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The EU sold its first green bond to record demand on Tuesday, taking its first step to potentially become the biggest issuer of environmentally friendly debt.
The 15-year green bond raised €12bn and received more than €135bn of demand, the European Commission said, making it the largest green bond launch and the highest level of demand for a green bond sale to date.
The bond, which will finance member states’ environmentally beneficial projects as part of the bloc's Covid-19 recovery fund, is the first step for the EU, which aims to be carbon-neutral by 2050, towards becoming a leading force in the fast-growing green debt market.
Thirty percent of the EU’s estimated €800bn Covid-19 recovery scheme, which gives grants and loans to member states until end-2026, will fund environmentally beneficial projects.
Up to €250bn of green bond issuance to back that could transform the EU into the world's biggest green bond issuer.
Such is the scale of the issuance that analysts at BofA Securities expect the EU will issue €35bn to €45bn in green bonds every year — equivalent to what all European sovereign and supranational borrowers issued in 2020.
Bram Bos, lead portfolio manager for green bonds at NN Investment Partners, said the scale of issuance from the EU would increase the liquidity of the green bond market significantly.
“I think the possibility and barriers to start 'greenifying' your government portfolios is getting easier and easier with these kinds of issuances from the EU, which in terms of size is massive,” Bos said.
Tuesday's bond priced for a yield of 0.453%, the commission said.
Jens Peter Sorensen, chief analyst at Danske Bank in Copenhagen, saw pricing near fair value based on the EU’s outstanding bonds.
That means the EU is paying a lower new issue premium than it usually pays for its bond issues, according to Danske Bank data, suggesting a pricing advantage.
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.
“One would have expected because of all of the supply they might have come cheaper, but it shows you how much demand there is for the green bonds,” Sorensen said.
All the green bonds the EU will issue backing the recovery fund will comply with the International Capital Market Association’s (ICMA’s) 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.
Still, 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 and member states have to provide details on how they will contribute to their green transitions.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.