Green bond sales head for record as more nations set for debuts

30 per cent of the EU's 800 billion-euro pandemic recovery funding is slated for green projects.
30 per cent of the EU's 800 billion-euro pandemic recovery funding is slated for green projects.PHOTO: AFP

LONDON (BLOOMBERG) - The green bond market is hotting up again with investors bracing for a potentially record month of sovereign sales.

Spain, Colombia and Britain are due to offer their inaugural green bonds this month, with the latter expected to "certainly be the largest" in the world by Chancellor of the Exchequer Rishi Sunak. That in in addition to established issuer Germany, which will sell a new 10-year green bond via auction next week.

All that will soon be dwarfed as the European Union prepares to enter the market, with 30 per cent of its €800 billion (S$1.27 trillion) pandemic recovery funding slated for green projects. The bloc will hold a call on Wednesday (Sept 8) with investors to give more details on its plans.

"Based on the way the pipeline is building, we could see a month for record issuance," said Ms Trisha Taneja, head of environmental, social and governance advisory for origination and advisory at Deutsche Bank. "This is typically the time that most issuers want to go to market, right after Labour Day."

According to NatWest Markets rates strategist Imogen Bachra, sovereign green sales this month could be at least €20 billion. That would test the current monthly all-time high, set in March, when Italy made a record-breaking debut and top issuer France sold more debt.

Since the first sovereign green bond by Poland in 2016, momentum has grown, with more and more issuers coming on board. Governments from around the world have sold US$39.1 billion (S$52.5 billion) in green bonds so far this year, already surpassing a total of US$37.5 billion in all of last year, according to data compiled by Bloomberg Intelligence.

That issuance boom has been led by European countries such as France, Italy and Germany, though developing economies are now joining in. Hong Kong and Chile have been among the largest emerging-market issuers this year, with Benin having pipped Ghana to sell Africa's first sovereign social bonds and Colombia set to debut this quarter.

Supply is just catching up with investor demand, with concerns over greenwashing - overstating the environmental benefits - less of an issue in the European sovereign market. All of the region's green sovereign bonds trade rich on the curve versus their conventional counterparts, in a so-called "greenium", and that is unlikely to change even in a record-breaking year, said NatWest's Ms Bachra.

"I feel there is cash available after summer to deploy and would not expect too much pressure on pricing," said Degroof Petercam fund manager Ronald van Steenweghen, who would like to see more issuance in five- to 10-year tenors. "Most new sovereign issues have been well telegraphed in advance and demand remains very strong, partially due to regulatory changes."

The biggest and most anticipated deal this month will be from Britain, with a green gilt maturing in 2033. Other euro-area debuts may come next year from the likes of Austria and Greece, though by then individual sovereign sales should be dwarfed by the EU.

"I think everyone will try to have their own green bond, but the EU issuance is definitely what everyone should focus on," said Societe Generale senior rates strategist Jorge Garayo. "This month may be big because you have Germany and Spain, but it's not going to be the biggest."