EU gives go-ahead for first green bond
An article by Christian Kopf
Head of Fixed Income and Member of the Union Investment Committee
Green bonds are in high demand. With its framework published today, the European Union gives the go-ahead for the issuance of green bonds to finance the EU Recovery Plan. The EU thus becomes the leading issuer in the green bond market. Overall, we expect strong growth for the European green bond market by the end of 2022.
Europe's capital market is facing a huge reallocation of investment funds towards green projects, with green bonds acting as an important financing instrument on the way to a climate-neutral European Union (EU). Now the EU can get started: With the green bond framework, the Community has established a framework to start issuing its own green bonds. The first EU green bond is due to come to market in October. The community of states wants to finance around one third of the funds for the "Next Generation EU" (NGEU) reconstruction fund via green bonds by 2026, i.e. around 250 billion euros. This should quickly make the EU the largest green bond issuer in the world.
We welcome the fact that the EU is thus creating another safe investment – only this time in green. Union Investment itself currently manages an investment volume of around seven billion euros in green bonds. EU green bonds will meet a very receptive and willing market: Investors are ready and the momentum in the market remains high. By the end of 2022, we forecast the volume of outstanding European green bonds to grow to one trillion euros.
We welcome the fact that the EU is thus creating another safe investment – only this time in green.
The EU is expected to issue up to €40 billion of green bonds annually by 2026 and quickly become the world's largest green bond issuer – ahead of France, which has itself issued €38 billion of green bonds so far. By comparison, Germany can currently raise a maximum of €18 billion per year via green bunds, although the demand for green bunds is many times higher. The reason for this is the low level of green investments in the federal budget. Here, the new EU Green Bonds should help to satisfy investor demand.
As a growing asset class, green bonds not only offer an opportunity to express ethical convictions on the capital market, but also to increase diversification and yield in the bond portfolio. However, green bonds are not a no-brainer: careful analysis is necessary both at the level of the individual issue and at the level of the issuer.
The EU issues its green bonds on the basis of the currently authoritative, recognised industry standard of the International Capital Market Association (ICMA). This creates transparency regarding the use of funds and guarantees that a second opinion is obtained to ensure the correct use of funds. However, green bonds issued by the EU on the basis of the green bond framework presented today will probably not meet all the criteria of the future European green bond standard. This is because the green projects of the EU Reconstruction Programme would otherwise have to meet the mandatory requirements of the EU taxonomy, which is to define green investments in the future. However, this is likely not the case and shows how restrictive the EU Commission's proposal for the European green bond standard is by referring to the EU taxonomy.
As at: 7 September 2021