Two years ago I brought up the topic about the importance of green bonds worldwide and the different types of issuance that exist in these instruments, but, starting from the premise that this is an increasingly relevant issue in financial markets from around the world, and since the Dominican Republic is no exception, the ideal is to spend time analyzing the reality of these bonds.
Over time, interest has increased among investors in this type of issue, which have the objective of financing projects with a positive impact on the environment and society. The Dominican Republic could be related to renewable energy projects, energy efficiency, clean transportation, waste management, among others.
Opportunities
The issuance of green bonds attracts investors who have a focus on sustainability and corporate social responsibility. This is intended to and can broaden the customer and investor base available to businesses and government institutions, which can reduce the cost of financing.
With this type of public offer, a higher level of transparency is required and a better and more detailed accountability regarding the projects financed and their environmental impact, helping companies and the State to improve their environmental management and increase investor and consumer confidence.
challenges
This type of public offering of securities can be costly in terms of time and resources. The State and the business sector must ensure that they comply with the green bond standards of the International Capital Markets Association (ICMA) and those established by the Superintendence of the Securities Market (SIMV), which may require the Hiring specialized advisors in the matter and carrying out independent audits.
There is also a risk that companies and government institutions may use the issuance of green bonds as a marketing strategy to improve their image and not to finance sustainable projects, better known as “Greenwashing” (common term in English). This could undermine investor confidence and reduce demand for these types of instruments.
Instrument used in the international framework
Although there is no exact figure for how many green bond issues there are in the world, due to the fact that this type of public offering is constantly being carried out and they are increasingly being used by large multinationals, according to data from the Climate Bonds Initiative (International Association of Capital Markets), which is the international organization that works to promote this type of financial instrument, has issued more than US$500,000 million in green and sustainable bonds by 2020, of which we can mention the largest:
• Apple in 2016, for a value of US$1.5 billion, destined to finance renewable energy and energy efficiency projects.
• Amazon in 2020, for a value of US$10,000 million, being the largest green bond issued by a company in history.
• Enel in 2019, for a value of €1,500 million, destined to finance renewable energy and electricity transmission projects.
• The Republic of France in 2017, for a value of €7,000 million, being the largest green bond issued by a government.
This shows how companies and governments adopt green and/or sustainable bond issues as a tool to finance projects of this nature and encourage investment in the transition to a low carbon economy.
Regulation and tax advantages
As part of the regulation of green bond issues in the country, we find that its legal framework is made up of the Securities Market Law No. 249-17 and the Law for the Promotion of Renewable Energies and Special Regimes No. 57-07 .
In addition, the Dominican State has adopted a series of policies and measures to encourage investment in sustainable projects. For example, in 2019, the Central Bank (BCRD) issued a resolution establishing tax incentives for green bond issuances. These benefits include exemption from Income Tax (ISR) for interest paid on green bonds issued by companies and government institutions.
In addition, there is a whole program of incentives for the renewable energy sector that includes an exemption from Taxes on the Importation of Equipment and Materials for renewable energy projects and the possibility of requesting financing with preferential interest rates.
Public offering tool with room for growth in the country
Given that there are more than US$500 billion in green bond issues in the world, the only issue that has been carried out in the Dominican Republic so far is fixed income, that is, the issuer agrees to pay a fixed interest rate. to investors during the life of the bond and, upon maturity, the issuer returns the invested capital, highlighting that, although green bonds are fixed income, the positive social and environmental impact generated by sustainable projects financed by these bonds can be an important factor in the investment decision by investors, in addition to the profitability they offer.
• Trust for Public Offering of Larimar I Securities, of Fiduciaria Popular in 2016, for a value of US$100 million until the year 2036, having as its main underlying asset the economic rights of Empresa Generadora de Electricidad Haina, SA Includes those who They are part of the energy sale agreement signed with the CDEEE, the purpose of which is the sale of the energy generated by that park.
This is the first public offering of securities in the country of this type and that complies with the standards established by the International Association of Capital Markets, with an A risk rating by the Dominican Feller Rate. It has just finished approving its second issuance of public offer in green bonds for an amount of up to RD$2.5 billion.
In the same way, there are public and private companies and trusts that could take advantage of this financial instrument, such as:
• Sustainable DO Trust: It is a public trust for the comprehensive management of solid waste, which seeks to achieve landfills with international standards for proper waste management, such as landfills and recovery plants. With the issuance of a public offer in green bonds, the trust would promote investment in sustainable projects throughout the country, fostering the culture of corporate social responsibility and commitment to environmental sustainability. It would have a multiplying effect, boosting and strengthening the green economy.
• Santo Domingo Aqueduct and Sewerage Corporation (CAASD): Being responsible for the management of drinking water and sanitation in the city of Santo Domingo and its surrounding municipalities, it can implement sustainable projects similar to the construction of the wastewater treatment plant in Haina, placing green bonds through to the figure of the Trust, to finance this type of initiatives.
• National Authority for Maritime Affairs (Anamar): Institution in charge of managing the country’s marine and coastal environment. It has carried out projects such as the restoration of coral reefs in the Samaná Bay, being able to issue green bonds to finance similar initiatives.
• Punta Cana Group: One of the largest tourism developers in the country, which has carried out sustainable projects such as the implementation of solar energy in several of its resorts, and the conservation of biodiversity in its properties.
• Rich Group: Business group with a presence in several sectors, including agriculture, energy and real estate. The group has carried out sustainable initiatives in the past, such as producing energy from biomass at its cogeneration plant, and could issue green bonds to finance similar projects in the future.
In conclusion, Green Bond issues present various opportunities for the business sector and government institutions, being an effective tool to finance sustainable projects and improve environmental management, which, to guarantee the success of a placement of public offering of securities of this type, it is important to have a serious commitment to sustainability and that they comply with the established standards.
Although there are challenges, the regulatory framework supports this type of issuance and offers tax benefits for issuers. And, taking into account the recent risk rating issued by Standard & Poor’s, which for the first time in history the country went from BB- to BB, we have become a stable country, with excellent management in public administration, which is reflected in its ability to maintain high rates of economic growth, strengthening fiscal planning and public debt management, for the call of foreign investors who can place their resources for these purposes.