EU first green bond sets record size and demand

EU budget commissioner Johannes Hahn.

The European Union sold its first ever green bond attracting record demand, potentially making the bloc the biggest issuer of environmentally friendly debt.

The €12bn sale of 15-year debt generated more than €135bn of orders, slightly eclipsing the UK’s £10bn debut in September.

The EU, which like many countries is currently facing an energy squeeze, aims to be carbon-neutral by 2050 – an important step it sees towards becoming a leading force in the fast-growing green debt market.

EU budget commissioner Johannes Hahn estimated that the bond priced with a “greenium” of 2.5 basis points. Greenium refers to the slightly lower yield these bonds pay relative to conventional peers given a dedicated investor base chasing a limited pool of assets.

The proceeds of the bond will be passed on to member states and targeted on areas such as energy efficiency, transport and nature protection.

The issue is the first of an expected €250bn of the European Commission green bonds, comprising about a third of the bloc’s €800bn Covid-19 recovery fund, which gives grants and loans to member states until end-2026, to fund environmentally beneficial projects and eradicate greenwashing

Analysts at BofA Securities expect the EU will issue €35 bn to €45 bn in green bonds every year – equivalent to what all European sovereign and supranational borrowers issued in 2020.

The EU’s debut green bond “will help strengthen the role of the EU and euro in the sustainable finance market,” said Hahn “This will serve as an inspiration to other issuers.”

All the green bonds the EU will issue backing the recovery fund will comply with the International Capital Market Association’s (ICMA) green bond principles, seen as the market standard.

They differ from the green bond standards the EU itself has proposed based on its taxonomy of green activities, which are yet to be finalised.

However, some aspects of the EU’s issuance will go beyond ICMA’s principles. In order for member states’ expenditures to qualify for the green EU funds, investments are required to not cause significant harm to any of the EU’s environmental objectives. Member states have to provide details on how they will contribute to their green transitions.

Brussels joins the ranks of many member states, including Germany, France, Spain, Italy and Poland, in tapping the green debt market.

Demand has skyrocketed with estimates from AXA Investment Managers showing overall it is on course to hit €400bn, doubling 2020’s total.

©Markets Media Europe 2021

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