European and non European countries have launched this week green bonds. For Spain, it was the first green bond ever issued, and the fourth for Germany. In the case of the Spanish Green Bond, the expected breakdown of the bonds will go from Clean Transportation, to sustainable management of water and wastewater to biodiversity conservation. We have received the first commentaries on the topic from Asset Managers.
Ronald Van Steenweghen, fixed income portfolio manager at DPAM
This issuance happens in the context of major issuances by EU and non-EU countries – we expect over the course of September additional inaugural issuance from both UK and Colombia while Germany will tap an existing line. Expect more “record” issuance over the coming months when the European Union will launch its first green bond. Important to note that there is an explicit mechanism to avoid overlap between national and NGEU eligible green expenditures.
This issuance will further strengthen the diversification profile for green bond investors. Spain is the 7th EUR government bond issuer but the non AAA/AA issuers remain underrepresented within this green market segment. The 20y maturity profile is understandable from an issuer perspective but falls again in the typical long tenor strategies and thus lacks duration diversification.
The issuer has communicated that it will issue on a frequent manner and support the liquidity in secondary markets. Given the similarities with traditional SPGBs, we think that investor demand (from both sustainable and traditional accounts) will be high for this inaugural issuance. Difficult to pinpoint an exact level of fair value with respect to pricing but on average green government bonds trade 3-5 basis points richer than their traditional equivalents in the secondary market.
Some additional bullet points on the actual green bond framework – which is off high quality –
The expected breakdown (see graph below) has been provided by the issuer, with the category of Clean Transportation clearly sticking out. This category focusses on expenditures aimed at reducing dependence on fossil fuel transport, such as aid for the development and maintenance of the rail system for freight and passenger transport, the development of low-carbon vehicles, aid for sustainable public transport and the promotion of modal shift to more environmentally friendly modes. According to the 2018 GHG inventory, the transport sector is the main contributor to GHG emissions in Spain, generating 27% of the country’s emissions. Therefore, we find it encouraging to find this category well represented in the framework.
This framework should also be seen in the governance context of Spanish institutions. Indeed, the country is a highly decentralized state at the administrative level, in which the regions have great autonomy in terms of competences and management of public spending. Thus, sub-central public administrations, unlike what happens in the case of other sovereign issuers, control part of environmental spending and even issue their own green bonds. Therefore, we might see issuances of lesser sizes compared to other European countries. Here we can outline that some regional issues choose the sustainability bond format that has both green and social use-of-proceeds.
We consider it encouraging that the selection criteria for the different categories in the framework embrace the thresholds depicted in the EU Taxonomy and the categories have been clearly linked with the EU Objectives. An extensive list of more controversial activities are also ex-ante excluded from the green bond framework ( exploration, research and exploitation of fossil fuels, Nuclear energy generation by fission, Energy generation with emissions above 100 gCO2/kWh, Intensive livestock farming, Alcohol and tobacco industries, Gambling, Arms production and contracts and Mining.
The working group to coordinate the green bond programme involves many different ministries to ensure the inclusion of all potential programmes and projects that could be eligible under this framework. The potential inclusion of external experts based on the working group’s needs is something we encourage.
Mitch Reznick, Head of Sustainable Fixed Income, del negocio internacional de Federated Hermes
The deal has been well-flagged and is among several debut issuers of sovereign green bonds in 2021, including green bonds from Italy last spring and the forthcoming deals from the UK and the EU. The timing of the deals in 2021 make sense. Signatories of the Paris Agreement on Climate Change at COP21 will want to showcase progress they are making on their climate change commitments ahead of COP26 in November. At the same time, there is plenty of demand for such an inaugural deal and may even deliver a small “greenium” to Spain because the sustainable finance market has been growing at a record pace. The long-dated tenor is consistent with previous deals from Italy, France and Germany.