By Yoruk Bahceli
(Reuters) – Eurozone governments have raised 15 billion euros ($15 billion) in green bonds over the past two weeks, increasing volumes from last year even as volatility increased in reducing issuances in the broader market.
Rising inflation and rapidly rising interest rates have introduced a level of turmoil in global markets not seen in years, leading to general caution among borrowers.
But this does not appear to have dampened the demand for green government bonds that finance environmentally beneficial projects.
Belgium on Wednesday became the third European country in two weeks to sell green debt, raising €4.5 billion in new 2039 bonds.
Germany raised 4.75 billion euros from the sale of new five-year bonds on August 31, and Italy made 6 billion euros from a 12-year offering last week.
Governments in the euro market have raised more than 40 billion euros in green bonds so far this year, according to ING bank, just above 39 billion in the corresponding period of 2021.
Bram Bose, Senior Portfolio Manager for Green, Social and Impact Bonds at NN (NASDAQ: Investment Partners, said there is “very strong” momentum in the government green bond market and that the conflict in Ukraine could provide further impetus.
“The war in Ukraine stimulated a lot of investments in renewable energy. A large part of that will be financed through governments,” he said. “This is certainly an incentive for governments to issue more green bonds in the future.”
The growth in sovereign green bond sales contrasts with the broader green bond market, where issuance — which also includes companies — reached $278 billion at the end of August versus $335 billion at the same time in 2021, according to UniCredit.
It lowered its forecast for total green bond sales this year to $500 billion, down about 10% from last year.
Corporate green bond issuance has declined this year along with conventional debt sales as rising interest rates and recession fears limit investor demand for corporate debt.
“There is a stronger commitment from governments to keep their green activity at a certain level, if only as a signal to the broader market,” said Benjamin Schroeder, chief interest rate strategist at ING.
While companies are often opportunistic borrowers and are more likely to change financing plans as market conditions change, governments – which have to finance state budgets – are less flexible.
Issuance from governments has also increased even as the “green” of debt has shrunk in recent months in the secondary market, ING data indicates.
“Greenium” refers to the offering of green bonds with a slightly lower yield against conventional debt, reflecting a dedicated investor base chasing a limited set of these assets.
ING saw this drop as a result of deteriorating liquidity in government bond markets in general.
Analysts said governments could face a tightening in pricing advantage as a result, but they could still benefit from an additional group of sustainability investors who focus exclusively on securities such as green bonds.
“When I look at our green bond strategies, we have record inflows this year, which is great because with most regular fixed income strategies, they are all experiencing outflows,” said Bos of NN Investment Partners.
Marek Post, director of the Belgium Debt Agency, estimated that Wednesday’s green bond issuance still offers a pricing advantage of 1 to 1.5 basis points over selling conventional bonds.
“In that sense, we feel that the green element has given us some improvement in terms and a smooth implementation that would have been more difficult otherwise,” he told Reuters.
A banker who managed the green bond sale in Italy last week said the banks that arranged that deal took into account the uncertainty about the election when deciding on the format. Italy holds elections on September 25.
“We thought that in that environment the green version would provide an added advantage for Italy and would definitely help them secure a very good deal,” said the banker, who spoke on condition of anonymity.