FRA’s Regulations Regarding Local E

The Board of Directors of the Financial Regulatory Authority (“FRA”) recently issued its Decision No. 127 of 2019 (the “Decision”)[1] to create and regulate an FRA registry of local experts and consultancy institutions who may undertake the assessment and testing of green and sustainable projects (the “Registry”). The Decision also elaborates on the registration requirements pertaining to each of these two categories, stipulating that only registered experts and consultancy institutions may undertake the monitoring of green and sustainable projects that issue green bonds. The Decision goes into effect a day following its publication in the Egyptian Gazette.

Background

Although the term has been increasingly used worldwide, there is no single, agreed definition for what constitutes green finance/financing. At a larger scale, the concept brings together the axes of economics and the environment into one equation, given the reciprocal relationship between both, and in this sense, green financing could be broadly defined as “any financial initiative, process, product or service that is either designed to protect the natural environment or to manage how the environment impacts finance and investment”.[2] However, at a more specific level, green financing could be conceived as “engaging traditional capital markets in creating and distributing a range of financial products and services that deliver both investable returns and environmentally positive outcomes”.[3] These products and services include such things as green bonds, carbon market instruments, green investment banks, green loans, and green funds. Accordingly, these attempt to move away from business-as-usual investments towards more sustainable patterns of investments, growth, and development. Among the most prominent initiatives worldwide within this field is the Green Bond Principles (“GBP”). First launched in 2014 by the International Capital Market Association (“ICMA”), the GBP is a set of voluntary process guidelines for issuing green bonds with the aim of promoting transparency, disclosure, and integrity in the green bonds market. As per the initiative, green bonds are defined as “any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects . . . and which are aligned with the four core components of the GBP” that pertain to (1) the use of proceeds, (2) the process for project evaluation and selection, (3) the management of the proceeds, and (4) reporting.[4] Since last year, there have been regulatory initiatives within the field of green financing in Egypt and these mainly follow the GBP. The most important of these efforts has been the inclusion of a new provision in the Executive Regulations of the Capital Market Law, as per Prime Ministerial Decree No. 2479 of 2018,[5] namely Article (35 bis. 3) that stipulates that bonds and sukuk may be issued to finance and refinance projects that are green and environmentally friendly. In specific, the Article lists six examples of environmentally friendly projects that could be financed through green bonds, and it is noteworthy that these categories follow those listed in the GBP: (1) new and renewable energy; (2) climate change adaptation; (3) energy efficiency; (4) pollution control and prevention; (5) green buildings; and (6) clean transportation (especially electric means of transportation). In addition, three different types of green bonds are specified in the Article and these are as follows: (1) green bonds that finance environmentally friendly projects, in which case the issuer is committed to repaying  the value of the bonds and their proceeds; (2) revenue-generating green bonds, in which case the obligations arising from the bonds and their proceeds are paid through the revenues generated from the financed projects; and (3) green securitization bonds, which are issued against a portfolio of financial rights and future receivables for an environmentally friendly company or project. Article (35 bis. 3) further regulates the issuance of green bonds, and this process involves obtaining FRA’s approval, the selection of an FRA-licensed investment bank and promoters, the obtaining of a credit rating, and the pricing of the green bonds and the determination of their proceeds. Furthermore, the Article specifies who may issue green bonds and these comprise Egyptian companies and other entities as well as foreign companies and institutions financing projects within Egypt. Green bond issuers must fulfil a list of requirements, many of which align with the GBP. These include the evaluation and selection of environmentally friendly projects; the disclosure to investors of environmental sustainability objectives in addition to external follow-up reports of compliance to the project evaluation procedures; internal procedures for the allocation of green bond proceeds to green projects, particularly through a sub-account in addition to a green investment portfolio; and various reporting requirements. With regards to the last point in particular, the Article specifies that independent experts and consultancy institutions are to prepare reports that evaluate and test the green projects, determining the compliance of projects financed through green bonds with the requirements of a clean environment and with the requirements of periodic reporting; these experts and consultancy institutions are to be registered at FRA upon coordination with the Ministry of Environment. This, in specific, is largely in accordance with the GBP, which encourages that the issuer’s internal process of project evaluation and selection be supplemented by an external review. To this effect, FRA issued its Board Decision No. 113 of 2019 last month, with a preliminary list of international experts and consultancy institutions (international environmental inspectors) whose reports regarding the assessment and testing of green, environmentally friendly projects are accredited by FRA.[6]

The New Decision No. 127 of 2019

The new Decision follows both the 2018 amendments to the Executive Regulations of the Capital Market Law and the previous FRA Board Decision on international environmental experts/consultants by regulating this time the registration of local experts and consultancy institutions who may undertake the assessment and testing of green and sustainable projects. As per the Decision, a registry is to be created at FRA for said local experts and consultancy institutions. Only FRA-registered experts and consultancy institutions may undertake the monitoring of green and sustainable projects that issue green bonds. The Decision also sets out the general registration requirements and those that are specific to experts and to consultancy institutions separately in addition to setting out the process of registration itself, as follows:

1. General Registration Requirements

To be registered at FRA, experts and consultancy institutions must be registered at the Ministry of Environment. They must possess a good reputation and no administrative measures (from FRA or the authority that oversees the experts or consultancy institutions) must have been issued against them within the three years prior to registration. In addition, experts as well as board members of the consultancy institutions must not have been convicted of a felony or misdemeanour in a crime affecting honour or integrity in the three years prior to registration (unless rehabilitated). A number of undertakings must be also submitted: (1) an undertaking of independence and the lack of conflict of interest during the assessment and testing of green projects; (2) an undertaking of the adoption of assessment methodologies that are in line with the Green Bond Initiative, the Climate Bonds Initiative, or other recognized international frameworks; and (3) an undertaking regarding the preparation of reports on the assessed projects in accordance to relevant international frameworks and criteria. An insurance policy against occupational hazards must be also issued in accordance with the regulations to be set forth by FRA. Finally, the service fees must be paid.

2. Further Registration Requirements Pertaining to Experts (Natural Persons)

Experts must have a suitable higher qualification, preferably a scientific and academic degree or a professional one in fields related to green and sustainable projects, whether from inside or outside of Egypt. Additionally, they must fulfil the required expertise and competence as put forth by the Ministry of Environment. Finally, they must also have practical and/or scientific experience in green and sustainable projects that is not less than five years.

3. Further Registration Requirements Pertaining to Consultancy Institutions

Consultancy institutions wishing to be registered at FRA must have in place structures and systems for the undertaking of the assessment and testing of green and sustainable projects. Prior experience in the inspection of green and sustainable projects under assessment is also a must. Finally, these institutions must submit a declaration of notifying FRA of their experts in charge of each project’s assessment along with their CVs and business history; it is noteworthy that these institutions’ experts must be specialized in the field of the project they are assessing.

4. Registration Procedures

Applications for registration are submitted to FRA along with the documents supporting the registration requirements. After the examination of the applications, FRA decides on the registration within two weeks from the date of submission of a complete application.   [1] FRA Board of Directors Decision No. 127/2019 on the registry of local experts and consultancy institutions who may undertake the assessment and testing of green and sustainable projects, available through this link (in Arabic). [2] Chartered Banker Institute. “Chapter 1: What is Green Finance?”. Available through this link. [3] Development Asia. (April 2018). “Green Finance, Explained”. Available through this link. [4] ICMA. (June 2018). “Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds.” Available through this link. Cf. Ünüvar, B. (2019). Financing the Green Economy. In S. Acar & E. Yeldan (Eds.), Handbook of Green Economics. London: Academic Press. International Finance Corporation. (April 2018). “Green Bonds: Capital Markets, Climate Finance.” Perspectives, Issue no. 1, available through the following link. [5] Prime Ministerial Decree No. 2479/2018 amending certain provisions of the Executive Regulations of the Capital Market Law issued by virtue of Minister of Economy and Foreign Trade Decision No. 135/1993, Official Gazette, Issue No. 47 (cont.) (b), 22 November 2018. [6] FRA Board of Directors Decision No. 113/2019 determining the preliminary list of international environmental inspectors, Egyptian Gazette, Issue No. 215, 26 September 2019.