Session 4 - Presentation by OECD, Takayoshi Kato
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This document discusses how Georgia can scale up green finance through further developing its local capital markets. Key challenges to mobilizing green finance in Georgia include limited long-term, low-cost finance options and underdeveloped capital markets. Diversifying financial instruments beyond traditional sources like banks could help scale up investment. Georgia's bond and equity markets are growing but not commonly used, especially for green projects. Linking ongoing capital market reforms to environmental, social and governance factors could facilitate greater green finance, such as through disclosure requirements.
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Session 4 - Presentation by OECD, Takayoshi Kato
- 1. Takayoshi KATO Policy Analyst, Green Growth and Global Relations Division Environment Directorate, OECD 22 June 2017 Session 4: Implication of Georgia’s financial market reform for green finance
- 2. 2 Scaling up and greening finance How to scale up investment in infrastructure and other fixed asset? How to make sure that such investment is green? A well-functioning local capital market can be part of solution for both
- 3. 3 Background: Key challenges to mobilising green finance in Georgia Challenges to green finance mobilisation Low risk-return profiles Limited low-cost, long-term finance Non economic barriers
- 4. 4 Background: Key challenges to mobilising green finance in Georgia Limited low-cost, long-term finance Limited capital market development Credit rating issues and high interest rate Risk mitigation instruments present but to be further explored Competition for capital with other infrastructure asset and with retail banking Limited options for financial sources/instruments
- 5. • Scaling up traditional sources of finance remains important (e.g. Governments, Dev. Finance Institutions, commercial banks). • Diversifying financial instruments and capital sources would complement the traditional sources and help further scale up green finance 5 Why can diversified financial channels help mobilise green finance?
- 6. Sources/Instruments work differently at various stages of infrastructure investment Source: Adopted from OECD (2016) Support Note on Diversification of Financial Instruments for Infrastructure
- 7. 7 What is needed for diversifying financial instruments for green finance? Further use of bond and equity for green finance Well-functioning local capital market Credit rating services Government yield-curve Measures to promote ESG* performance of assets Good payment service *Environment, Social and Governance
- 8. • Georgia’s capital market (e.g. for corporate bonds and equity) is still at an early stage of development • Use of equity and corporate bonds is increasing but not yet common as finance instruments in general, let alone for green finance. 8 Capital market development still at early days, but progressing
- 9. Sector Currency Size (million) Maturity Coupon Exchange Republic Of Georgia Gov. USD 500 2021 6.88 London BGEO Group Financial USD 350 2023 6.00 Dublin Georgian Oil & Gas Corp Energy USD 250 2021 6.75 London Georgian Leasing Co Financial USD 10 2017 8.75 Georgia M2 Real Estate Real Estate USD 25 2019 7.50 Georgia Nikora Trade Retail USD 5 2018 11.00 Georgia Georgian Water & Power Utilities GEL 30 2021 11.25 Not listed Georgian Water & Power Utilities GEL 2.6 2017 14.00 Georgia 9 Increasing bond issuance (but in many cases, outside the country) Table 3. Examples of issued bonds and their performance Source: OECD based on JSC Galt & Taggart (2017)
- 10. • Equity investment (in green projects) already exists in Georgia mainly for hydro power, and green bonds are gaining interest. • Georgia’s ongoing reform of capital market may have implications for future scaling-up of green finance in Georgia: – Reforming securities (bond and equity) market – Reviewing regulatory frameworks on investment funds – Increasing local currency denominated asset 10 Possible linkages between capital market reform and green finance in Georgia
- 11. • Should/Can the government link Environment, Social and Governance (ESG) factors with its capital market development? – Facilitating information disclosure on: company GHG/pollutants emissions, labor and human rights policies, corporate governance structures, etc., while avoiding unnecessary burden for paper work. – Institutional investors are getting increasingly concerned. 11 Should the linkages be more explicit? Ex. EU Non Financial Reporting Directive provides a legislative framework to require public companies to disclose a range of information, including ESG factors. Source: European Commission (n.d.), Directive 2014/95/EU [Link]
- 12. Session 4: Discussion questions • What are the drivers for and challenges to diversifying financial instruments? • Within your business, what could the financial market development bring to scaling-up of green finance in Georgia? • Could Georgia’s effort for financial market development be more explicitly linked with climate and green growth agenda over time? If so, how?
Editor's Notes
- Among various components of the on-going study, I’d like to a few issues around mobilisation of green finance in Georgia, which may also be relevant to other middle income countries as well. I hope this can give some views to discussions during the session. We have categorised these issues into three 3 broad challenges: 1st low risk-return profile of climate-related projects and activities, 2nd limited low-cost, long-term finance, and 3rd non-economic barriers.
- Credit rating issues and high interest rate Limited availability of low-cost, long-term capital in Georgia severely hampers investments in green and other types of fixed assets. Limited securities market development To mobilise green finance, it is important both: to scale up currently available financial resources (e.g. bank lending); and to explore new and innovative ones over time (e.g. bond and equity financing). Georgia’s securities market (especially for corporate bonds and equity) is still at an early stage of development: hence neither equity nor corporate bonds is commonly used for green finance yet. Green bonds are gaining an increasing interest in Georgia (IFC, 2017) and have a potential to lower the (re)financing costs of green investment in corporates and projects. Risk mitigation instruments To mitigate political, macroeconomic, regulatory, business and technical risks, various risk mitigation instruments have been used in Georgia, such as guarantees and regulated price level under PPAs. But they can be further explored. A comprehensive stock-taking and review of risk mitigation instruments available in the country can be useful: to make the best use of the available ones; and to see important risks that have not been adequately covered in the country. Competition for capital with other infrastructure asset and with retail banking A shortage of long-term capital is often exacerbated by attractive short-term lending opportunities, such as retail banking (rather than corporate banking) and by large hydropower projects.