Design and implementation of green bonds for the Prague SECAP 2030
On 20-21 October 2022, the Policy Learning Platform held an online peer review for the City of Prague, which requested advice regarding their policy challenge on design and implementation of green bonds to finance the Prague SECAP 2030.
A detailed description of the challenge and recommendations can be found in the follow-up report
The City of Prague is the capital of Czech Republic. In 2019, the Capital City of Prague voluntarily declared to actively monitor and slowly reduce its direct and indirect carbon dioxide (CO2) emissions.
The city therefore officially announced its climate pledge to a 45% CO2 emission reduction by 2030 and also confirmed that it sees the departure from fossil fuel use in energy production, transport, and other economic activities as an opportunity, rather than a threat, in transforming the city into an eco-friendly metropolis and an attractive place to live.
The overall budget of the Climate plan is approximately 230 billion CZK (9 billion EUR) and Prague’s municipal budget is able to cover around 10% of all costs, thus green bonds might be a useful tool to finance the plan.
The City of Prague has shown interest in the experience of and case studies from other regions and municipalities to get a better understanding of:
- Design of the internal administrative life-cycle of green bonds: from preparation to issuance to monitoring and reporting
- Ensuring the “green” credential of green bonds: Types of projects, indicators, monitoring & reporting, communication
- Legal, financial and market feasibility, selection of issuing bank and green bond standard
Alongside Katharina Krell, Low Carbon Economy Thematic Expert, and Magda Michaliková, Environment and Resource Efficiency Thematic Expert, seven excellent peers were invited, and participated in the peer review:
- Claes Ramel & Nina Hellström Narancic, Municipality of Malmö, Sweden
- Fredrik Block, Municipality of Göteborg, Sweden
- Alexander Labermeier & Anna Beil, State of Hessen, Germany
- Andrea Berger-Schulze & Timo Werner, City of Munich, Germany
The experts came together to share their experience and to provide recommendations for ways of tackling the challenges related to issuance of green bonds and green financing. They provided the host with valuable insight, know-how and practical suggestions for solving the challenges presented above.
Recommendations
The peers presented examples of governance frameworks, shared tips on how to go about the green bonds’ development process, discussed which resources are needed, how to select partner financial institutions and third-party rating agencies, how to attract investors, described the green bond principles and available standards, debated the EU Taxonomy, showed different ways of managing proceeds, defined important criteria in the selection of projects, and explored the importance of external reviews and reporting.
The peers recommended the host to use green bonds as one of the instruments of choice to raise money for large or “repetitive” green projects‚ to keep in mind that ‘green‘ or ‘social‘ framework is a mega trend that is sought after by the market, advised to avoid liability, to be careful not to make a legal commitment regarding the green impact, and to build trust with the investors, as building long-term relationships is key and will pay out also for other types of credits.
They noted the PR potential of green bonds, the so-called green halo effect, which has a positive effect on any credit, and recommended to start with a small GB issuance for a specific project, to keep it as simple as possible and to have dedicated resources (human, financial) to design the framework and manage the green bond scheme.
As the EU Taxonomy is still under development, the peers suggested to start with well-accepted market standards (eg ICMA principles) and develop it further if needed, while closely monitoring the EU GBS and alignment with the current Climate Action Plan.
They argued that diversification is important, sometimes banks are a better provider and sometimes the market is. In the case of existing relations with banks, the host should work with them and negotiate a better discount for green and social projects.
As first steps, the peers recommended the following:
- ensure strong political support for effective implementation of the Prague Climate Plan 2030,
- set up a dedicated sustainable financing strategy including securing new funding sources in cooperation with relevant administration departments (environment, energy, budget, investment, school, health),
- set up a dedicated team, develop a larger strategy incl. capacity building, stakeholder involvement etc. for the Climate Plan,
- identify individual sub-projects, apply green impact indicators for each sub-project of Climate Plan, build a pipeline of high-quality investment-ready projects to absorb the available funds, develop a pool of green projects,
- break down 2030 goal into ambitious annual investment targets, conduct gap analysis: what amount is missing / can it be covered by existing funds, create a list of candidates for a first Green Bond.
The host’s policy challenges, and all the peer suggestions can be found in the follow-up report.
Pleased with the outcome of two full days of intense discussions moderated by the Policy Learning Platform Eva Lepšová and Ondřej Ptáček from the City of Prague, as well as Alexander Labermeier from the side of the peers, and Tomáš Černý from the side of the stakeholders commented:
“We now need to gain political support once the new administration is selected and start working. I would like to thank all the peers who were willing to share their experience and the Policy Learning Platform for finding the peers and organising this exchange.”
Eva Lepšová
Thank you very much all the peers and PLP. It has already overreached my expectations, the level of details you were able to share. There is no excuse for the city of Prague, and we should start working on the green bonds right away.
Ondřej Ptáček
Thank you very much for inviting me to be part of this peer review. It is interesting to see what the others are doing and where we have similarities and different approaches.
Alexander Labermeier (Hessian Ministry of Finance)
It was very interesting even for a banker and I learned a lot. Good luck to the City of Prague and to the peers. Once there is room for help from the bank, we will be very pleased to do so.
Tomáš Černý (Erste Group/Česká Spořitelna)
The host used the peer review to involve local stakeholders in a discussion and is now assessing the recommendations received from the peers to see how they could inform the decision-making process to implement green bonds in the financing strategy of Prague’s Climate Plan 2030.