Sustainable development has become an increasingly important policy issue for current and future governments. Two landmark events have substantially changed the capital market policy landscape since 2015, when international agreements were established with the adoption of the UN 2030 Agenda and the Paris Climate Agreement. The Paris agreement, in particular, stipulates a shift in financial flows towards low-carbon and climate-resilient development.
Finland has taken an active and ambitious approach to tackling climate change and promoting environmentally and socially sustainable development. After the release of the report by Intergovernmental Panel on Climate Change in November 2018, eight parties in Parliament set up a national working group and agreed on common and unified climate policy goals facilitating the implementation of the Paris Agreement in the coming years. As part of Finland’s National Energy and Climate strategy for 2030, the Finnish Government has already submitted a bill to Parliament which would ban coal-fired power and heating generation as of 2029.
In order to promote transparency, Finland was one of the first countries in the world to incorporate sustainable development in its 2019 Government budget. In accordance with the Government report on implementing the UN 2030 Agenda, Finland is focusing on two concrete priority areas: a carbon-neutral and resource-wise Finland, and a non-discriminating, equal and highly skilled Finland. The budget’s new analysis section will help to identify and monitor how much funding the budget allocates for promoting sustainable development.
Time to take a more holistic view?
It is evident that sustainable development trends have been feeding through to capital markets and even to sovereign issuance since the adoption of the UN 2030 Agenda.
Green bonds, specifically earmarked bonds to be used for climate and environmental projects, have been a household solution for corporates and public agencies to address sustainability issues. The growth of the green bond market clearly demonstrates the success of the product as a modern project-funding tool.
Many sovereign issuers have also studied prospects to issue green bonds. The conclusions, however, are not that clear cut. Some issuers have successfully presented new green bond maturity lines as part of their conventional bond curves. Other issuers, including Finland, do not view earmarked project bonds as a perfect match to fund the general budget. Issuers with limited debt issuance volumes have taken a view of preferring to allocate their scarce activities in nominal bonds to secure their liquid sovereign curve. In the case of Finland, launching a green bond programme would not help the liquidity of our nominal benchmark bonds.
Frankly, there is a certain mismatch between the scope of sovereign issuance and green bonds. Sovereign governments have broader policy objectives than just narrow economic goals or individual schemes the project bond funding is typically used for. Sovereign bond issuance reflects broad government policy initiatives which have a wider and more far-reaching scope and perspective. One can argue that the overall commitment of the government on sustainable development defines the sustainable or even the green nature of its nominal government bonds.
The Finnish State Treasury sees major advantages in an alternative approach toward institutionalising sustainable and green ratings for sovereigns. By providing a more holistic and longer-term perspective to focus on Environmental, Social and Governance (ESG) factors when assessing the country risk of an individual issuer, the ratings would serve sovereign fixed income investors and sustainably responsible sovereign issuers perfectly.
The convergence of the traditional credit rating approach and ESG analysis is already beginning to take place. Institutional investors are applying ESG frameworks to provide further input into their sovereign risk scenario assessments. Rating agencies are designing new products taking more thoroughly into account ESG aspects in their rating services. Besides, there is a need for sovereign issuers to be more proactive and transparent in providing information for investors on government initiatives and actions to promote environmental, social and governance issues. This is exactly what Finland as a sovereign issuer is highly committed to doing in the future.
The key function of the State Treasury is to safeguard the liquidity and funding for the central government. In 2018, the Republic of Finland successfully fulfilled its EUR 14.1 billion issuance programme. The net borrowing amounted to EUR -0.9 billion. For 2019, the scale of our financing programme is similar. The overall gross borrowing requirement, including short-term funding, will be EUR 15.1 billion.
Keeping our bonds attractive to investors remains our long-term goal. We believe that Finland’s strong credit outlook and commitment to sustainable development will support our bonds and serve all socially and environmentally responsible investors in the coming years.
Teppo Koivisto is Director of Finance and Head of the Finance Division at the State Treasury of Finland. Mr Koivisto is in charge of the central government debt management function, which includes funding, liquidity management, investor relations and interest rate risk positioning of the government debt.