One More Government Opts for Green Bonds

    Stockholm (NordSIP) – On October 10, Ireland announced the issue of a €3 billion green bond. European investors showed a very strong interest, and among them, Nordic institutions such as Alecta, AP2, Danske Bank Asset Management and Varma subscribed to 12% of the total issue.

    Lars Mac Key, who is responsible for DCM Sustainable Bonds at Danske Bank, the only Nordic bank selected by the Irish government as a joint lead manager for the bond, shared his comments on the process with NordSIP.

    After a successful roadshow where investors had a chance to examine the new Irish framework, which sets the conditions that allow for the distinction between a green bond and a regular bond, the transaction launched in the morning on October 10. The initial demand was strong and subscriptions reached €11.3 billion, 3.8x the size of the issue. The pricing was set at MS + 12bp, which was 3bp better than the first guidance of MS + 15bp, and corresponds to a new issue premium of 1bp.

    Beyond the success of the issue itself, Mac Key puts this first Irish issue in a historical context and explains what is in it for Ireland right now.

    “After COP21 in Paris in 2015, a race started between different nations to issue the first green state bond,” he says. “According to the COP21 agreement, the EU has committed to reducing its carbon footprint by 40% by 2030 compared to the 1990 level. Green bonds in general and sovereign green bonds in particular are a fantastic instrument to help finance this transition.”

    “As COP21 was held in Paris, France grabbed the opportunity to position itself as the world’s green financial center, and became the first proponent of sovereign green bonds,” Mac Key continues. “It was however in Poland that the first green government issue saw the light in late 2016. It totaled €750 million, with a maturity of 5 years. In early 2017, France came with its first green government bond, which amounted to €7 billion, with a maturity of 22 years. The issue was eagerly anticipated and translated into a very strong €23 billion book. Earlier this year, Belgium entered the market with a €4.5 billion bond, while Poland added another €1 billion issue and even Lithuania launched a €20 million issue. France increased its inaugural green bond to almost €15bn.”

    “Ireland has already been affected by climate change, as the country has experienced droughts as well as storms of extraordinary strength. The government also had to take tough measures to get the country out of the recent debt crisis. As a result, they developed a series of goals and documented guidance on their plans and actions. Green financing has therefore become accessible for Ireland’s dedicated and well documented environmental projects,” says Mac Key.

    “Green bonds issued by government bonds are not especially different from those issued by private, regional or municipal entities,” Mac Key continues. “The assets underlying the issues are typically the same, but governments have more options. Traditionally companies and municipalities finance physical assets they own, banks and agencies, like Kommuninvest, finance loans secured by physical assets. A government, in addition to physical assets, can finance tax credits or other subsidies such as those obtained through public programs. A green bond could possibly contribute to incentives shifting citizens to use public transportation instead of their own car, for example.”

    According to Danske Bank’s numbers, the market for green government bonds only represents some 7% of all outstanding green bonds worldwide. This includes bonds from Fiji, Nigeria and Indonesia and amounts to €25 billion. Thanks to the recent issues, in the Euro segment of the 2018 green bond market, the proportion lies at 30%.

    “By law, most countries cannot issue debt that is ear-marked to specific projects,” Mac Key explains. “To qualify as green, an issuer must be able to guarantee that the proceeds will be used exclusively for an environmental project, such as renewable energy, energy-efficient building, sustainable transport, sewage treatment and access to drinking water, sustainable forestry and agriculture, or adaptation to climate change, for example. Poland chose to pass a law that allows the country to ear-mark financing to specific projects, whereas France, Belgium and Ireland have not chosen to alter their respective laws but have committed to investments in green projects corresponding to the amounts of each issue.”

    For Mac Key, the market is ready for more green government bonds. “States now have a good template. Hong Kong for example has already announced programs in the order of €10 billion. Many states are looking at the possibility. In Sweden, the government conducted a study to find out how the state can help strengthen the green bond market. The investigation concluded that the Swedish state has many assets and great opportunities, and that they should issue a green bond. As the state is in no need of new funding, the debt office is still contemplating the possibility, and we hope that they will soon take the step. Sweden is otherwise a strong market for green bonds. The Swedish krona is the fourth most widely used currency for green bonds after the Euro, the US Dollar and the Chines Yuan, thanks to strong and sustainable conscious local investors. This year, approximately SEK 60 billion have been issued in green bonds compared to SEK 38 billion in FY 2017, which represents approximately 11% of all bonds in Swedish kronor in 2018. But the year is not over yet, and there is more coming!”

    Image from InspiredImages on Pixabay

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

    Latest Posts


    partner insights

    Find out more >

    NordSIP Insights Handbook

    What else is new?

    ESG Leaders 2023