Stockholm (NordSIP) – In October 2019 the Irish Government issued a €2 billion green bond through a tap of a 2031 fixed income security originally issued in October 2018. Proceeds from the green bond will be allocated to finance new projects, or to refinance existing projects that qualify under the Irish Sovereign Green Bond framework. The framework was reviewed by Sustainanalytics, which described it as “credible”, “impactful” and in “aligned” with the Green Bond Principles.
The bond pays a 1.35% coupon and was priced at a 112.619 premium to yield 0.229%, equivalent to 24bps over mid-swaps, 2bps below the original MS+26bps guidance, after receiving over €11.5 billion in bids from 130 accounts. Sectorally, demand was dominated by asset managers (43%) and banks (24%), followed by hedge funds(14%), pension and insurance funds (12%), central banks and official institutions (6%) and corporations (1%). Geographically, the Nordic region (24%) dominated, followed by the UK (19%) and investors from the Americas (16%). Germany/Austria (14%), France (11%) and investors from other European countries (16%) took up the rest.
The yield on this latest tap was also down from its 1.399% level at the October 2018 launch. On that occasion, Ireland’s National Treasury Management Agency (NTMA) commented that the transaction demonstrated “our commitment to finding attractive new ways to meet the State’s funding requirement by diversifying our issuance and accessing a new base of investors to lend to Ireland. Sovereign Green Bonds are an innovative form of finance, and it makes sense for Ireland to be at the forefront of developments in this space.”
Ireland’s Green Bond Allocation – Where is the Additionality?
At the moment there is only one series of Irish sovereign green bonds. The sovereign borrower published its 2018 Green Bond Allocation Report for the Year-End at the end of June 2019. According to the report, of the €2.9 billion outstanding at that time, €1.949 billion (65.3% of the inaugural proceeds) had been allocated to different projects by the end of the December 2018.
The leading category of projects to which the green bond proceeds have been allocated to was “Clean Transportation” (44.7%), within which two subcategories dominate: “Public service provision payments” (18%) and “Public and sustainable transport investment programme” (25%).
The report describes the first subcategory as “funding that the Exchequer provides to support the continued operation of public transport services provided by public transport operators for the provision of socially necessary but financially non-viable, transport services. It also includes funding for local link services under the Rural Transport Programme which is managed by the National Transport Authority”. The description is a bit vague, and unfortunately, no reference is made to any specific green or climate-related investments under this category worth €351.6 million.
According to the report, of the €485.1 million allocated to the “Public and sustainable transport investment programme”, €206.8 million and €109.9 million were assigned to the “Heavy rail safety and development” project, and the “Bus fleet & Bus Connects” projects, respectively.
“This multi-annual investment programme protects investment already made in the national railway system by funding maintenance and safety projects needed to maintain safety and services levels in railway operations,” the allocation report notes regarding the first of these projects. Although “safety and development” are doubtless a worthy cause, this project seems to be marginal to the fight against climate change, at best.
According to the allocation report, the “Bus fleet & Bus Connects” project is intimately tied into the National Development Plan 2018-2027, “which identifies the delivery of the full BusConnects programme for Ireland’s cities as a key investment priority over the period of the plan.” This part of the plan includes “ticketing systems, bus corridors, additional capacity, new bus stops and bus shelters, the transition of the fleet to low emissions vehicles”. The relevance of the project stands on the fact that all the elements combine to shift people’s transport habits from private cars to public transportation, which should decrease GHG emissions.
More Details Needed
Much of the allocation of the proceeds from the green bond is certainly uncontroversial. No one can argue with the relevance of the € 448 million spent in “Built Environment/Energy Efficiency Total”, “Climate Change Adaptation Total” and “Environmentally Sustainable Management of Living Natural Resources and Land Use Total”. The amount represents a mere 23% of the total use of the green bond proceeds.
It is somewhat less clear why the €558.4 million (28.65%) worth of transportation investments highlighted above require the Irish sovereign to use green bond funds. This is not to say that the projects cannot be labelled as green. After all, Sustainalytics did comment that “all projects reviewed complied with the Use of Proceeds criteria.” But they seem marginal to the cause of climate change, and in the absence of more information, the apparent lack of additionality would suggest they could have been funded through the issuance of standard debt.
Green bond investors argue that the ability to point to the use of proceeds is their guarantee that their investments are moving the needle. However, the funds are normally not ringfenced for specific projects, falling instead onto rather broadly defined expenditure categories, which are often difficult to understand. For green bonds to fulfil their real potential, it may be appropriate to provide more granular data regarding the use of proceeds and their impact in terms of emission savings or other project-level key performance indicators. In the case highlighted here, such added transparency might even unveil additionality that is simply not being described.
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