Sovereigns Still Shunning Green, Catastrophe Bonds

Emerging and developing countries are not joining the sustainable structures offered by the private market.

Chris Westfall
Chris Westfall

Reinsurers, investment banks and boutique firms have failed to make significant headway with governments backing new catastrophe and green bonds despite years of trying, according to a new report from the Initial Monetary Fund (IMF).

"Catastrophe and green bonds in the private sector have become the most prominent innovations in the field of sustainable finance in the last 15 years," the report states. "Yet the issuances at the sovereign level have been relatively recent and not well documented in the literature."

The report adds that while green and catastrophe bonds "have gained significant popularity" with private issuers and local governments, they "remain fairly shallow at the sovereign level."

For example, the the IMF says that sovereign green bonds make up about 0.2 percent of all government debt securities in the Organisation for Economic Co-operation and Development (OECD) area. In emerging market and developing economies (EMDEs), sovereign green bond issuances account for 12 percent of total green bond issuances.

Reasons for the poor take up of sustainable finance instruments by sovereigns vary according to the IMF.

For green bonds, the IMF says that lack of an international guidelines green bonds, a narrow investor base, the risk of being accused of "greenwashing" and little interest in emerging market and developing economies. For catastrophe bonds, the authors cite high transaction costs, a small investor base and "complicated underlying catastrophe models."

To solve the problem, the IMF argues advanced economies should promote sustainable finance to emerging and developing economies most susceptible to climate change.

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