international organization Climate Bonds Initiative