A number of factors are creating the perfect environment for Taiwan’s development of green bonds. Its green industry is growing expeditiously on the back of strong momentum in the offshore wind segment, and the market is becoming familiar with convertible bonds. An important international green bond financing market combining green fintech with big data and cloud computing could be just around the corner.

Sustainable development is receiving increasing global attention due to global warming and the increased frequency of abnormal climate events. A variety of energy conservation, carbon reduction, and environmental protection measures have been promoted, giving birth to a number of green industries. Green financing, not just government support, is necessary for green industries to thrive. The recent growth of these industries has been accompanied by the fast-growing emergence of green finance.

Bonds are an important type of green security. According to statistics from the Climate Bonds Initiative (CBI), global green bond issuance achieved a brisk compound growth rate of 100.2% from 2012-2019. Furthermore, the World Economic Forum estimates that global green bond transactions will soon reach US$ 2.36 trillion in value. In response to the COVID-19 outbreak in 2020, the EU will invest up to EUR 750 billion to establish a revitalization fund, 1/3 of which will be funded by green bonds. This will not only help the pandemic response and environmental improvement, but also guide international public and private funds into the green finance market.

Taiwan’s first four green bonds were listed on the OTC market on May 19, 2017. On January 17, 2020, 15 green bonds were listed, for a total issuance value of NT$ 416 trillion, with 46 total tranches in circulation, with total issuance balance of NT$ 137.267. The issuers come in five categories: state-owned enterprises (Taiwan Power and PetroChina, domestic banks, foreign banks (including NTD-denominated bonds issued by foreign banks in Taiwan), private domestic non-financial companies, and foreign private non-financial companies (i.e. offshore wind providers). Although Taiwan’s green bond issuance has grown rapidly, the liquidity following issuance appears to be insufficient. The creation of an effective green bond market is critical for the growth of green industries.

Besides third-party mechanisms for information disclosure, evaluation, verification, certification and rating, considerations including the tradeoff between green bond financing cost and yield advantages, as well as trading and pricing on the secondary market, are all very important for the market to play a key role in activating green bond circulation. Certification is also a key perquisite in order to attract active participation by investors.

Three standards for market activation

Certification is a key way to activate the green bond market, and is currently being promoted by a number of countries and organizations focusing on sustainable development. Three main international standards are currently used to certify green bonds.

The first is the Green Bond Principles (GBP) of the International Capital Market Association (ICMA), which include 10 broad categories of green projects, including renewable energy, environmental protection, water resource protection, and green buildings. Four methods are allowed for external confirmation: evaluation verification, certification, and rating by a consultant.

The second is the Climate Bonds Standard (CBS) of the CBI. This standard is divided into 44 activity types in eight categories. The latest version 3.0, issued in December 2019, emphasizes independent verification mechanisms and procedures, as well as final approval by the Climate Bonds Certification Board (CBSB). Therefore, the CBS focuses more on investor returns and risks, with each item carefully verified.

The third is the EU Green Bond Standard (GBS), issued in June 2019, which expands the EU Taxonomy Regulation. It sets 67 technical selection criteria for green economic activities in manufacturing, agriculture, transport, and other industries that meet six environmental objectives, and specifies disclosure as a necessary condition. The GBS is a more consistent and stringent standard on the basis of the EU Green Bond Label. In the future, the EU market will likely follow through with compulsive legislation to regulate the EU market through disclosure and incorporation of certification bodies into management, giving the market full play for investment and financing of green projects.

Taiwan is currently setting criteria for green economic activity in accordance with the June 2019 Green Bond Standards, aiming for Taiwan’s green industry rating information to meet international standards of rigor, and to present the information transparently and objectively.

Energy accounts for a decreasing portion of capital utilization

Besides certification, another important factor affecting the viability of the green bonds market is fund coverage. Use of green funds is expanding internationally. According to statistics by the international ratings agency Moody's, non-energy utilization of global green bonds is gradually increasing.

Taiwan’s current green bond issuance focuses on renewables and related technologies. Attracting more private funds into green industries and other sustainable activities through means such as expansion of green bonds into sustainable development bonds would further increase the scale of market issuance. The Green Finance Action Plan 2.0, issued by the Financial Supervisory Commission, also plans to move from green bonds towards sustainable development bonds – i.e. from funds raised only for green projects to also including projects for social benefit.

In fact, the fund usage for the latest two tranches of sustainable development bonds issued by domestic banks in November 2020 includes both green projects and social benefit. They were mainly used to finance solar projects, government projects, and SMEs affected by the pandemic. The issuance of these two bonds is a good start for Taiwanese sustainable finance.

Five recommendations for public-private cooperation to improve market function and efficiency

Based on international experience, low rates are very important for green infrastructure finance. Low-cost and long-term funding from green bonds would be a suitable tool to guide institutional investors to green infrastructure. Taiwan should integrate green infrastructure design through a green bond certification mechanism, allowing the government, finance industry, and investment institutions to join hands to develop efficient, market-based green financing. Here are a few recommendations for implementation.

The first, following the GBP, CBS, and EU Green Bond Standard, is to use a standard which includes a certification mechanism to facilitate internationalization.

The second is to broaden green fund usage and improve certification so that the targets of green bonds are not limited to renewable energy, but can also be extended to sustainable development projects such as energy-saving buildings and green infrastructure.

The third is to encourage issuance of green bonds using new security types and technologies to broaden the scope of financial products. Asset securitization, for example, could allow small investors to participate and strengthen the role of green trading platforms, and also be accompanied by tax incentives to encourage uptake.

The fourth is to set up incentives to activate the primary and secondary green bond markets, managing the market to guide private funds to green infrastructure and strengthen the social benefits of the funds.

And finally, the fifth is to integrate Taiwan into international markets by encouraging international entities to participate in issuance or purchase of Taiwanese green bonds, attracting international specialists to local capital markets to create international competitiveness.

Clear strategies with reference to the interest rate liberalization experience

Taiwan's story of interest rate liberalization from 1970-1980 is taken as reference in Southeast Asia, but its successful implementation was not accidental. In order to increase the number of liquid securities, forward letters of credit and negotiable certificates of deposit were launched from 1973-1975, laying the foundation for the money market. Subsequently, in order to reveal full information on capital supply and demand, in May 1975, Chung Hsing Bills Finance Corporation was founded, followed by International Bills Finance Corporation in January 1977 and China Bills Finance Corporation in December 1978.

After the money market began operations, the February 1977 Notes on the Implementation of the Revised Tax Law stipulated that taxes on short-term notes issued after February 1, 1977 would only be deducted at the time of redemption, and no longer incorporated into taxpayers’ personal or business income, increasing liquidity. In addition, in 1978, bank reserve requirements were increased from 5% to 7%, protecting depositor’s rights while also encouraging banks to hold short-term notes, helping further expand the money market.

This allowed the banking industry to refer to the interest rate to freely set the rates for negotiable certificates of deposit. Therefore, since 1980, the Central Bank has continued to gradually promote liberalization of interest rates, relaxed their upper and lower limits, and allowed banks to set their own rates on more products. In July 1989, Article 40 of the Banking Law was amended to formally abolish bank deposit and lending rate control, allowing banks to set their own rates, and completing interest rate liberalization.

Global ESG investment has reached almost US$ 23 trillion, and will continue growing significantly. The United Nations estimates that funding gap necessary to meet its Sustainable Development Goals (SDGs) at US$ 2.5 trillion; the gap for clean energy alone is US$ 1 trillion. The CBI estimates that the global gap to reach the 2050 zero net emissions target is US$ 90 trillion. Due to high existing debt balances, governments are not inclined to borrow further, so the UN believes that 80-90% of this gap will be made up by the private sector. Banks can only partially meet this demand; the rest will require capital markets, insurers, and innovative funding channels.

Green industries are growing rapidly. Given stronger future investor demand, green bonds have much room for future growth as asset managers and holders diversify their investments and seek non-financial returns driven by sustainable development.

Just as with the liberalization of interest rates, however, a clear strategy is required, along with supporting measures like taxation financial product diversification, regulations, management measures, and cross-sector and cross-department integration. The creation of a green bond market will help Taiwan develop green finance and green industries, and will also help Taiwan internationalize its financial industry.