Green Bonds Are the Fresh Way to Get Germany to Borrow

(Bloomberg Businessweek) -- Governments are getting set to cash in on a booming market in green bonds—debt that funds projects with environmental benefits. Fueled by the growing awareness that more radical action has to be done to combat climate change, and by the need to fund it, Europe is taking the lead.

The European Union needs as much as €290 billion ($321 billion) per year in extra financing to reach a goal of being a climate-neutral economy by 2050. Germany looks set to issue its inaugural sovereign green bonds next year—potentially more than €10 billion worth. It’s the first country with a AAA credit rating to do so after the Netherlands this year. That’s a big deal for the green bond market. “German government bonds are the benchmark ‘risk-free’ asset in Europe,” says Wolfgang Bauer, a money manager at M&G Plc. “It’s fair to say that there would be demand.”

Sovereign green debt issuance has climbed to $76 billion this year, up 60% from $47 billion last year, according to data compiled by BloombergNEF. Germany has been slow to come to the party. But boosting spending on green projects may be a more acceptable way for the fiscally conservative country to do some borrowing and spending that many economists say is badly needed to stimulate an economy that is perilously close to recession. “There is this focus by the people on the climate,” says Ronald van Steenweghen, a money manager at Degroof Petercam Asset Management, which has holdings in European government bonds. “I’m not saying it is an excuse to fiscally ease, but doing something on infrastructure, on digital and climate—maybe something is shifting.”

There’s also plenty of interest from investors. Many institutional asset managers turn to green bonds because some clients, such as pension funds, institutions, and individuals, want their portfolios to reflect their concern about the environment. Pacific Investment Management Co. is starting its first bond fund linked to tackling climate change. Axa Investment Managers, one of Europe’s largest funds, has called on the EU to set up a €500 billion Climate Emergency Fund, which would issue debt to take advantage of record-low interest rates.

Poland will likely be the first in 2020 to sell more green debt, having been the original nation to issue it in 2016. It has spent the funds raised so far on investments in renewable energy, clean transport, sustainable agriculture and afforestation. Belgium, France, and Ireland have all followed, along with state agencies elsewhere, while Spain says it plans to issue next year. “Thanks to the issue of green bonds, we were able to attract new investors who would not be able to buy our bonds otherwise,” says Ewa Wajszczuk, a Polish finance ministry official.

One key bond buyer is still largely on the sidelines for now. The amount of sovereign debt that’s green—less than 5% of the total—is probably too small for the European Central Bank to target it when it’s buying bonds as part of its quantitative easing program. (It has purchased some green debt as part of its strategy of buying a broad array of bonds.) But the bank may be willing to signal a preference for green bonds in the future, according to Citigroup Inc. That could prompt a snowball effect, boosting both the supply and demand. Christine Lagarde, the new president of the ECB, said in comments after her first policy meeting on Dec. 12 that the central bank would look for ways to contribute to the fight against climate change, but that it would be helpful if the EU could agree on standards defining green investments.

Either way, the sovereign green bond market appears to be heading in only one direction, with countries looking to build up a supply of bonds in a range of maturities. That will help make the debt more tradeable, since it will be easier for investors to build portfolios around green bonds. Germany will look to issue a “green twin” for the conventional bonds it sells, Tammo Diemer, the co-head of Germany’s Federal Finance Agency, told German newspaper Boersen-Zeitung. A twin would have the same maturity and coupon as the regular bond.

Outside Europe, sovereign green bonds have been issued by Chile, Fiji, Indonesia, and Nigeria. In the U.S., municipal bonds dubbed green are beginning to make up for a lack of green Treasuries. The California State Teachers’ Retirement System sold a debut green bond this month. It’s funding an expansion of its headquarters, which will have energy-efficient and water-conserving features. BlackRock Inc. strategists have found that there is no pricing difference between green bonds and conventional securities—evidence that the debt is no longer just a niche investment strategy. —With Adrian Krajewski and Dirk Gojny

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Neil ChatterjeePat Regnier

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