More Than Just Proceeds from GSSS Issuance

Done well, these frameworks and issuances not only provide vital financing from an expanded investor base. They can also provide leadership that inspires local businesses to embark on their own sustainability practices.

Over the last few years, public sector issuers from the Middle East, North Africa and Turkey (MENAT) region have been increasing their ESG disclosures, updating their nationally determined contributions (as set out in the Paris agreement), setting net zero targets, and publishing more evidence on how they are performing on their sustainability targets.

With the global focus on reducing emissions and increasing sustainability, there is a window of opportunity for regional sovereigns to continue their transition agenda by engaging with the international capital markets. Many of them are already on that journey. Egypt, the first MENAT sovereign to issue in ESG format, used its debut green bond proceeds to finance projects such as Cairo Monorail and El Dabaa Desalination Plant.¹ Since then, it has updated its green finance framework into a sustainable financing framework. This gives it more flexibility to finance both green and social projects. In October 2023, the country issued its debut onshore China RMB-denominated sustainable bond, becoming the first sovereign from the region to access the so called panda bond market in a sustainable format.²

Turkey published its sustainable financing framework at the end of 2021, allowing it to undertake GSSS financing. Under this framework it issued its debut green bond from which the proceeds were allocated towards green activities.³ This encouraged local and regional authorities to pursue their own sustainable financing frameworks, such as the Istanbul Metropolitan Municipality, which published its framework in 2023.

The Kingdom of Saudi Arabia announced in 2021 that it intended to publish its own sustainable financing framework and issue a debut ESG transaction under this framework once finalised. Saudi Arabia’s sovereign wealth fund, PIF, has also issued green bonds in the international capital markets.⁴

When the Emirate of Sharjah issued its inaugural USD1 billion sustainable bond in February 2023⁵, it was the first Middle East sovereign / sub-sovereign to issue a sustainable bond. Sharjah decided to bring in elements of social funding in addition to funding green expenditure from its sustainable bond. This social investment included affordable housing, access to essential services, affordable basic infrastructure, employment, and socioeconomic advancement as a part of a programme of social improvements for its people. HSBC was the sole Global Coordinator and ESG Structuring Agent for the transaction.⁶

“What was new about this deal was that Sharjah’s sustainable bond finances both green and social expenditure, with a heavy focus on social spend,” says Lokesh Arora, Vice President of Sustainable Debt Capital Markets, HSBC Bank.

the success of the Sharjah deal could lead other sovereign and sub sovereign issuers around the MENAT region to consider broadening to a sustainability financing framework. Meanwhile with sufficient green projects available it is likely that the green label will continue to comprise a significant proportion of the market.

Many issuers have considerable experience issuing into their local capital markets in local currency as well as in international debt capital markets. However, GSSS issuance comes with its own set of considerations.

Data Reporting Requirements

Himesh Patel, Interim Head of Public Sector, EMEA, HSBC Bank says that "there is a significant amount of data reporting required and therefore sovereigns and sub sovereigns need to have a pipeline of eligible projects, the right systems to monitor projects, and the ability to record the allocation and the impact of the proceeds of a bond. This all needs to be weighed up against a conventional issuance where the funds can be used for anything - including green and social projects."

The reporting is required to comply with the various principles and standards for sustainable finance, such as those promulgated by the International Capital Markets Association (ICMA). The reporting confirms the allocation of proceeds to green and/or social projects as committed at the time of issuance. It also provides both the qualitative and quantitative positive environmental and/or social impact of the projects financed, which helps investors who hold these GSSS bonds and need to publish annual reports on the impact generated by their investments.

One pressing consideration for sovereigns is around inter-ministerial coordination, getting different ministries within a government to work together to identify the country’s eligible green and/or social spend. This is usually coordinated and led by the finance ministry or the debt management office.

"A lot of time and resources are needed to understand the definition of what projects can be considered as green and/or social," says Arora. This process of learning, co-ordination, data gathering and putting systems in place can take anything from two months to more than a year.

"I would say a lot of work we do with sovereign clients is pre-issuance – eligible projects identification, framework drafting and getting a pre-issuance external review in the form of a Second Party Opinion," says Arora. And that means the strategic dialogue starts a long time before the actual transaction.

Capturing the Upside

From a financial point of view, there are upsides that can be captured by undertaking a GSSS issuance. It diversifies an investor base, which reduces concentration risk. Further, GSSS investors tend to be more buy and hold, which reduces turnover of the debt in the secondary market. These factors mean that such issuance can, but not always, lead to lower yields than for conventional issuance.

"All of the costs can be negated by the benefits of doing a GSSS bond," says Patel. "It can help issuers to diversify their investor base, and that can – although not always – lead to better pricing compared to conventional bonds. Having more investors that are willing to look at your name in the future adds intrinsic value to your debt profile. While you put the time and effort and cost upfront with sustainable finance, you have more – and more diversified – investors in the long run.”

GSSS investors tend to have distinct characteristics from traditional investors, and this brings other advantages to the issuers. According to Arora, these dedicated investors tend to be more buy and hold type of investors, which can lead to a reduction in volatility in the secondary market, a widely seen benefit of undertaking a GSSS issuance programme.

Putting a Framework in Place

HSBC is a trusted partner to its sovereign and sub-sovereign clients in the region and can call on its experience with sovereigns in other regions.

"A lot of the governments in the MENAT region have economies that rely on revenues from hydrocarbons. However, they are using the revenues from these issuances to help diversify their economies. There are solar projects. There are green hydrogen projects. There are social housing projects. We want to make sure that investors are aware of this."

Given the wide scope of projects that GSSS issuance can finance, sovereigns should also ensure that they are the right entity to be borrowing the money.

"Sovereigns might have a large list of eligible green and/or social spend that are financed directly or indirectly by the government” says Arora. "It is about working with them and building out the list of projects that are not being financed by the state-owned entities that have their own sustainability financing frameworks. Finding and ensuring the issuer’s link to those projects is clear and that there is no double counting is also crucial for sovereigns."

From that stems a further need to consolidate all the sustainability-related work that a sovereign is doing in one framework. This gives the investors, who might have only a partial awareness of the full scope of activity, a much more detailed picture of what work the sovereign is undertaking.

In the end it comes down to actions being louder than words. When governments decide to undertake a GSSS issuance, it shows that they are looking at using this instrument to spur the non-oil related sectors of their economy. It has a powerful demonstration effect that can galvanise investment in other areas. It is about much more than the financing that is raised.

"Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. Find out more: https://www.hsbc.com/who-we-are/our-climate-strategy "