World Views | A chance for the EU to become the green bond king

The green bond market has blossomed, with annual global issuance growing fivefold in the past half-decade. To become a fully fledged asset class, it needs a benchmark borrower. That’s a role the European Union is well placed to fill by selling environmentally friendly debt as it accelerates its bond-issuing program to fund the bloc’s pandemic recovery.
The EU will have to substantially step up its bond-market borrowing to finance the 750 billion-euro ($885 billion) package approved last month to help its 27 members weather the coronavirus’s economic aftershocks. As a top-rated issuer, it can foster the market for green securities by channeling as much of that issuance as possible to the nascent sector. Doing so would reinforce the lead its taken in encouraging financial firms to acknowledge their long-term responsibilities as the guardians of environmental as well as monetary wealth.
EU officials are studying what standards they would apply to green bonds, but the guidelines aren’t likely to be ready this year, Bloomberg News reported yesterday. S&P Global Ratings estimates it could sell as much as 225 billion euros of the securities, close to the global total issued last year, the news report said.
After the global pandemic took priority with borrowers earlier this year, the pace of green bonds sales has since increased, reaching more than $137 billion last month, according to figures compiled by Bloomberg New Energy Finance.
Nations are lining up to tap investor demand for green debt. Sweden is marketing 20 billion kronor ($2.3 billion) of the securities to investors. (Although it’s ignoring my advice to make its debut issue a century bond, and instead will choose a maturity of between seven and 10 years.) The U.K. is mulling whether it should tap the category too. Germany, Europe’s benchmark borrower for regular debt, plans to sell about 11 billion euros of green bonds by the end of the year, starting with a 10-year issue worth 4 billion euros next month.
France is arguably the current benchmark issuer in the green asset class. At more than 27 billion euros, its issue repayable in 2039 is by far the biggest green security to date. At launch, it was priced to yield 13 basis points more than a French government vanilla issue repayable in 2036. At current market prices, that premium is down to a bit less than 9 basis points.
For investors, the question of whether planet-friendly debt is a better investment financially remains a thorny issue. Comparing the performance of two Bloomberg indexes, one representing 414 billion euros of global green securities and the second returns on $54 trillion of worldwide investment-grade debt, shows there’s little difference.
But for borrowers, there’s an increasing responsibility to use the funds they raise in ways that don’t harm the environment – a duty the EU is taking seriously with its efforts to create clear rules and classifications that will prevent issuers and asset managers from greenwashing the funds over which they have stewardship.
By routing as much of its future financing as it can justify to bonds deemed environmentally friendly, the EU can lead by example, cementing the market as a true and distinct asset class along the way. The bloc can also show how the coronavirus crisis can be a catalyst to tackle the climate crisis, harnessing what will hopefully prove to be a short-lived economic downturn to produce a better long-term environmental outcome. Mark Gilbert, Bloomberg