Introduction

In recent times, the financial markets of the world have witnessed significant growth in Sustainable Bonds, especially in Europe and in Asia. According to data available with the International Capital Market Association (ICMA), Green Bonds accounted for the largest portion of issuances in 2023 (USD 425 billion) followed by Sustainable Bonds (USD 153.8 billion). The major portion of the Sustainable Bonds issued came from Europe (49.9%) followed by Asia (24.2%), North America (9%), and South America (4%).

Standard & Poor Global Ratings notes that drivers of growth for Sustainable Bonds and the sustainability bond markets includes an increased adoption of government sponsored sustainable taxonomies and transparency initiatives, growth in issuance from emerging markets, and efforts to accelerate the energy transition and decarbonization of regional economies.

The Colombo Stock Exchange (CSE) too has in recent times adopted a legal framework for Sustainable Bonds in the Listing Rules with the approval of the Securities and Exchange Commission of Sri Lanka. This enables Sri Lankan listed companies, unlisted companies, and even public corporations to issue Sustainable Bonds making use of the facilities available with the CSE.

Sustainable Bond Types

Basically, Sustainable Bonds fall into two major categories, i.e., Sustainability Linked Bonds and Use of Proceeds Bonds.

Sustainability Linked Bonds are any type of instrument for which the financial or structural characteristics can vary depending upon whether the issuer achieves pre-defined sustainability objectives.

Use of Proceeds Bonds (UoP) are any type of instrument where the net proceeds are exclusively used to finance or re-finance (in part or in full) new and or existing eligible green and / or social projects. Two important subsets of UoP Bonds are Green Bonds and Social Bonds (which is discussed in a separate article).

Green Bonds

Considered as a sub-set of UoP Bonds, Green Bonds have been described in the Listing Rules of the CSE as “including any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full new and /or existing green projects which are aligned with at least one of the International Standards set out in Rules 2.2.1 (l)(b) of the Listing Rules”.

The International Sustainable Bond Standards recognized by the CSE are the principles issued by the ICMA with regard to Green and Blue Bonds, The European Green Bond Standards (EUGBS), and the Climate Bond Initiative Standards (CBI Standards).

The Green Bond Principles (GBP) of ICMA recognize several bond categories for eligibility to be considered as ‘Green Projects’ based on their contribution to environmental objectives including climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control. These categories include but are not limited to the following:

·        Renewable energy (including production, transmission, appliances and products)

·        Energy efficiency such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances and products.

·        Pollution Prevention and Control (including reduction of air emissions, greenhouse gas control, soil re-medication, waste prevention, waste reduction, waste recycling and energy/emission, efficient waste to energy).

·        Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture, animal husbandry, climate smart form inputs such as biological crop protection or drip irrigation; environmentally sustainable fisheries and aquaculture; environmentally sustainable forestry including a- forestation or re-forestation and preservation or restoration of natural landscapes.

·        Terrestrial and aquatic biodiversity conservation, including the protection of coastal, marine, and watershed environments.

·        Clean transportation (such as electric hybrid, public rail, non-motorized, multi-modal transportation, infrastructure for clean energy vehicles, and reduction of harmful emissions).

·        Sustainable Water and Wastewater Management (including sustainable infrastructure and clean and/or drinking water, wastewater treatment, sustainable urban drainage, systems and other forms of flooding mitigation).

·        Climate change adaptation (including efforts to make infrastructure more resilient to impacts of climate change as well as information support systems such as climate observation and early warning systems).

·        Circular economy adapted products, production technologies and processes (such as the design and introduction of reusable, recyclable and refurbished materials, components and products circular tools and services) and/or certified eco-efficient products; and

·        Green buildings that meet regional, national or internationally recognized standards or certification of environmental performance.  

Categories of Green Bonds

ICMA recognizes four broad categories of Green Bonds:

(i)                Standard Green UoP Bonds - an unsecured debt obligation with full recourse-to-the-issuer only and aligned with the GBP.

(ii)              Green Revenue Bonds - a non-recourse-to-the issuer debt obligation aligned with GBP in which the credit exposure in the bond is pledged to the cash flows of the revenue streams, fees, and taxes etc., and whose use of proceeds go to related or unrelated green projects.

(iii)            Green Project Bonds - a bond for a single or multiple green projects for which the investor has direct exposure to the risk of the projects aligned with GBP with or without potential recourse to the issuer.

(iv)            Secured Green Bonds - secured bonds where the net proceeds will be exclusively applied to finance or re-finance either the green projects securing the specific bond only or where the green projects of the issuer, originator or sponsor may or may not secure the specific bond in whole or in part.

Blue Bonds

Another subtype of the Green Bonds is Blue Bonds, which are used to fund projects that are water related including the management and restoration of water bodies and eco systems (e.g., seas, rivers, lakes, etc.), sustainable fisheries, seafood processing/shipping, sustainable tourism, and sustainable water supply. For more details, see the ICMA Blue Bond Practitioner’s Guide, IFC Blue Finance Taxonomy, and the UN Global Compact Practical Guidance to Issue a Blue Bond.

The Regulatory Aspects Covered by GBP

The regulatory pillars of GBP cover the following areas - Process for Project Evaluation and Selection, Use of Proceeds, Management of Proceeds, and Reporting.

Process for Project Evaluation and Selection: the issuer of a Green Bond should clearly communicate to investors the environmental sustainability objectives, the process by which the issuer determines how the projects fit within the eligible green project categories and the related eligibility criteria applied to identify and manage potential material environmental and social risks associated with the project(s).

Use of Proceeds: the utilization of the proceeds of the bond for green projects should be appropriately described in the prospectus or the introductory document. GBP requires that all ‘Designated Green Projects’ provide clear environmental benefits that are assessed and where feasible quantified by the issuer.

Management of Proceeds: the net proceeds of the green bond should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for green projects.

Reporting: the issuer should make disclosures and maintain up to date information on the use of proceeds. This will be reviewed annually until full allocation has been made, and on a timely basis in case of material developments. The Annual Report should include a list of the projects to which green bond proceeds have been allocated as well as a brief description of the projects and the amounts allocated and their expected impact.

Regulatory Framework of the CSE

It appears that the legal framework relating to Sustainable Bonds in the Listing Rules of the CSE mostly if not entirely seems to cater to UoP Bonds and very particularly to Green Bonds and appear to have followed the regulatory pillars or components of the GBP of ICMA.

Any entity seeking to issue Sustainable Bonds is required to appoint an “Independent External Verifier” prior to the issue. Further, in terms of the Listing Rules of the CSE, entities seeking to issue Sustainable Bonds must disclose inter alia in their Prospectus the following:

1.      The international Sustainable Bond Standards adhered to and a brief description of such Standards.

2.      The list of eligible sustainable projects in which proceeds of the Sustainable Bonds are proposed to be allocated to or invested in, including a brief description of such projects.

3.      Factors considered by the issuer in determining the Eligible Sustainable Projects.

4.      Details in relation to the Independent External Verifier appointed by the Issuer including the name, qualifications and experience of the verifier and the scope of the review.

5.      An Independent Assurance Statement prepared and signed by the Independent External verifier in accordance with the required minimum content specified by the CSE; and

6.      Details of the systems, procedures, processes and controls to be employed by the issuer for

A.     Allocation and use of proceeds, including ring fencing or ear-marking funds to Eligible Sustainable Projects.

B.     Evaluation and selection of Sustainable Projects.

C.     Management of Sustainable Bond proceeds including tracking the deployment of the proceeds of the issue and managing un-allocated proceeds during the tenure of the Sustainable Bond; and

D.     Reporting on investments, allocations, eligibility, and impact including proposed intended indicators if applicable.

In the event, a listed entity has listed Sustainable Bonds on the CSE, such entity shall additionally disclose the following in its Annual Report:

a.      The list of Sustainable Projects to which proceeds of the Sustainable Bonds have been allocated, including a brief description of such projects and the amounts disbursed.

b.     Any updates in relation to the disclosures made in the documentation on Sustainable Bonds as from the date of listing the said bonds.

c.      Qualitative Performance Indicators in line with the International Sustainable Bond Standards and where feasible, quantitative performance measures of the environmental impact of the Sustainable projects. In the event such quantitative benefits/impact cannot be ascertained, the said fact must be appropriately disclosed, with the reasons thereto.

d.     Methods and the key underlying assumptions used in the preparation of the performance indicators and metrics.

e.     An update on eligibility, allocation and the impact of the outstanding Sustainable Bonds including at a minimum the following details:

(i)               An eligibility update which shall confirm the characteristics or performance of Sustainable Projects that support their eligibility to be associated with the Sustainable Bond(s). Such confirmation to contain the following:

·        A Statement on the objectives of the Sustainable Bond.

·        A confirmation that the Sustainable Bond remains aligned with the selected International Sustainable Bonds Standards.

·        Any updates in relation to the disclosures made in the documentation on Sustainable Bonds from the date of listing.

·        A confirmation that the Sustainable Projects continue to satisfy the eligibility requirements identified in the selected international Sustainable Bond standards, and

·        Information on the environmental characteristics or performance of Sustainable Projects that are relevant to the eligibility requirements.

(ii)              An allocation update which shall, at a minimum, confirm the allocation of the Sustainable Bond proceeds to Sustainable Projects. The update shall contain the following:

·       The list of Sustainable projects to which proceeds of the Sustainable Bond have been allocated, including a brief description of such projects and the amounts disbursed;

·       An estimate of the share of the Sustainable Bond proceeds used for financing and re-financing and the Sustainable Projects that have been refinanced; and

·       The approximate geographical distribution of the Sustainable Project(s) within and outside of Sri Lanka.

(iii)            An impact update which shall at a minimum describe impact metrics or indicators that reflect the expected and actual impact of Sustainable Projects. Such an update must contain the following;

·       The expected and actual outcomes /impact of the Sustainable Projects with respect to the objectives of the Sustainable Bond.

·       Qualitative performance indicators in conformity with the selected International Sustainable Bond Standards and where feasible, quantitative performance measures of the environmental outcome or impact of the Sustainable Project. In the event such quantitative impact cannot be ascertained the said fact must be appropriately disclosed with the reasons thereto.

·       Methods and the key underlying assumptions used in the preparation of the performance indicators and metrics.

Continuous Disclosure Requirements for Entities having Issued Listed Sustainable Bonds

Entities that have listed Sustainable Bonds on the CSE shall submit the following information signed by two directors of the issuer to the CSE for dissemination onto the market.

a.     A report on the utilization of the proceeds of the Sustainable Bond as per the tracking done by the listed entity using the internal process as disclosed in the Prospectus or introductory document.

(i)                On a quarterly basis along with the quarterly financial statements of the listed entity;

(ii)              Within 12 months from the date of issuance of the Sustainable Bond and thereafter on an annual basis in the Annual Report of such entity.

The above reports are to be submitted until the proceeds allocated to the Sustainable Project(s) have been fully utilized.

b.     The Independent Assurance Statement prepared and signed by the Independent External Verifier relating to

(i)                The alignment of the Sustainable Bond with the selected Sustainable Bonds Standards and

(ii)               Verifying the utilization of the proceeds.

The above statement must be submitted to the CSE along with the Annual Report of the entity.

c.      The following confirmations must be submitted along with the Annual report of the Entity until the proceeds allocated to the Sustainable Project(s) are fully utilized:

(i)                That the Independent external Verifier is and has remained independent; and

(ii)              That the alignment with the selected International Sustainable Bond standards have been verified on an ongoing basis by the Independent External Verifier.

Since advice from Consultants and institutions with recognized expertise in environmental sustainability and other aspects of the issuance of Green Bonds are available and are accessible locally and globally, more Sri Lankan Corporates and even public corporations can turn to issuing Green Bonds for their financing needs in light of the priority that have been given by the Sri Lankan Government to sustainable development.

Conclusion

Sri Lanka stands at a pivotal juncture in its journey toward sustainable economic growth and environmental resilience. The development of a robust green bond market presents an opportunity to mobilize much-needed capital for renewable energy, climate adaptation, and sustainable infrastructure projects, aligning with both national and global sustainability goals.

By implementing clear regulatory frameworks, fostering investor confidence, and leveraging international partnerships, Sri Lanka can position itself as a regional leader in sustainable finance. The collaboration between policymakers, financial institutions, and corporate stakeholders is critical to ensuring the credibility and scalability of green bonds.

With a concerted effort to address market barriers and promote awareness of green financing, Sri Lanka has the potential to transform its financial landscape while contributing to the global fight against climate change. A robust green bond market is not merely an aspiration but a vital tool for securing a greener and more prosperous future for the nation.