Climate change is one of the world's major challenges to overcome. After the 2015 Paris Agreement, 196 countries around the globe agreed to undertake policy measures for keeping the average rise of global temperature below 2° Celsius by 2050. The main goal of this global governance framework is to help the parties mobilize financial resources and mitigate the effects of climate change. Under the agreement, every country must regularly report its contributions to emission reductions.
The governmental budgets worldwide will not be sufficient to finance the necessary climate change mitigation and adaptation infrastructure projects. On the one hand, there exists a large investment gap in developing countries of around 530 billion United States dollar (USD) that need to be invested by 2030 solely in the energy sector to meet the countries’ sustainable infrastructure needs. Since the urbanization rate is rapidly increasing, especially cities in emerging economies urgently need large amounts of capital. On the other hand, large institutional investors are increasingly introducing Environmental, Social, and Governance (ESG) criteria in their investment decisions and incorporating ‘green’ mandates in their statutes. One potential instrument to meet policymaker’s and investor’s needs are green bonds (GBs).
Therefore, this research aims to investigate the market barriers for municipal green bonds (MGBs) in Colombia. Since the topic has a niche character, the research method is based on a literature review and three experts’ interviews to add an insightful perspective of market practitioners. The structural barriers identified as obstacles to market development were macroeconomic variables that limit the access to capital markets, political variables such as corruption, conflicts, rivalries between parties and cortoplacismo as well as market skepticism to-wards new financial instruments and ‘green’ topics. Additionally, some specific market barriers of the green bonds market are significantly high transaction costs, lack of technical knowledge, dependence on external market actors, liquidity, and greenwashing risk. The last chapter of this master thesis presents policy recommendations for three key market actors: Colombian municipalities, the central government, and multilateral development banks.
Table of Contents
1 Introduction
2 Theoretical framework
2.1 Climate change vulnerability and investment gap
2.2 Cities’ importance for climate change action
2.3 GBs definition and relevance
2.4 Method
3 The GBs market
3.1 How does a GB become ‘green’?
2.1 Categorization, types, and market actors
3.2 The GBs issuance process
3.3 Evolution and state of the GBs market and sectors
3.4 The current state of the GBs market in Colombia
4 Opportunities and benefits for the issuance of MGBs in Colombia
4.1 Change in paradigms in the financial markets
4.2 Demand and supply asymmetries
4.3 Expansion of investor’s base and access to financial sources
4.4 Economic incentives
4.5 Signaling for environmental commitment and international political support
5 Market conditions for the issuance of MGBs in Colombia
5.1 Institutional context and legal framework for GBs issuances
5.2 Legal framework for municipal bonds issuances
5.3 Municipal financing
5.4 Current debt, payment capacity, and risk ratings of Colombian cities
6 Challenges and market barriers for the issuance of MGBs in Colombia
6.1 Structural barriers
6.1.1 Macroeconomic variables and limited access to capital markets
6.1.2 Political conditions
6.1.3 Skepticism of market actors
6.1.4 Specific barriers
6.1.5 Transaction costs
6.1.6 Transparency, credibility, and greenwashing risk
6.1.7 Know-how and technical problems
6.1.8 Dependence of external actors
6.1.9 Liquidity risk
7 Policy recommendations
7.1 Policy recommendations for municipalities
7.2 Policy recommendations for regulators and central government
7.3 Policy recommendations for multilateral and national development banks
8 Conclusions
Research Objectives and Themes
This thesis investigates the market conditions, opportunities, and barriers for the issuance of Municipal Green Bonds (MGBs) in Colombia. It addresses the research question: "Which are the obstacles and market barriers impeding the implementation of MGBs in Colombia?" by analyzing the country's institutional environment and comparing international experiences with local needs.
- Analysis of the current GBs market state in Colombia
- Economic incentives and benefits for MGB issuers
- Institutional framework and legal conditions for municipal debt
- Structural and specific market barriers (financial, political, and technical)
- Policy recommendations for municipalities, regulators, and development banks
Excerpt from the Book
3.1 How does a GB become ‘green’?
The question about what kind of bond can be categorized as a GB is not always straightforward. De facto, the lack of harmonization and common standards in the GBs market have been mentioned in the literature as one of the main obstacles that need to be tackled in the market. For many authors, such as the European Commission et al. (2016), the lack of a common definition for GBs is one of the main hurdles for the development of regional GBs markets. As Hilbrandt & Grubbauer (2020) pointed out, standards are a central part of every market structure. They are “the social, cultural, and technical conditions that make [markets] possible” (MacKenzie, 2005). Standards are needed to create transparency and thus credibility in one specific financial asset. This definition issue in the GBs market mainly concerns the question: what is green? (European Commission et al., 2016).
Due to this lack of definition, the CBI launched the first Climate Bonds Standard and Certification Scheme in 2010 (Beschloss & Mashayekhi, 2019). Additionally, the International Capital Market Association (ICMA) also took the initiative and published the Green Bonds Principles (GBP) in January 2014 which primarily focused on reporting and designing features of the GBs (Wadhwa, 2020; Adhikari, 2016). These were key catalysts for the development of the market and instruments to combat the so-called greenwashing. Thus, they were the first frameworks to decide what makes a GB ‘green’. In the opinion of Beschloss & Mashayekhi (2019), both voluntary frameworks gained authority by recruiting scientists and market leaders to develop rigorous standards and metrics and by winning the support of a vast number of issuers and investors.
Summary of Chapters
1 Introduction: Provides the global and national context regarding climate change and the necessity of leveraging private capital through green bonds.
2 Theoretical framework: Defines the climate change vulnerability, the investment gap, and the specific role of cities in mitigating these risks.
3 The GBs market: Explains the mechanisms of green bond certification and the evolution and current status of these instruments in the global and Colombian markets.
4 Opportunities and benefits for the issuance of MGBs in Colombia: Examines factors like paradigm shifts in financial markets, ESG criteria, and the demand-supply imbalance as drivers for MGB adoption.
5 Market conditions for the issuance of MGBs in Colombia: Details the institutional, legal, and financial framework, including solvency and sustainability indicators for municipalities.
6 Challenges and market barriers for the issuance of MGBs in Colombia: Analyzes the structural and specific barriers such as policy risks, transaction costs, lack of technical knowledge, and liquidity constraints.
7 Policy recommendations: Presents strategic proposals for municipalities, government regulators, and development banks to facilitate MGB implementation.
8 Conclusions: Synthesizes the main findings and offers a critical perspective on the potential for local issuance versus external international issuance.
Keywords
Green Bonds, Municipal Green Bonds, Colombia, Climate Change, Market Barriers, Sustainability, ESG criteria, Investment gap, Fiscal management, Transparency, Greenwashing, Financial instruments, Capital markets, Infrastructure projects
Frequently Asked Questions
What is the core focus of this research?
The research explores the feasibility, opportunities, and significant barriers to issuing Municipal Green Bonds (MGBs) within the context of Colombian cities.
What are the central themes of the work?
Key themes include climate change financing, the role of local governments in sustainability, market standardizations (taxonomy), and the legal constraints of municipal debt.
What is the primary research goal?
The aim is to identify the specific macro-structural and technical obstacles that prevent Colombian municipalities from accessing capital through green financial instruments.
What methodology is employed?
The work utilizes a qualitative approach, combining a comprehensive literature review with expert interviews representing regulators, consultants, and certification bodies.
What topics are covered in the main section?
It covers the current state of the GBs market in Colombia, structural macroeconomic/political barriers, specific issues like high transaction costs, and policy recommendations for market growth.
Which keywords best characterize the study?
Colombia, Green Municipal Bonds, Climate Finance, Market Barriers, and Sustainable Infrastructure.
How does the tax policy in Colombia affect green bond issuance?
The thesis identifies existing tax incentives for environmental investments and suggests that clear regulatory frameworks (like the new taxonomy) are essential for market credibility.
What is the significance of the "greenium" in this research?
The "greenium" is analyzed as an economic incentive, acting as a potential premium for issuers and a discount for investors, which can make green bonds more attractive despite additional reporting costs.
- Arbeit zitieren
- María Torres (Autor:in), 2021, Should Colombian Cities Issue Green Bonds?, München, GRIN Verlag, https://www.grin.com/document/1568331
