Institutional Traps in the Green Bond Market

Abstract

The article identifies the national configurations of green bond market development in the countries of Eastern Europe, the Caucasus and Central Asia, and institutional traps that may arise during its formation. The following methods were used: the method of theoretical generalization (for studying scientific works of foreign and domestic scientists related to the formation of the green bond market); the analytical method (for studying national configurations of green bond market development in individual countries); the logical method (for drawing conclusions). The authors found that Kazakhstan, Ukraine and Georgia have the most advanced experience in developing a green bond market, unlike Armenia and Moldova, where the green bond market is actually at the conceptual stage. A comparative analysis of these countries allows us to identify several “institutional traps” that these countries fall into: 1) the “dual regime” trap (Kazakhstan) means a situation when part of the best practices and incentives are concentrated in a special financial zone, while the main volume of emissions falls on the national exchange, where regulation has not yet been fully adapted. This reduces the systemic effect of reforms and splits the market into “pilot” and “mass” segments. 2) the trap of “external dependence” (Georgia, partly Armenia and Ukraine) is that green bonds are issued mainly on international exchanges or through private placements with one or two large international investors. The local capital market remains secondary, which limits the development of domestic infrastructure and the investor base and makes it impossible for “green” instruments to become a driver of the development of the national bond market. 3) the trap of “low liquidity” (Moldova, partly Ukraine) is due to the fact that the small size and limited liquidity of the bond market make the issuance of green bonds unattractive for issuers, even if the investment needs in the “green” sectors are significant. As a result, the main flow of green financing goes through bank loans and loans from international financial institutions, and not through the capital market. 4) the “single issue” trap (Armenia) means that without a formalized national framework (taxonomy, disclosure standards), a successful pilot issue by an individual bank does not turn into a mass trend that would cover other financial institutions, corporate and municipal issuers. Overcoming institutional traps requires deeper institutional reforms aimed at increasing transparency, strengthening the role of independent regulators and developing institutional investors. This provides prospects for further scientific exploration.