Iceland’s Sustainability Bond Debut
Sigurður Ingi Jóhannsson, Iceland’s Minister of Finance and Economic Affairs, talks about the country’s inaugural green bond issuance, which was promptly followed by the world’s first sovereign gender bond.
The sovereign green bond market has come a long way since 2016, when Poland became the first country to issue a €750 million (US$805 million) bond to finance a range of climate-related projects.
In 2023, a record 35 sovereigns issued sustainability bonds totalling US$169 billion – exceeding the 2022 historic high of 26 issuers with US$141 billion in issuance, according to BNP Paribas. This year has already started strong, with large-ticket green bond issuances from the EU, France, Austria and the UK.
Iceland was among a handful of countries that issued their first green bonds earlier this year, which is perhaps surprising for a nation that is seen as a global leader on sustainability. Already about 85% of the total primary energy supply in Iceland is derived from domestically produced renewable energy sources, according to the government – the highest share of renewable energy in any total national energy budget.
But the issuance has been a few years in the making, due to external and internal events that delayed the country’s coming-to-market – as Sigurður Ingi Jóhannsson, Iceland’s Minister of Finance and Economic Affairs since April, explained to ESG Investor. Jóhannsson previously also served as prime minister, and most recently as minister of infrastructure.
“We have been a regular issuer in the international capital markets over the past few years, but don’t need extra funding because of our foreign reserves,” he said. “As Iceland tends to be conservative when it comes to its financing programme, we were a little concerned about how a green bond might affect our general funding programme. But then we saw the opportunities, so we started our background work in 2020.
“We wanted to highlight the goals and the objectives of the government, as well as diversify our investor base,” he continued. “Our issuances traditionally receive interest from a small group of investors, which tend to be buy-and-hold types. As such, the bonds are quite illiquid.”
Building blocks
Iceland began its foundational work by creating a working group, which published the sovereign sustainable financing framework in September 2021. However, parliamentary elections later that month, followed by the eruption of the Russia-Ukraine conflict in early 2022 and subsequent market volatility, led the Treasury to put the issuance on hold.
Instead, the government used the time to revise the framework and align it with the Green Bond Principles guidelines and best practices seen in other jurisdictions. The updated version, which covers many green, blue, and social project categories, was published in April 2023 with an annex specifically focused on financing for gender equality.
Iceland received a ‘dark green’ rating on blue and green issuances from the Cicero Centre for International Climate Research (now part of S&P) – the highest available. This grade is allocated to projects and solutions that present a long-term plan for a climate-resilient future.
“The framework is likely to contribute to setting Iceland’s transport and buildings sector on a path towards the long-term vision of a low-carbon future, while also likely contributing to higher levels of nature and biodiversity preservation,” according to Cicero.
Following a Q4 2023 road show, the Icelandic government settled on 14 March to go to market – and received a warm response. The sovereign successfully issued a record-breaking maiden green bond with a €750 million 10-year benchmark due 21 March, 2034.
The final orderbook was nine-times oversubscribed, exceeding €7 billion, and attracted more than 270 investors – the largest number ever to participate in an Icelandic transaction. The highly diversified investor group included central banks, official institutions, bank treasuries, insurance companies, sustainability specialists and other institutional investors – mainly from Northern Europe.
“We have never seen that amount of interest in Treasury bonds before, and there is also much interest in the secondary market,” said Jóhannsson. “It was good to get a broader spectrum of investors. During the process, we also received some clarification on our green bond, which is considered very green.”
Interestingly, the sovereign didn’t opt to go down the sustainably-linked bond (SLBs) route – mainly because the green bond was of greater interest to investors, according to Jóhannsson. He believes that issuing a use-of-proceeds green bond signals a stronger commitment because of the level of reporting required on the impact process.
However, the finance ministry is keeping a watching brief on developments in the SLB space.
New climate plan
According to Jóhannsson, the funding will help to make Iceland’s green transition even better. The government will use the proceeds of the bond over the next three years to implement its recently revised climate change action plan.
Launched on 14 June, the proposed roadmap provides greater detail on the actions needed to deliver on the country’s commitments to achieve a 55% reduction in carbon emissions by 2030 (compared to 1990 levels) and carbon neutrality by 2040, and to be totally free of fossil fuels by 2050.
The revised plan consists of 92 climate actions and 58 climate-related projects, and signalled a fundamental change in the government’s approach in terms of dialogue with business and local authorities on climate issues.
“Even though the government has big goals and big ambitions, it is not possible to go it alone,” said Jóhannsson. “The only way forward is to get all those components – industry sectors, municipalities and the general public as well – with us to succeed in [achieving our targets].”
For example, the transport sector is central to delivering on the country’s commitments, Jóhannsson explained. The government is currently focused on increasing the electrification of rental and family cars, and in 2023 just over 60% of all of Iceland’s family vehicle imports were electric or hybrid cars.
But challenges remain in the heavy-vehicle and maritime transport space. As such, the government is taking steps to help companies in those sectors make the transition through targeted incentives.
Overall, the engagement with industry and municipalities is progressing well, according to Jóhannsson, as there is a common understanding of the pathway forward.
“There is some doubt about whether it is possible to reach all the goals within the timeframe. But if we didn’t set up ambitious goals, then it would be 100% certain that we wouldn’t reach them,” he said. “The only way to get there is to set goals upfront and then create the roadmap to achieve them.”
The plan is open for consultation until 14 August, giving the public, non-governmental organisations and businesses an opportunity to submit comments and suggestions.
Leading on gender
Iceland has already taken its next step in the thematic bonds space. In a groundbreaking move on 24 June, it became the first sovereign to issue a gender bond, highlighting the country’s commitment to gender equality.
“Similar to the green bond, it is a statement that we are at the forefront of gender equality in the world,” said Jóhannsson. Iceland ranks as one of the most gender-equal countries in the world, and has topped the World Economic Forum’s Global Gender Gap Index for the past 15 years.
The proceeds from the €50 million issue will finance projects that advance gender equality, such as providing decent living standards for women and gender minorities in a vulnerable position, or contributing to reducing and redistributing the burden of unpaid care and domestic work.
In addition, the gender bond will contribute to attaining UN Sustainable Development Goal 5 (SDG 5) on achieving gender equality and empowering all women and girls. The sustainable financing framework annex defines five project categories based on key challenges related to achieving this goal, include the gender income gap, unequal responsibility for the household and family, and sexual and gender-based violence.
“Gender equality is one of the key objectives of the Icelandic government, and we have the ambition to be a leader when it comes to leveraging tools of public finance and capital markets in that regard,” said Jóhannsson. “The gender bond plays an important part in achieving that ambition.”
He believes that sovereign involvement in environmental and social bond issuance can lead to greater awareness and acceptance in the international capital markets, and ultimately more liquidity.
“Everything we are doing now will lead to success,” he added. “In the years to come, everyone will see that this is the only way forward.”
The post Iceland’s Sustainability Bond Debut appeared first on ESG Investor.