Germany’s Debut Five-Year Green Bond Meets Tepid Demand

Germany’s second foray into green debt received a surprisingly lukewarm welcome from investors.

It raised 4.6 billion euros ($5.4 billion) from the debut auction of five-year green debt, yet demand only exceeded the amount offered by 1.29 times. That lagged the oversubscription rate for its most recent sale of conventional five-year debt, and was far off the near-record demand seen in its first issue of 10-year green securities.

The weak result also comes at a time of heightened bidding for haven assets, given uncertainty over the outcome of the U.S. election. Critics say Germany’s green label is misleading as it is raising new environmental debt to finance previous federal spending.

While intended to fund what the country’s Finance Minister Joerg Kukies called an “ambitious climate program,” the green bonds are relegated to rollover finance because of a legal quirk that requires lawmakers to approve draft budgets before the onset of the fiscal year.

“Instead of labeling expenditure retrospectively, fresh money should be collected in the financial market for climate protection,” said Sven-Christian Kindler, lawmaker of the Green party in Germany’s lower house. “Simply labeling bonds green without spending even one euro more on climate protection is greenwashing.”

The practice of greenwashing, where the environmental benefit of an investment is exaggerated or misrepresented, is in focus as appetite grows for strategies that take environmental, social and governance factors into account. The European Union, where the majority of the world’s ESG assets are based, is stepping up its scrutiny of the industry -- forcing asset managers to quantify and disclose how much their investments are involved in damaging the environment.

A spokesperson for the German finance ministry told Bloomberg News that federal green bonds “create transparency” around the government’s environmental spending.

Different Approach

Issuing green bonds to finance existing projects is allowed under existing and voluntary guidelines from the International Capital Markets Association. However, other countries have taken different approaches. The Netherlands and France, for example, stipulate that at least 50% of new green bond proceeds be earmarked for current or future expenditure.

The Netherlands split the proceeds from its debut 5.985 billion-euro issue in 2019 evenly between expenditures that year and in 2018. The country sought a balance between investor preference for new spending and its own aim of “a high level of certainty” over the use of proceeds, said Jasper Meeuwissen, a spokesman for the Dutch State Treasury Agency.

Advisers on France’s inaugural green bond said it was “good practice” and “more suitable in the eye of investors” to focus on current and future projects, according to Alexandre Vincent, green bond manager at Agence France Trésor.

German companies have taken a variety of approaches. Deutsche Bank AG, which sold a debut green bond in June, has made no commitment to invest part of its green bond proceeds in new assets. Energie Baden-Wuerttemberg AG’s hybrids sold in 2019 largely funded new projects.

Greenwashing Seen as Biggest Obstacle to Investing Sustainably

Greenwashing concerns aren’t diminishing the popularity of ESG investments. Sustainability-focused funds around the world took in a record $81 billion in the third quarter, according to a report from Morningstar Inc. Multi-billion order books for green sovereign bonds also suggest that investors aren’t deterred.

“It’s good not only to finance new projects, but also to give more transparency over what’s already been financed,” Bram Bos, a senior portfolio manager at NN Investment Partners told journalists in October. “For us, both works.”

©2020 Bloomberg L.P.

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