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Mr. Sakai Ando, Mr. Francisco Roch, Ursula Wiriadinata, and Mr. Chenxu Fu
Financial markets will play a catalytic role in financing the adaptation and mitigation to climate change. Catastrophe and green bonds in the private sector have become the most prominent innovations in the field of sustainable finance in the last fifteen years. Yet, the issuances at the sovereign level have been relatively recent and not well documented in the literature. This Note discusses the benefits of issuing these instruments as well as practical implementation challenges impairing the scaling-up of these markets. The issuance of these instruments could provide an additional source of stable financing with more favorable market access conditions, mitigate the stress of climate risks on public finances and facilitate the transition to greener low-carbon economies. Emerging market and developing economies stand to benefit the most from these financial innovations.
Ando Sakai, Mr. Francisco Roch, Ursula Wiriadinata, and Mr. Chenxu Fu

Classification Numbers: Q54; H63 Keywords: Green bonds, greenium, catastrophe bonds, fnancial innovation. Author’s E-Mail Address: sando@imf.org cfu@imf.org froch@imf.org> uwiriadinata2@imf.org Title Page Sovereign Climate Debt Instruments: An Overview of the Green and Catastrophe Bond Markets Sakai Ando, Chenxu Fu, Francisco Roch, and Ursula Wiriadinata July 2022 * The authors are grateful to Giovanni Dell’Ariccia, Prachi Mishra and Adrian Peralta-Alva for very helpful comments and suggestions.

Ando Sakai, Mr. Francisco Roch, Ursula Wiriadinata, and Mr. Chenxu Fu

(the “greenium”). However, there are still several obstacles impairing the further development of the green bond market: lack of an international set of guidelines of what constitutes a green bond, narrow investor base, the risk of fund mismanagement (greenwashing), and little issuances in emerging market and developing economies. Second, catastrophe bonds provide effective insurance against natural disasters and can be considered adaptation policies for the countries with exposure to climate change risks. Yet the note discusses significant barriers to the scale up

Afsaneh Beschloss and Mina Mashayekhi

given issuer than on that issuer’s “brown” offerings? Should issuers expect lower financing costs—a so-called greenium? Should they accept lower internal rates of return on green private equity or infrastructure investments? Fiduciaries’ initial reaction has, in many cases, been “no,” but this is changing. A great deal of effort is going into better quantifying long-term risks and returns associated with climate, and the United Nations Sustainable Development Goals, versus short-term profits. Progress is beginning to show. Sustainable finance may be experiencing a

Mr. Ananthakrishnan Prasad, Ms. Elena Loukoianova, Alan Xiaochen Feng, and William Oman

that mostly have significant social and climate benefits. A potential benefit for green bond issuers is to enjoy a green premium (or “greenium”) in pricing, although empirical evidence on the actual size of the pricing benefit remains mixed . 36 While the greenium is still small reaching around 50 basis points at best, the margin could widen with increasing demand and credibility of green and ES-linked bonds. 37 Thus, ESG investors should be willing to have lower return investing in this type of products, but at the same time meeting their mandate. MDB

International Monetary Fund. Asia and Pacific Dept

appears to carry a greenium (green bond premium) since 2020, aligned with a surge in global ESG investment demand. However, the other government green sukuks do not appear to show a similar premium, probably because they lack liquidity and have long maturity. In the chart, the green sukuk 1 has the largest amount of issuance and the shortest remaining maturity among the four green sukuks and shows higher prices than conventional bonds. While the green market is still at an early stage of development, it would be important to closely monitor developments in both the

Mr. Ananthakrishnan Prasad, Ms. Elena Loukoianova, Alan Xiaochen Feng, and William Oman
Global investment to achieve the Paris Agreement’s temperature and adaptation goals requires immediate actions—first and foremost—on climate policies. Policies should be accompanied by commensurate financing flows to close the large financing gap globally, and in emerging market and developing economies (EMDEs) in particular. This note discusses potential ways to mobilize domestic and foreign private sector capital in climate finance, as a complement to climate-related policies, by mitigating relevant risks and constraints through public-private partnerships involving multilateral, regional, and national development banks. It also overviews the role the IMF can play in the process.
Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer

the issuance of ESG-linked bonds for such operations (thereby reducing the overall cost relative to a plain vanilla bond issued for such purposes). While the “greenium” associated with ES-linked bonds is currently low—up to 50 basis points in the best case—the margin could widen as the credibility of these instruments and overall demand increases. Most ESG issuances have been made by advanced economies. The improved monitoring and commitment from implementing KPIs could allow countries access climate finance at a cheaper cost than under plain vanilla instruments. By

Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer
This paper compares debt-for-climate swaps—partial debt relief operations conditional on debtor commitments to undertake climate-related investments—to alternative fiscal support instruments. Because some of the benefits of debt-climate swaps accrue to non-participating creditors, they are generally less efficient forms of support than conditional grants and/or broad debt restructuring (which could be linked to climate adaptation when the latter significantly reduces credit risk). This said, debt-climate swaps could be superior to conditional grants when they can be structured in a way that makes the climate commitment de facto senior to debt service; and they could be superior to comprehensive debt restructuring in narrow settings, when the latter is expected to produce large economic dislocations and the debt-climate swap is expected to materially reduce debt risks (and achieve debt sustainability). Furthermore, debt-climate swaps could be useful to expand fiscal space for climate investment when grants or more comprehensive debt relief are just not on the table. The paper explores policy actions that would benefit both debt-climate swaps and other forms of climate finance, including developing markets for debt instruments linked to climate performance.
Jochen M. Schmittmann and Han Teng Chua
Green debt markets are rapidly growing while product design and standards are evolving. Many policymakers and investors view green debt as an important component in the policy mix to achieve the transition to a low carbon economy and ensure the pricing of climate risks. Our analysis contributes to the nascent literature on the environmental impact of green debt by documenting the CO2 emission intensity of corporate green debt issuers. We find lower emission intensities for green bond issuers relative to other firms, but no difference for green loan and sustainability-linked loan borrowers. Green bond, green loan, and sustainability-linked loan borrowers lower their emission intensity over time at a faster rate than other firms.