It’s Time for Green Bonds!

9.12.2020

We have previously written about the advantages of Iceland issuing green government bonds. In our previous writings, before the Covid-19 pandemic, we assumed that we had ample time to thoughtfully assess the issue and subsequently make a decision. We’ve organized meetings with the administration’s leaders regarding the advantages of issuing green government bonds and also sent a memorandum to the Icelandic government.

Thus far, we’ve had positive responses. At the 2020 Annual Iceland Business Forum, Iceland’s Prime Minister announced a new working group on the issuing of green bonds. Green investments have been added to Iceland’s Climate Action Plan and the recently published 2021-2025 Fiscal Plan mentions the possibility of issuing green government bonds. We were invited to meet the working group where we shared the experience of green bonds in Iceland as well as elsewhere and clarified ways going forward.

Our experience with issuing green bonds in Iceland has been tremendously positive. Fossar Markets has worked extensively with the City of Reykjavik and Reykjavik Energy in issuing green bonds. These issues have been very successful, with considerable excess demand reflected in favourable pricing, and both issuers plan to continue funding their extensive green projects pipeline with green bonds going forward. Fossar worked with investment company Reginn on issuing the first green bonds for an Icelandic real estate company, an endeavour that proved a great success. At this point, Fossar Markets has issued 68 of the 72 billion ISK which has thus far been issued in green, sustainable and social bonds on the Icelandic market and Fossar has the ambition and drive to continue on the same path.

With issuance in foreign currency we will establish the currency reserves necessary to propel Iceland out of recession.

Numerous countries have been going down this green road recently. The issuances of green government bonds in Poland, Ireland and France were a great success and garnered considerable attention and in 2020, the Netherlands, Sweden and Germany were added to the mix. Even Germany intends to issue green bonds on a regular basis over the next decade in order to create a new yield curve for government bonds. The United Kingdom is now expected to issue its first green bonds, a stimulus effort in the middle of a pandemic.

Far from what we all thought around this time last year, Iceland’s state treasury now has to raise a substantial amount of funds from the financial market. The current spending bill mentions capital requirements of 360 million ISK in foreign currency. We believe that now is the time to issue green government bonds to strengthen the state treasury’s foundations. This will in turn fully finance Iceland’s Climate Action Plan to meet the challenges we face in energy transition and future modes of transportation. At the same time, we will have created an interesting investment route for pension funds that want to include green investments in their portfolios. Additionally, issuance in foreign currency will create necessary currency reserves to propel Iceland out of this recession.

The experience we have seen from other nations is that the issuance of green bonds attracts strong and responsible investors from far and wide, demand increases and interest in the issuance is far greater. By issuing green bonds, Iceland can show that it means business in building a sustainable post-pandemic future and that the country’s commitment to tackling climate change is a serious one. Now is the time for Iceland to join in and for the government of Iceland to show the world an ambitious way to conquer recession moving onto a green, sustainable future.

Authors are Andri Guðmundsson, Fossar Market’s managing director and Kristján Guy Burgess, responsible investment consultant.