Europe set for biggest shift yet in financing cleaner growth

The European Union will unleash as many green bonds as the world issued last year, testing the level of investor interest in financing a shift towards cleaner economies.

The bloc plans to create up to €225 billion (S$360 billion) of green debt, which will propel it from a debut issuer to the largest player in the nascent market in coming years.

With no set definition on what makes a green bond, its criteria are likely to set a benchmark standard for others to follow. The plans are undoubtedly a big win for the industry - just four years after the first sovereign green bond issuance. Yet the EU's efforts will gauge whether such assets can attract mainstream funds outside Europe, or find demand limited to an enthusiastic but specialised group of investors.

"From a market point of view, a development point of view and a climate change point of view," said Mr Mitch Reznick, the head of sustainable fixed income at Hermes Fund Managers, the EU's offerings are "going to alter the landscape".

"From a value point of view, this works best for thematic funds, where value isn't necessarily the primary driver."

The huge issuance plan is the latest to fund pandemic rescue packages, leading to a surge in global debt. So far there has been no shortage of demand for green assets, thanks to a boom in environmentally-conscious investing.

These specialised funds helped Germany's debut green bond this month attract five times as many orders as the debt available.

The number of sustainable index mutual funds and exchange-traded funds and their assets of US$250 billion (S$340 billion) have both doubled in the past three years, according to Morningstar.

The EU's climate chief Frans Timmermans sees this deeper pool of investors as an opportunity for the bloc to fund change.

Deutsche Bank's head of sustainable finance Trisha Taneja said: "Demand will continue to outstrip supply at least in the near term."

 
 
 

The EU is stepping into a relatively small market, worth around US$80 billion. Governments have lagged behind firms in issuing green bonds, though the pace is picking up: Those looking set to follow Germany may include Italy, Kenya and Brazil.

In the United States, a win for Democrat presidential nominee Joe Biden in November's election could mean a boom for green finance, given his US$5 trillion climate plan.

Germany's entry into the market could spark a flurry of issuance from other countries, said Mr Colin Finlayson, co-manager of the Aegon Strategic Bond Fund. Still, "as an investment alternative to conventional or traditional bonds, it is not yet clear whether green bonds will offer a superior return", he added.

"Interest and demand will come from those who are making a conscious decision to support a government's efforts to invest in sustainable projects."

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A version of this article appeared in the print edition of The Straits Times on September 22, 2020, with the headline 'Europe set for biggest shift yet in financing cleaner growth'. Print Edition | Subscribe