Insight & Analysis

German Green Bund set to spur corporate issuance

Water droplets on a green leaf

Germany’s debut Green Bund looks set to trigger more corporate issuance across Europe as new EU guidelines promise to make disclosure easier.

The German government is planning to issue a Green Bund next year for the first time. The debut offering will follow green sovereign issuance from France, The Netherlands and Poland and is likely to galvanise a raft of other European countries including Spain, Sweden and Denmark to follow suit. Further afield, Chile, Fiji and Nigeria have sold green bonds, marking the start of a global trend that proponents say will act as a catalyst for more corporate green bond issuance around the world.

“Against the backdrop of Germany’s specific role as a benchmark issuer in international capital markets, this process must be conducted with utmost scrutiny and discretion,” the German Federal Ministry wrote in a recent statement, reported by Bloomberg Environment, that outlined the different green Bund options it is exploring.

It may be cautious, but progress is unmistakable, particularly since Bunds are a benchmark for the eurozone, enthuses Sean Kidney, Co-Founder and CEO of the Climate Bonds Initiative. “When you have one of the most conservative issuers in the world issuing green bonds something is finally moving on this planet. The instruments have the same credit quality as other issuance because they are fully backed by a corporation or government. It’s taking root and spreading like wildfire.”

Over the last decade, annual green bond issuance has grown from zero to nearly US$170bn. In 2019, global issuance is expected to reach a record US$200bn – however green bonds remain a tiny fraction of the US$100tn global bond market, according to Climate Bonds Initiative data.

Enthusiasts argue more government issuance will trigger widespread corporate issuance, pushing green bonds from niche to mainstream. Witness how France’s 2017 issue of €7bn of debt with a 22-year maturity proves how sovereign issuance acts as a catalyst to others, says Kidney. “It’s no accident that the world’s largest issuer of green bonds in the first half of this year was France where the French State has led with a significant contribution to benchmark pricing and liquidity.”

The French government specifically picked out tenors where there wasn’t benchmark pricing in green bonds as part of an active intervention in growing the market, he says. France ranks first in Europe and third globally with cumulative green bond issuance of €37.7bn as of March 2018.

Disclosure challenge

Significant barriers to growth remain, however – and none more so than the disclosure burden. If a corporate or sovereign borrower wants to sell a green bond, it must lay out its environmental strategy and detail how it will use the proceeds. Borrowers must also report that they have kept their promises and show what the money has been spent on to reassure investors they aren’t greenwashing. It’s the kind of disclosure, new to the debt markets, that many companies say they find off-putting.

But progress is under way here, too. The EU’s Technical Expert Group (TEG) has just published a report announcing the introduction of an EU Green Bond Standard to simplify the current market for issuers and investors. It’s part of the EU’s new sustainable finance taxonomy which aims to standardised guidelines around sustainable activities, likened to a green encyclopaedia for financial market participants. Elsewhere, FTSE and Russell recently announced new indices enabling investors to judge the environmental credentials of sovereign countries and regions.

Besides, companies mulling green issuance shouldn’t over-complicate the process, says Kidney, who says that issuing corporates should focus on what they are financing – or re-financing – and prove the metrics fit. “Take a transport company as an example,” he says. “It only needs to show how the financing meets simple criteria like emissions reduction for the next five years. It’s not overly complicated.”

Sticky investors

Green issuance is also a powerful investor engagement tool. It nurtures a sticky investor base that makes the additional disclosure and engagement worth it and can also help on pricing, allowing companies to borrow at preferential levels. It won’t be long before green bonds are a central part of companies’ annual financing plans, predicts Kidney. “Every corporate treasurer we talk to says this looks hard – but once they understand it, many have gone on the road as zealots for change.”

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