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The return of green bonds

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Social bonds fund pandemic response while Europe drives green-bond demand

Dominic Kini

Dominic Kini
European Credit and Green Bond Strategist

Green bonds are about ‘building things’ – hard to do during lockdowns – while social bonds are about ‘doing things’, which makes social bonds ideal for responding to the coronavirus pandemic. Even so, by September, issues of green bonds during 2020 were ahead of the same period last year and as initial lockdowns ease, we expect more.

Green bonds raise funds for environmentally-friendly projects while social bonds finance projects such as healthcare that address specific social issues. Sustainability bonds fund a mix of green and social projects, so social and sustainability bonds can fund both healthcare and the broader economic pandemic response.

Issuance of social bonds between January and September was five-times as high as in 2019 at USD49.9 billion – far more than the USD17.2 billion issued in the whole of last year – while issuance of sustainability bonds rose 81 per cent by September at USD40.3 billion.

However, USD168 billion of green bonds were issued this year by September, exceeding the USD158 billion at the same stage of 2019 and heading towards last year’s total of USD230 billion. Europe accounted for 44 per cent of issues, emerging Asian countries 20 per cent and North America 19 per cent.

That took the overall market for green bonds to USD778 billion, of which 45 per cent is denominated in euros, 30 per cent in dollars and 12 per cent in Chinese renminbi.

Some of this growth is coming from sovereign countries. Germany has issued its first green bond, receiving EUR33 billion of orders for a USD6.5 billion 10-year bond. It also plans a 5-year issue of up to EUR4.5 billion this year to be followed by 2-year and 30-year bonds. Germany has identified EUR12.7 billion of eligible green spending in its 2019 federal budget, and although this is existing planned expenditure, green bonds bring stronger transparency and reporting to spending.

The overall market for social bonds reached USD91.9 billion by September with sustainability bonds totalling USD113 billion. Europe has issued most of these bonds and 55 per cent are denominated in euros against just 27 per cent in dollars.

But the European Council of Ministers agreed in July that 30 per cent of the EU’s EUR1,074 billion budget and the EUR750 billion post-pandemic recovery fund should be climate related, complying with targets to achieve climate neutrality by 2050.

As the EU is now authorised to borrow up to EUR750 billion on the capital markets by 2026, could it issue green bonds? Raising 30 per cent of that would dwarf all other green-bond issuers.

However, there are hurdles. First, EU green-bond standards and definitions are yet to come into force. Second, funds borrowed by the EU can be used only to address the consequences of COVID-19. And third, the funds will be spent by member states, requiring the EU to impose additional conditions on how they spend the money – after all, the whole point of green, social and sustainability bonds is knowing exactly what projects they fund.

But there are projects to be funded, particularly in countries with existing green-bond frameworks. The question is whether governments allocate those projects to their own green or social bonds, or prefer EU green or social bonds.

First published 11 September 2020.

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