Green finance in the local capital markets

Alistair Borg, Emmanuel Farrugia and Therese Lethridge

In recent years, the green bond market has grown rapidly worldwide surpassing the $1 trillion mark in cumulative issuances since its inception. This substantial growth can be attributed to the rise in environmental awareness and risks of climate change as green finance continues to be at the top of various stakeholders’ agenda. However, despite incentives by local authorities, no green instrument has been as yet listed on the Malta Stock Exchange (MSE).

In the last quarter of 2021, the Central Bank of Malta conducted a survey investigating the local market’s perspective towards the issuance of green bonds and awareness related to the topic. Local investors’ perspectives were also sought to provide a holistic view and thereby evaluate potential demand for these securities in the event of future issuances.   

Around 63% of the participants stated that they never invested in green bonds. Most investors pinned their lack of investment in green bonds to the risk of greenwashing (the marketing of green products/projects which in actual fact do not contribute to a better environment), failure to meet financial targets, lack of historical data and unified standards and illiquidity issues related to such instruments. Nevertheless, around 90% of the survey participants said that they were willing to invest in locally issued green bonds in the future. Investors are pushing to incorporate environmental considerations in their investment decisions and such kind of bonds would provide a good fit for their portfolios.

The survey also revealed that around 87% of the participating local issuers never considered green bonds as a means of acquiring capital, although respondents considering issuing green bonds stated that they are likely to do so in the coming five years. The survey showed that the major barriers for issuing green bonds are the lack of both information and green capital projects, as well as the associated high costs of issuance. Unfortunately, several respondents were not aware that the MSE had established Bye-Laws and incentives that allow the listing of such instruments. This outcome clearly demonstrates the need for raising awareness on this matter among potential issuers. It was also noted that there is an informational mismatch between investors and issuers. The few issuers who expressed interest in acquiring capital through green bonds do not seem to be aware of the appeal of such products to local investors.

While survey results show an apparent interest among investors in this segment, the local green bond market is still yet to be developed. However, local investors perceive that the opportunities that there may exist to tap this market do not outweigh the costs of the barriers to entry that have been identified in this study. Therefore, it appears that there is potential for a local green bond market to flourish, but requires time and effort to create conditions that can fulfil the needs of local issuers. The creation of a common platform where both investors and issuers can formally interact and share ideas with the scope of developing the market could help to bridge the information mismatch. Additionally, the local investor’s demand could be further enhanced through tax incentives, while increased awareness on the already existing Bye-Laws and incentives by the MSE would benefit potential issuers.

Lastly, it seems that a market leader is required to kickstart the local green bond market. As the largest issuer in the local capital markets, government could take the lead by issuing the first local green bond which could pave the way for the development of a sustainable and responsible investment market.

The full report of this survey can be viewed through https://www.centralbankmalta.org/market-operations-research. 

Alistair Borg is manager Government Securities Office at Monetary Operations & Government Securities Department, Central Bank of Malta

Emmanuel Farrugia is Research analyst and Government Debt Trader at Monetary Operations & Government Securities Department, Central Bank of Malta

Therese Lethridge is senior Research analyst at Monetary Operations & Government Securities Department, Central Bank of Malta