Stockholm (NordSIP) – Following the explosion of green bond issuance in the late 2010s and early 2020s, the European Union passed the European Green Bond Standards Regulation in 2023, following a long political negotiation. The goal of this new rulebook is to better regulate the green bond market, improve its supervision, provide a standard of quality by connecting the transactions with the EU Taxonomy, reduce greenwashing and improve transparency and accountability.
On September 23rd, the Kingdom of Denmark issued a ten-year DKK7 billion sovereign green bond aligned with the European Green Bond Standard (EuGBS), the first of its kind. According to the Denmark’s EuGB Factsheet, the Nordic sovereign has conducted this transaction to support the government’s overarching climate goals by financing the sectors that will drive the green transition, with 100% of the EuGB proceeds allocated to refinancing of the taxonomy-aligned environmentally sustainable activities.
Denmark’s EuGBS Details
The bond offers a 2.25% coupon and was priced at a 97.28% discount to yield 2.558%. Following initial price guidance of issuing the bond at the same level as the pre-existing Danish government bond of the same maturity and coupon, yields tightened and spreads fell to -1.5 basis points (bps).
Demand was very strong with order books in excess of DKK 12 billion, including DKK 500 million from joint lead managers. Geographically, demand was dominated by domestic Danish investors who purchased 75% of the bonds. Asian investors and investors domiciled in the UK and Ireland both purchased another 9% of the bonds each, leaving the rest to investors from the rest of Nordics (3%), Benelux (2%), Germany, Austria and Switzerland (1%), and other miscellaneous jurisdictions (1%).
Sectorally, fund managers purchased 42% of the bonds, followed by Insurance & Pension Funds (27%), Banks & Private Banks (22%), and Central Bank & Official Institution (9%). The bond was issued through syndication, with BNP Paribas, Danske Bank, Nordea and SEB acting as joint lead managers.
Danish pension fund, P+, was a prominent participant in this transaction, investing DKK 400 million. “First and foremost, we see the green government bond as a good and safe investment in a broad portfolio. At the same time, it makes great sense for P+ to invest in bonds that are in line with the EU taxonomy for sustainable activities and that are earmarked for green spending in the Danish state budget,” says Jasper Riis, investment director at P+. (Translated)
Greenium Appeal
This EuGB was issued as a twin bond, with the same financial terms as the pre-existing standard Danish government bond that matures in 2035 and has the same 2.25%. Because twin bonds offer the same terms as a standard bond, except for the green use of proceed, they can be used to calculate the “greenium”, the difference between the yield of the conventional bond and the green bond. In this instance, the spread can be used to show that Denmark’s EuGB provided a 1.5bps greenium.
The transaction marks the third successful opening of a Green twin bond in the Danish government bond market. The EuGB twin is expected to rise towards DKK 10 billion in outstandings via auctions throughout the rest of the year.
According to a research note from the Anthropocene Fixed Income Institute (AFII), Danish bonds have shown a persistent positive greenium, which would provide a clear, if small, motivation for the sovereign to enter this market. However, the AFII also notes that the greenium has tended to compress over time so the benefits available to the sovereign issuer are somewhat limited.
For investors, this EuGB has two benefits. On the one hand, Danish green bonds appear to be less volatile. On the other hand, a twin EuGB is akin to purchasing a convertibility option. “The explicit convertibility in Denmark’s structure should mean the green bond can never trade with a higher yield than its twin, because the moment this happened the investor would swap to the conventional bond and capture the difference. Therefore, the value of this convertibility option is maximised when the greenium is trading close to zero. (…) As an indicative order of magnitude, this could suggest investors would forego a few basis points each year in return for this option,” the AFII notes.
Denmark’s Green Commitment
BNP Paribas, Nordea and SEB were also Joint Coordinators for the EuGB factsheet, which highlights Denmark goals of reducing greenhouse gas (GHG) emissions by 70% by 2030, as per the Climate Act of 2019. The plan must balance cost-effectiveness, sustainable business development, and competitiveness. According to Denmark’s Ministry of Climate, Energy and Utilities’ annual status report on GHG emissions, 2023 witnessed a 51% reduction compared to 1990 levels.
The deal was first announced at the start of September, Governor of Danmarks Nationalbank Signe Krogstrup noted that the bond stood as a sign of Denmark’s support for “a common European language for green investments. The European Green Bond Standard creates transparency and trust in the market – and the Danish state is leading the way by adhering to the highest standards, thereby supporting the development of green capital markets.”
“As the first sovereign to issue an EuGB aligned with the new European Green Bond Standard, the Kingdom of Denmark has set a new benchmark for sovereign green finance, showcasing its leadership in sustainability and commitment to the EU Taxonomy,” says Lars Mac Key, Head of Sustainable Products at Danske Bank.
Commenting on this transaction, Peder Bach, Head of Large Corporates & Institutions Denmark at Nordea, emphasises the bond programme’s significance for supporting Denmark’s green transition. “By offering our expertise, we’re helping to secure capital for Denmark’s green transition. This new government bond, which is the first sovereign EuGB to date, reflects Denmark’s commitment to transparency and sustainable finance. It gives investors very detailed information on what they’re funding.”
