Stockholm (NordSIP) – The commodities market supply-side shock brought about by the war in Ukraine created inflation pressures not seen for several decades in Europe. Eurozone annual inflation was recorded at 8.1% at the end of May, driven by a 39% increase in energy prices. The present macroeconomic conjuncture is particularly problematic for investors in fixed-income products such as green bonds, whose coupons are not traditionally adjusted to compensate for inflation shocks.
To address this issue, and in support of green bond markets, the French government issued a 15-year inflation-linked green bond at the end of May, the first inflation-linked green bond ever issued. The security is a €4 billion green OAT€i that pays a 0.10 % coupon over the indexed to the harmonised European consumer price index. Following this issue the total outstanding amount of green OATs issued to date to €49.4 billion.
Total demand worth €27 billion helped price the transaction at a 108.62 premium corresponding to a real rate of return at issue of -0.415%. According to the French debt management office (Agence France Tresor), the securities were delivered on 1 June 2022, at which date the indexation coefficient was 1.06747. This means that the capital raised for each €1 security is €1.06747.
Nearly 230 end investors took part in the operation. Geographically, French investors represented the largest share of the investors, amounting to 29%, followed by Italians (8%), Germans (4% ) and investors from other euro area countries (16%). The remaining of the bonds went to investors from the United Kingdom (20%), Nordic countries (12%), other European countries outside the eurozone (3%), and Asia (7%) and miscellaneous investors from the rest of the world (1%). Sectorally, 29% of the syndicated amount was allocated to banks, 28% to asset managers, 15% to pension funds, 14% to public institutions, 10% to insurers and 5% to alternative management. According to the leaders of the banking syndicate, more than half of the securities have been placed with green investors.The lead managers of this operation were Barclays, BNP Paribas, Crédit Agricole CIB, Natixis and Société Générale.
Funds from green bond transactions will be channelled to eligible green projects targetting climate change adaptation, climate change mitigation, protection of biodiversity, and the reduction of air, soil and water pollution, according to the French Government Green Bonds Framework. An appendix has been added to this framework document in order to take into account the specificities of indexed green OATs.
When the Framework was defined in 2017, it appears to have foreseen green bond-funded spending worth €13 billion. Projects within six sectors were defined as eligible for receiving funding from these securities. €4.1 billion have been budgeted for improving buildings’ energy efficiency. €2.45 billion has been set aside for transportation projects. €2.85 billion is also budgeted to promote organic farming, enhance biodiversity and land environmental protection. Another €1.7 billion is planned for energy research and innovation including investments in smart grids. Seeking to address concerns similar to those voiced by HSBC’s Stuart Kirk, €900 million is also available for the development of climate change extreme weather events observation systems, adaptation-related research and infrastructure. Last but not least, €300 million is set aside for the development of pollution monitoring and control systems and the promotion of sustainable consumption and production modes, such as waste reduction and recycling. Another €700 million is allocated to “transversal” expenditures, which are deemed to contribute significantly to several Green Sectors together and therefore.
According to the information provided by Agence France Tresor, the government’s green bond issues will back €15 billion of eligible green expenditure in 2022.
