First green EU bond to spur ‘absolute riot’ of investor demand
Europe’s first green bonds are finally arriving, and investors are gearing up for massive interest.
The European Union sale, expected in the coming week, will be the starting salvo for as much as €250 billion of such assets that will make it the world’s biggest green borrower. In terms of potential demand, the bloc only has itself to beat: a debut social bond last year smashed all-time records with €233 billion of orders.
The bonds will be seen as one of the safest assets, a future rival for US Treasuries, and come at a time of surging fund demand for anything with an environmental label. The offering follows the biggest-ever month for sovereign green sales in September, as more countries enter the market for the first time.
“It will validate the start of a greener Europe,” said Ronald van Steenweghen, a portfolio manager at Degroof Petercam Asset Management. “It adds another big pocket of risk-free green paper to the market so certain types of investors are eagerly awaiting this.”
The EU is expected to make its debut via a 15-year bond, syndicated by banks, to raise as much as €10 billion, according to analysts at ING Groep and Danske Bank. Banco Santander is also expecting 30-year bonds, for a total of up to €15 billion.
The proceeds will be funnelled to member states for green projects such as renewable energy. The debt is part of a pandemic recovery fund agreed last year, to help meet a goal to cut emissions at least 55% by 2030 from 1990 levels.
The sale is not without controversy: the bloc won’t be using its own green bond rules that it hoped would be a “gold standard” for the world market, as they haven’t been signed off yet by the European Parliament and Council. Instead it will rely on a mix of its own classification for green spending and existing guidelines from the International Capital Market Association.
“I don’t think it will put investors off - it doesn’t stop me thinking this is going to be an absolute riot,” said Kerr Finlayson, head of frequent borrowers group syndicate at NatWest Markets. “It will be the jumbo size of the range, and I think it will definitely be well received, there’s no doubt about that.”
The sheer size of the EU sales means getting in on the bookrunning act is going to be crucial for banks wanting to grab growing fees from this burgeoning market. So far this year, JPMorgan Chase, BNP Paribas and Citigroup top the green league table.
Investors will want to ensure the funds are used by the bloc’s myriad member states for legitimate purposes, at a time when the market and regulators are increasingly scrutinising sustainably-labelled assets for any signs of greenwashing, or overstated environmental benefits.
“The fact that there will be impact reporting on how the funds have been spent does provide some added value and hope that member states will be more careful on the sustainability of their recovery spending,” said Bas Eickhout, a Dutch Green member of the European Parliament.
Over the next five years the EU’s plans would more than double the market of euro-denominated green bonds from sovereign and supranational issuers, according to Bank of America Global Research analysts including Sphia Salim and Kay Hope. Demand will be fuelled by banks and reserve managers, who are being increasingly incentivized to grow their green assets, they said.
That demand should translate into a premium over conventional debt, or so-called greenium. The UK managed to shave 2.5 basis points off borrowing costs with its recent green debut, the most among investment-grade nations, according to underwriter HSBC Holdings.
The EU could top that. Lombard Odier Investment Managers expects a greenium between 1 and 4 basis points.
The bloc “has the ability to deliver volume in green bond issuance which the green bond market is looking for,” said Erika Wranegard and Nic Hoogewijs, from Lombard Odier’s fixed income portfolio team. “It is very encouraging.”
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