Introducing Green Bonds to Sri Lanka

On March 13^th, 2023, The Foreign Ministry of Sri Lanka hosted a High-level discussion on Sustainable Climate Financing in collaboration with the Senior Advisor of the President on Climate Change, Ruwan Wijeywardena, and the Global Green Growth Institute (GGGI). This was a brainstorming session titled “Sri Lanka Sustainable Finance Session: Opportunity for thematic bonds and Debt for nature swaps.” Several themes on Green investment services were discussed at this event. The main objective of this session was to enhance the awareness amongst critical decision-makers on the associated risks and benefits of Climate Financing instruments in Sri Lanka. 

Following this, the Colombo Stock Exchange (CSE) announced the introduction of listing and trading of Green Bonds to the Sri Lankan stock market as effect from 25th April this year. This opened up proceedings to be invested in Green Projects focused on renewable energy, energy efficiency, sustainable waste management, sustainable land use (forestry and agriculture), biodiversity, clean transportation, and clean water. This was made possible to facilitate Sri Lankan cooperates to raise funds allocated for green projects and foster transparency and accountability when using these proceedings from the Green Bonds. This aligns with the Green Bonds Principles by the International Capital Markets Association (ICMA), the European Green Bond Standards (EUGBS), and the Climate Bonds Initiative Standards (CBI Standards), which the CSE accepted. 

Subsequently, a cabinet decision was made announcing the government’s expectation of turning to Green Finance at the Budget 2023 on the 23rd of May. With the support of The United Nations Economic and Social Commission for Asia (UNESCAP), United Nations Development Program (UNDP), and GGGI, the country agreed to use funds gained from green bonds towards renewable energy, energy efficiency, green buildings, clean transportation, sustainable water and wastewater management, pollution prevention, governance, and circular economy, adaptation to climate change, conservation of biodiversity and sustainable use of natural resources. A green bond statement has now been drafted for Sri Lanka Accordingly. 

The Climate Fact Checks team spoke to Mrs. Punyamali Saparamadu, the Senior Vice President – of Commercial at the CSE, to better understand the exact procedures that may follow when Sri Lanka turns towards Green FInancing. 

Green Bonds Vs. Traditional Bonds 

The main question to be asked when comparing Green bonds with Traditional bonds is whether they have investment returns that are higher, lower, or similar to each other. Some theories suggest that the Green Bonds approach might generate higher returns than traditional bonds. 

From the perspective of an issuer, both green bonds and traditional bonds have the same credit risks involved. However, traditional bonds have a higher risk, as green bonds from an issuer would trade at lower yields and higher prices than conventional bonds. 

Moreover, Green bonds may come with tax incentives such as tax exemption and tax credits, making them a more attractive investment than traditional bonds. These tax advantages provide a monetary stimulus to tackle prominent social issues such as climate change and support countries moving toward renewable energy sources. 

To qualify for green bond status, they are often verified by a third party, such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include environmental benefits. Mrs. Saparamadu stated that the CSE has looked into Sri Lankan audit firms with the required resource people to take over the role of third-party reviewers. Accordingly, the Big 4 audit firms have been selected. 

In addition, a second-party opinion is required to confirm that the bond is a green issue. Hence the investors can participate, and the issuer can claim the green bond added by Mrs. Saparamadu. 

When considering all these, she stated that many would prefer a traditional bond over a green bond. Hence LSE is currently identifying the incentives to be provided so people would consider green bonds. She mentioned that the starting point should be at the sovereign level, significantly boosting this concept in Sri Lanka. 

How Sri Lanka Invested in Green Projects in the Past 

In the past, Sri Lanka funded its Green Projects through either corporate CSR budgets, International grants, or government budgets. However, this process did not bring a long-term flow of funds for these projects. Moreover, it limited the project scope to the requirements of the funding agencies. Additionally, more funding is needed to sustain many of the green projects in Sri Lanka as it is inadequate to pay the workforce. 

Mrs. Saparamadu stated that the Green Bond concept was in the pipeline for some time. It was done in consultation with the Asian Development Bank and its Office of the Secretary (SEC), which helped set up rules and preliminaries in listings. In addition, the government’s attention toward green bonds may mean these processes will be included in the legal system.

She also stated that looking at the two sides of a Green Bond, the issuer and the investor, the main focus of LSE is to get the transaction process commercialized and to make it workable in the country. In addition, third-party reviewers are required for pre and post-assurance of the projects. Hence, before listing the projects, the third-party reviewers should certify that they align with the three green bond principles. Then, once the project becomes eligible as a green project, it can open up to investors for funding. 

Will Sri Lanka Benefit from Green Bonds? 

Green Bonds could be identified as a new asset class for potential issuers and investors. By issuing Green Bonds, an issuer could access a broader pool of capital, including access to a foreign investor base interested in investing in green projects. It also can play a positive role in raising awareness and building expertise among investors on issues relating to the environment, thus fostering greater transparency in the use of proceeds from the Bond.

Green Bonds can also facilitate the establishment of public-private partnerships that accelerate the pace of green investment, lead to the adoption of new technologies, and contribute to a sustainable economy. Mrs. Saparamadu stated that the main benefits LSE expects from introducing Green Bonds are to broaden the investor base, do product innovations, and stimulate the capital market, as these things are currently inactive regarding secondary trading in the country. She also added that Sri Lanka needs to embrace this concept in line with the Paris Agreement to achieve the set targets in the climate change mitigation process. 

The challenges in introducing Green Bonds to Sri Lanka, according to Mrs. Saparamadu, lie in providing clarity and correctly pitching the concept to issuers. In addition, for an issuer to take up a Green Bond, with all the prerequisites, is challenging from a cost perspective, considering the country’s current economic environment, she added. 

In Conclusion 

Sri Lanka is heading in the right direction regarding Climate Financing following the discussions at COP27 last year. The Government taking up this opportunity at a sovereign level in partnership with the CSE would allow the country to be more sustainable in implementing green projects. The general public must be open to and aware of similar opportunities as it would mean the country’s development would take a right turn towards a sustainable future. 

If you have any queries or come across suspicious content related to climate change or the environment and want us to verify them for you, then send them to us on our WhatsApp hotline: +917045366366