Monday, January 24

First EU green bond sparking ‘outright tumult’ in investor demand

Europe’s first green bonds are finally arriving and investors are bracing for massive interest.

The European Union sale, scheduled for next week, will be the initial salvo of up to 250 billion euros ($ 289 billion) of those assets that will make it the world’s largest green borrower. In terms of potential demand, the block just has to beat: a debut social bond last year broke all-time records with 233 billion euros of orders.

The bonds will be seen as one of the safest assets, a future rival to US Treasuries, and will come at a time of growing demand for funds for anything with an environmental label. The offering follows the largest month in history for sovereign green sales in September, as more countries enter the market for the first time.

“It will validate the start of a greener Europe,” said Ronald van Steenweghen, portfolio manager at Degroof Petercam Asset Management. “It adds another big risk-free green bag to the market, so certain types of investors are eagerly awaiting this.”

The EU is expected to make its debut through a 15-year bond, syndicated by banks, to raise up to 10 billion euros, according to analysts at ING Groep NV and Danske Bank A / S. Banco Santander SA also expects bonds to 30 years, for a total of up to 15,000 million euros.

Revenues will be channeled to member states for green projects such as renewable energy. The debt is part of a pandemic recovery fund agreed last year to help meet the goal of reducing emissions by at least 55% by 2030 from 1990 levels.

The sale is not without controversy: the bloc will not use its own green bond rules that it hoped would be a “gold standard” for the world market, as they have not yet been approved by the European Parliament and Council. Instead, it will be based on a combination of its own classification for green spending and existing guidelines from the International Capital Market Association.

“I don’t think it discourages investors, it doesn’t stop me from thinking this is going to be a real riot,” said Kerr Finlayson, head of the frequent borrowers group union at NatWest Markets Plc. “It will be the jumbo size of the range, and I think it will definitely be well received, there is no question about that.”

The sheer size of EU sales means that getting involved in the book selling act will be crucial for banks wanting to get increased rates from this burgeoning market. So far this year, JPMorgan Chase & Co., BNP Paribas SA and Citigroup Inc. top the green league table.

Expense review
Investors will want to ensure that funds are used by the bloc’s myriad member states for legitimate purposes, at a time when the market and regulators are increasingly scrutinizing sustainably labeled assets for signs of greenwashing. or exaggerated environmental benefits.

“The fact that there are impact reports on how the funds have been spent provides some added value and he hopes that member states will be more careful about the sustainability of their recovery spending,” said Bas Eickhout, Dutch green member of the European Union. . Parliament.

Over the next five years, the EU’s plans would more than double the market for euro-denominated green bonds of sovereign and supranational issuers, according to analysts at Bank of America Global Research, including Sphia Salim and Kay Hope. Demand will be driven by banks and reserve managers, who are increasingly being incentivized to grow their green assets, they said.

That demand should translate into a premium on conventional debt, or the so-called greenium. The UK managed to cut 2.5 basis points in borrowing costs with its recent green debut, the highest among investment-grade nations, according to underwriter HSBC Holdings Plc.

The EU could overcome that. Lombard Odier Investment Managers expects a greenium of between 1 and 4 basis points.

The block “has the capacity to generate the volume of green bond issuance that the green bond market is looking for,” said Erika Wranegard and Nic Hoogewijs, from Lombard Odier’s fixed income portfolio team. “It is very encouraging.”

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