*5.2. Policy Implications*

As restrictions of the COVID-19 are easing and economies are opening, governments are beginning to unveil their economic recovery plans. However, there is a lack of motivation to strengthen the green agenda in recovery plans. This is because the recovery outlook seems to follow the 'growth first and green when possible' approach of existing development plans. This will endanger meeting the SDGs and the Paris Agreement on climate change.

Therefore, in the current insufficient investment level in the green sector, especially in the post-COVID-19 era, imperative financial and fiscal policy reforms, such as global or regional carbon taxation, regulations, and strategies on green financing, supporting policies for facilitating the issuance of green bonds, the establishment of green credit rating to measure the greenness of the projects, targeting the energy subsidies, reducing the direct and indirect subsidies to fossil fuels, and introducing public de-risking tools such as a green credit guarantee scheme for reducing the risk of green investments, are required. In other words, the world is required to establish a green financial system in order to facilitate the public and private financing of the green projects.

A major takeaway from this study is the relatively high risk and return associated with bonds issued in Asia and the Pacific. Most importantly, the research showed that bonds issued by banks in Asia were associated with lower returns. Thus, the study proposes several policy recommendations to address each of the weaknesses of Asian bonds, and eventually encourage their issuance, as green bonds are useful tools against climate change.

First, this study proposes using tax spillover to increase the rate of return of green bonds issued by banking and finance. Since this sector represents 60% of issuance in Asia, it is likely that traditional banking will keep playing a decisive role in green finance in the region. While green infrastructure requires high up-front costs, these projects create employment and revenue in the long term. Subsidizing green bonds in the early stages of project development could be a solution, as in the long term, these subsidies could be repaid to the public sector through tax spillover generated by employment and increased economic activity. A similar idea is developed by [5], although not applied to green bonds in particular. Figure 6 displays how an increase in the rate of return can directly impact investors' portfolios and contribute to making Asian green bonds more attractive. Detailed calculations behind this policy recommendation are provided in Appendix A.3.

**Figure 6.** Effect of tax spillover on rate of return of green bonds. Source: Authors' depiction.

Since bonds issued by the banking and finance sector in Asia are shown to have lower returns, another solution to increase their attractiveness would simply be to encourage the diversification of issuers, and generally by promoting the involvement of the public sector. As shown in Figure 4, bonds issued by the public sector in Asia have high associated risks and relatively high returns. Diversification is not necessarily limited to the sector of issuance, however, and [30] highlighted the possibility of increased financial connectivity between Asian and European public institutions in financing green infrastructure.

Finally, a last remedy to increase the amount of green bonds issued in Asia and the Pacific is to reduce the risks associated with these instruments. Several studies have highlighted the risks associated with green infrastructure projects and proposed de-risking approaches for policymakers. The authors of [31] suggested a simplification of administrative procedures linked with project developments. They also proposed the establishment of agreements with local governments or companies, as green infrastructure projects are

often more oriented towards the long term. The authors of [32] also proposed a wide array of de-risking solutions—ranging from general measures such as the unbundling of the electricity market, corruption control mechanisms, or reforms of fossil fuel subsidies, to financial de-risking measures such as credit guarantees or guaranteed power prices and the establishment of public–private partnerships to reduce political risks generally associated with green policies. Specifically, [33] proposed a model green credit guarantee scheme, where a public entity absorbs the risks related to green infrastructure projects by providing a credit guarantee. As many companies involved in green projects tend to be small- and medium-sized enterprises, credit guarantee schemes can allow these firms to receive higher funding, as the public entity acts as a form of collateral. Utilizing tax spillover to increase the rate of return of green bonds, diversifying sectors and regions, and de-risking policies could surely contribute to increasing the attractiveness of Asian green bonds and help to accelerate the fight against climate change in the region [13].

In order to have a well-developed green bond market, it is crucial to have a clear definition of what green is. This means an unambiguous definition of green bond is needed. In the meantime, green labeling has helped somewhat, but it is not enough. Currently, 80% brown and 20% green is called green, and 90% green and 10% brown is also called green. There are many different definitions of greenness that are all called green, and green bonds are used for financing them. Therefore, we need a clear greenness credit rating to show the ratio of greenness. Nowadays, satellite photos can show how much CO2 is exposed by each company or each project, and it is possible to detect and measure the emissions that would be used to assess the greenness of the projects. Globally, having unified green rating agencies rather than having different standards for each country is required [26,34–36].

Finally, in bank-oriented financial systems such as in Asia and several other regions, just relying on green bond issuance might not be an adequate solution to fill the green finance gap. Green bond is a complementary financial instrument that needs to be used besides banking solutions. There are several mechanisms and instruments that can help to bridge the green finance gap for meeting SDGs. These mechanisms include the modification of the collateral framework, changes in capital adequacy ratios, a market of SDG lending certificates, the introduction of rediscounting policies, the establishment of a green credit guarantee scheme, green credit rating, etc. [37,38].

Another fundamental problem is 'decoupling,' i.e., the fact that green bonds apply a financial logic to solve an ecological issue, which is created in the first place by the economic system and its financial indicators. As a result, green bond investment strategies prioritize ecosystem services generating the most significant and most stable payment flows to the detriment of other invisible ecosystem services, but just as essential. The author of [39,40] uses the term a financial "logos" (defined as a structuring discourse integrated into financial practices' management tools and belief systems) to describe this problem. His article argues that any ecological finance theory devised to fit the SDGs needs a paradigm shift in the morphology of randomness underlying financial risk modeling by integrating the characteristics of "nature" and sustainability into the modeling carried out. Most recently, the authors of [41] have proposed a strategy to incorporate ecological issues into financial economics. They used the concepts of resilience, diversity, self-thinning, self-regulated mitosis, and ecological transparency from biology and introduced them to the field of financial economics.

In addition, public financial institutions (PFIs)—or those publicly created and/or mandated financial institutions that have often been created to correct for the lack of marketbased finance through the provision of missing financial services—have a potentially vital role to play to scale-up private sector investments in green projects for meeting SDGs. However, there are four critical points for the involvement of PFIs in green projects: (1) They need to provide long-term financing (long-term loans) compared to private commercial banks, (2) setting up the interest rate lower than private banks, stable and fixed, and (3) avoid harmful effects of government lending through PFIs. This means avoid increasing

the government's role in the economy and avoid crowding out private deposits and loans. (4) Make loans by PFIs, where the private sector cannot make loans.

**Author Contributions:** Conceptualization, F.T.-H.; Formal analysis, F.T.-H. and H.P.; Methodology, N.Y.; Project administration, H.P.; Software, F.T.-H.; Supervision, H.P.; Validation, N.Y.; Writing original draft, F.T.-H.; Writing—review and editing, N.Y. and H.P. All authors have read and agreed to the published version of the manuscript.

**Funding:** Economic Research Institute for ASEAN and East Asia (ERIA) financially supported this project and the article processing fee.

**Institutional Review Board Statement:** Not applicable.

**Informed Consent Statement:** Not applicable.

**Data Availability Statement:** Data sharing not applicable.

**Acknowledgments:** This paper results from a research project titled 'Energy Sustainability and Climate Change in ASEAN and East Asia' for the Economic Research Institute for ASEAN and East Asia (ERIA). The authors are grateful to Fukunari Kimura and Jun Arima and all members of the working group in the aforementioned project for their valuable comments and inputs, which significantly contributed to improving the quality of this study. The authors are also grateful to the Climate Bonds Initiative (CBI) for providing part of the data used in this research. The authors are grateful to Aline Mortha for her research assistance throughout this project.

**Conflicts of Interest:** The authors declare no conflict of interest.
