Indonesia, the world’s biggest exporter of coal used to generate power, is set to become the first Asian country to sell green bonds, underlining the tension in the nascent but fast-growing market.
Indonesia is selling a five-year, dollar-denominated sukuk bond, which is structured to comply with Islamic law, that offers a coupon of 4.05 per cent.
It is the latest country to plan a bond whose proceeds have to be used for environment-friendly projects.
Poland, which generates 80 per cent of its energy from coal, is a pioneer in the market and last month became the first country to sell two green bonds.
The dilemma for investors with the likes of Indonesia, which relies on coal for more than half of its electricity production and is the fifth-largest emitter of greenhouse gases in the world, is how seriously to take its environmental ambitions.
One banker involved in the deal said Indonesia’s green credentials were “better than Poland’s”.
The process of raising green finance can be a way for governments to force their ministries to implement environmental assessments for the projects they finance, he added.
The Indonesian government has said it wants to boost the share of renewables to more than 20 per cent by 2026, from the current level of less than 3 per cent.
Indonesia is also a large producer of palm oil and copper, and has the second-largest copper mine in the world at Grasberg.
“Indonesia’s climate policy is a contradiction — an apparent mismatch between a plan to have renewables play a stronger role in its energy mix, while simultaneously locking in a large and growing role for coal, which will lead to continually rising emissions,” noted the independently run Climate Action Tracker website, which tracks countries’ actions to reduce carbon emissions.
Indonesia’s move is the latest evidence of robust investor demand in the rapidly expanding market for environment-friendly finance.
The proceeds of green bonds are allocated to climate or environment-related projects, such as renewable energy, sustainable transport, waste management and green buildings.
“It is a very interesting green bond as they are using their existing infrastructure for Islamic finance, and the areas in which they are going to be investing — climate mitigation and climate resilience — are interesting,” said Felipe Gordillo, a senior analyst at BNP Paribas Asset Management.
Recommended The green arm of the law When finance becomes a beneficiary of the green agenda Environmental qualms cloud Poland’s green bond sale The market for green finance has grown rapidly in recent years, with issuance reaching a record $155bn in 2017, according to Moody’s.
The credit rating agency forecasts global green bond issuance will surpass $250bn this year.
It expects emerging market issuers, sovereigns, municipals and green securitisations will be “important engines of growth.
” France issued €7bn of green bonds in January last year, while Fiji became the first emerging market to launch a green bond in October with a $50m deal.
Belgium is expected to bring its inaugural green bond to the market shortly.
Sovereign green bond issuance is “on course to reach critical mass in 2018”, according to Matthew Kuchtyak, a Moody’s analyst.
“China and India will be the leaders among emerging markets, though issuance will increase in other countries as governments look to implement green finance policies.”
A number of factors are set to support the growth of the market, including the benefit for governments in signalling their commitment to the Paris climate agreement through green bond issuance.
Citigroup, CIMB, Dubai Islamic Bank PJSC, HSBC and Abu Dhabi Islamic Bank acted as bookrunners on the deal.