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Europe Takes Global Leadership Role In Issuing Green Bonds

Jake Gard

Europe has seen a recent surge in the issuance of sovereign green bonds, as more countries eye debt instruments as a way to help them finance eco-friendly projects and programs.

Spain and the UK were among the European countries to launch their inaugural green bonds in September. That same month, Germany sold a 10-year green bond, its fourth so far. Those moves followed Italy’s inaugural sovereign green bond in March, which raised about 8.5 billion euros.

Meanwhile, the European Union presented its green bond framework in September in preparation for its first green bond issuance, scheduled for October.  Part of the proceeds for that bond will go to the EU’s coronavirus recovery fund.

Photo Courtesy Guillaume Périgois

These moves are part of a larger trend in which countries are using debt to finance Environmental, Social, and Governance (ESG) initiatives. Governments from around the world have sold more than $39 billion in green bonds so far this year, according to data compiled by Bloomberg Intelligence. That already surpassed the $37.5 billion sold during all of 2020.

Spain’s debut green bond aimed to raise about 5 billion euros ($5.9 billion). The UK announced plans to sell at least 15 billion euros worth of green bonds in two offerings this year.

European sovereign green sales in September could surpass 20 billion euros, Bloomberg reported. That puts it close to the all-time monthly high set in March when Italy made its inaugural offering, and France, Europe’s top issuer of green bonds, also sold more debt.

“Based on the way the pipeline is building, we could see a month for record issuance,” Trisha Taneja, head of ESG advisory for origination and advisory at Deutsche Bank AG, told Bloomberg.

Photo Courtesy NOAA

Green bonds, also known as climate bonds, are used to finance sustainable projects that range from renewable energy and sustainable technology to clean water. Their rapid rise is partly due to government mandates to lower carbon emissions, often in compliance with the United Nations’ 17 Sustainable Development Goals.

But financial factors have also come into play. As Bloomberg noted, research from Deutsche Bank found that green bond borrowers got a reduced rate vis-a-vis their outstanding debt on 61% of the deals sold in the second half of 2020. That was a higher percentage than during the first half of the year.

It is also less expensive to issue green bonds nowadays than it used to be.

“We are now able to go to issuers and tell them, ‘If you issue your debt in green format, you will actually save money,’ meaning that the hurdles we had to overcome for our clients to issue green bonds are now gone,” Henrik Johnsson, co-head of investment banking EMEA at Deutsche Bank in London, told Bloomberg.

Photo Courtesy Amy Hirschi

Worldwide, overall green bond issuance recently passed $1 trillion, with 90% of sovereign issuance coming from Europe. Green bond issuance in Europe has risen five-fold over the past half-decade and accounted for more than 50% of global issuance last year. Even so, green bonds only make up 2.6% of total EU bond issuance. That percentage needs to rise considerably if the EU is to reach its climate goal of net zero emissions by 2050.

The European Green Bond Standard (EGBS) should help. It was established to bolster oversight of the sector and funnel money to projects and programs that can help it meet its climate goals. The EGBS will use the definition of green economic activities as laid out in the EU’s classification of climate-friendly assets. It also aims to provide tougher regulatory oversight than what is currently seen for market-driven green bonds.

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