Reward Green Countries: Exploring the Case for ‘Pure Play’ Sovereign Green Bonds

The World Bank Group’s Finance, Competitiveness & Innovation Global Practice (FCI) combines expertise in the financial sector with expertise in private sector development to foster private-sector led growth and help create markets in client countries. With more than forty trillion dollars in global assets, the pension sector has a key role to play in allocating capital for sustainable development. The good news is that the momentum for sustainable finance has been picking up, particularly since the adoption of the SDGs and the Paris agreement in 2015. This is reflected in market developments such as the continued growth of financial instruments targeting green investments, like green bonds and investment approaches incorporating Environmental, Social and Governance (ESG) considerations. At the same time, governments have started to strengthen the role of the financial sector to manage climate risks and mobilize capital for green development.

For this project, the World Bank has tasked the Capstone team to focus on countries like Panama, Suriname, and Bhutan- which are net negative emitters. Based on their carbon output and abundant forests and natural reserves, they actually serve as carbon sinks. Therefore, there is an argument to be made that all sovereign bonds from these countries should be rated as green bonds. The Capstone team will research relevant precedents, including in the corporate bond space, as well as potential impacts and challenges, assessing the viability of such an approach and providing implementation recommendations. A set of criteria for qualifying as a ‘pure play’ green bond would be proposed – with countries then screened to see how many would qualify now, are close to doing so and /or are on track to do so in the coming years. The goal of the project is to determine if sovereign green bonds are an option worth pursuing and provide recommendations on the approach and potential challenges.