According to the Financial Times, the EU Commission is considering financing part of the joint debt for the European Recovery Fund through green bonds. Of the 750 billion for the Recovery Fund, around 200 billion financing sustainable investments could be issued through green bonds. Such bonds are particularly sought after by investors who invest funds according to environmental or social criteria.
Recently, the German government launched its first green bond on the market, the “Green Bund”. The interest rate of the green Bund is to be kept at the same level as that of a comparable ordinary bond by means of market interventions. If the interest rates of the green Bund and its conventional twin bond move away from each other, the German Finance Agency exchanges the bonds for each other until the price is identical again. The aim of this structure as twin bonds is to ensure that the liquidity of the green bond is identical to that of conventional bonds and that investors can resell it just as easily. If this was not the case, investors would possibly demand a higher so-called liquidity premium, meaning that they would want to pay a little less for the green Bund than for an ordinary one.
The twin structure prevents the emergence of an independent risk-free yield curve for green bonds as a reference value for other green securities. In this way, the federal government is counteracting the development of an independent market for green bonds. A separate market for green bonds could reflect the various risks and opportunities: On the one hand, investors may be willing to accept a lower yield because green bonds have lower environmental risks. On the other hand, they may demand a premium for the lower liquidity of green bonds. Without such a green yield curve, it is uncertain what an effect such factors will have overall.
The current reference for green bonds is the European Investment Bank as the largest issuer. The EIB has a very good credit rating, but its solvency is not quite as good as Germany’s. Moreover, German Bunds are highly liquid. Therefore, the German government bond with the lowest interest rate is the reference value. With the green Bund, Germany could have created an interest rate reference for the green bond market, in addition to the traditional reference value of the German Bund as the bond with the lowest interest rate.
Moreover, the Green Bund will only refinance existing investments. When a traditional bond financing a sustainable project is due, it is replaced by a green bond. This rules out the possibility that such bonds would finance truly additional sustainable projects that would not have come about without them. Such a green bond does not boost the sustainable transformation.
The EU Commission must not repeat the mistakes of the green Bund. The EU Green Bond to finance the European recovery fund can now achieve what the federal bond failed to: creating a yield curve for green bonds as a benchmark for European financial markets. This would be made possible by the large volume of envisaged borrowing via EU green bonds. In order to avoid competing standards, the EU Commission should stick to the planned EU Green Bond Standard. It is now up to the EU Commission to decisively advance green financial markets in Europe.
With green European greetings,
Link to the Financial Times report on the planned green EU bonds (paywall): https://www.ft.com/content/7a893f6d-08c9-426c-8f19-aa19d434b018
Link to an analysis of the green federal bond by Dr. Moritz Kraemer on the blog of Finanzwende (in German): https://www.finanzwende.de/blog/die-nicht-so-gruene-bundesanleihe/?L=0
P.S.: Save-The-Date | Italian-German webinar on “Funding the Corona Recovery by curbing tax dumping and money laundering” with Finance Ministers Scholz (Germany) und Gualtieri (Italy) on Wednesday, 30.9.2020 7-8pm. Register here: https://us02web.zoom.us/webinar/register/WN_Tt9-EIA_Q9-1eC_QetcPCg