Some investors say green bonds do little to incentivise governments to increase funding for environmental projects
Some investors say green bonds do little to incentivise governments to increase funding for environmental projects © Bloomberg

Investors queued up to buy Germany’s first ever green bond on Wednesday, as the eurozone’s safest borrower took advantage of surging interest in environmentally friendly investment.

The German Treasury attracted more than €33bn of bids for up to €6bn of 10-year debt, in a deal seen as a landmark step in the development of Europe’s green bond market that will help establish a benchmark for pricing other green transactions.

But it has also reawakened questions about this type of debt, with some investors saying it does little to incentivise governments to increase funding for environmental projects.

“Germany has low enough borrowing costs to begin with, and I would like to think the German government would go ahead with investments in green technology and infrastructure regardless of this issuance,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “All you are doing by giving some bonds a green label is making the rest of your debt a little bit browner.”

Issuance of green bonds has exploded in recent years, as fund managers hunt for assets linked to environmental, social and governance criteria that are increasingly important to some clients. A total of $263bn of this type of debt was sold last year, up from less than $1bn a decade ago, according to figures from Moody’s.

Germany follows the likes of France, Poland, Ireland and the Netherlands, which have tapped the market in recent years, and Sweden earlier this week. European politicians including German chancellor Angela Merkel have emphasised that the funding for the Covid-19 recovery should have a green tinge.

Column chart of Global green bond issuance ($bn) showing Rapid rise of green bonds

The Jülich research group in Berlin estimated that Germany’s plan to become carbon neutral by 2050 could cost as much as an extra 1.1 per cent to 2.8 per cent of gross domestic product a year — underlining the massive level of funding the transition is likely to require.

Germany’s green bond programme will involve up to €12bn in issuance this year, across a range of maturities from two to 30 years. The finance ministry has outlined €12.7bn of qualifying expenditure from last year’s budget, covering everything from the construction of new bike lanes to research into renewable energy.

However, this spending is not necessarily conditional on the issuance of green debt.

Sabine Mauderer, a member of the Bundesbank’s executive board, said it was important that green bonds encourage the financing of new projects, as well as bankrolling the previous year’s budget.

“The new green Bund is already fostering a political debate about green projects — here I see things changing,” she said. “The signalling effect of these new bonds will be important, but the main change needs to be made in the real economy.”

Despite the reservations, many investors view the sale as a significant step. German bonds serve as the risk-free benchmark for assets across the eurozone, and the new debt could serve the same purpose for green assets.

“It is important to investors that they will be about to buy German green bonds across the full range of maturities, and that matters when you are the pricing reference point for trillions of euros of securities,” said Gerald Podobnik, chief financial officer of Deutsche Bank’s corporate banking unit, who is also a member of the German government’s sustainable finance advisory council.

Unlike existing sovereign green debt, Germany’s bonds will be “twinned” with an equivalent conventional bond. Once the bonds have been sold, investors will be able to swap their green bonds for the conventional equivalent at any time, a structure designed to allay fears that smaller, less liquid green securities would trade at a lower price. The ministry will seek to ensure the price of the green twin is always at least that of the conventional bond, by purchasing green bonds if it falls below that level.

The new 10-year bond was expected to be sold at a yield of roughly minus 0.46 per cent, 0.01 percentage points below the yield on the twin conventional bond, according to banks on the deal. Over time the price of new green bonds in the primary and secondary market will provide a useful guide as to what premium, if any, investors are willing to pay for green debt.

“You will be able to see exactly how much people think green is worth,” said David Zahn, head of European fixed income at Franklin Templeton.

Lupin Rahman, a portfolio manager at Pimco, predicted that Germany’s green bond plan would inspire smaller European countries and emerging market nations to follow suit. 

“Given there is scope for pricing to be slightly tighter than the conventional bond curve, that is an incentive for other debt management offices to go ahead with their own issuance,” said Ms Rahman, who both runs Pimco’s emerging market sovereign credit operations and oversees its integration of ESG issues.

Chile issued a green bond last year and Mexico recently held a non-issuance roadshow on its sustainable development goals, which was widely seen as a precursor to issuing green bonds. 

Even so, a persistent “greenium” in bond markets would present another challenge to the ESG industry’s claims that investors can earn superior returns while also doing good. If green debt is more expensive, and therefore lower yielding, then buying it would be less profitable than buying run-of-the-mill bonds.

“The corollary of lower borrowing costs for companies and governments is lower yields for investors,” said James Athey, who manages government bond portfolios at Aberdeen Standard Investments. “There's no getting away from that.”

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