European Green Bond Market Set To Grow And Diversify

Shanny Basar

The European green bond market will have increased engagement from the corporate and banking sector and more varied deals, according to a report from the Climate Bonds Initiative.

“Strong political impetus is expected to continue driving market evolution and improvement, such as through the adoption of a common EU green asset taxonomy in 2019 as part of the Commission action plan on sustainable finance, banks implementing the reporting recommendations set out by the Financial Stability Board’s Taskforce for Climate-related Financial Disclosure and starting to green-tag loans,” added the report.

The European Commission established a High-Level Expert Group on Sustainable Finance in 2016 and their recommendations form the basis of the action plan on sustainable finance adopted by the Commission in March this year. The action plan includes establishing a clear and detailed EU classification system, or taxonomy, for sustainable activities; establishing EU labels for green financial products; introducing measures to clarify asset managers’ and institutional investors’ duties regarding sustainability and strengthening the transparency of companies on their environmental, social and governance policies.

There have been concerns that companies are not using the proceeds of green bonds for environmental projects but the Climate Bonds report said nearly all, 98%, of issuance in Europe has at least one external review and 93% include a second party opinion.

This year Belgium and Lithuania have issued debut sovereign green bonds and there has been repeat government issuance from France and Poland. The study said Sweden and Italy are also expected to sell their first green bonds this year and the UK Green Finance Taskforce has recommended a green gilt.

“Sovereign green bond frameworks feature a wide range of eligible investment categories,” said the report. “The key ones are renewable energy, low carbon buildings, sustainable land use and low carbon transport. However, actual allocations may vary from bond to bond, as demonstrated by Belgium’s first green OLO, which allocated 85% of proceeds to rail transport network investments.”

In addition government-backed entities from the Nordics and France have made a particularly big contribution to green bond issuance.

In Europe 145 entities have issued green bonds, a third of the global total, with 48 from the energy sector and 35 from financial institutions.

“Diversification to date is a big accomplishment but it would be good to see more corporate issuance, especially from countries with large economies and highly-developed and active bond markets such as the UK, Germany and France,” added the report.

The study continued that the Green Loan Principles, recently published by the Loan Market Association, and the green tagging of loans should facilitate a more targeted green financing approach across sectors and could support further green bond issuance from banks.

In addition, the range of green bond products for investors is increasing with, for example, Lyxor, Societe Generale’s exchange-traded unit launching a green bond ETF last year and more than a dozen European asset managers setting up dedicated funds.

In March this year European asset manager Amundi and IFC, part of the World Bank Group, closed the world’s largest targeted green bond fund focused on emerging markets. The Amundi Planet Emerging Green One fund closed at $1.42bn and is expected to deploy $2bn over its lifetime. The investor base included pension funds, insurance companies, asset managers, international development banks and other institutions, with some committing to green finance for the first time.

Philippe Le Houérou, chief executive of IFC, said in a statement:  “The global market for green bonds has expanded rapidly in recent years—totalling more than $155bn in 2017, but few banks in developing countries have issued such bonds. IFC and Amundi expect this new fund to encourage more local financial institutions to issue green bonds, by increasing global demand and building local markets.”

The Amundi fund is listed on the Luxembourg Stock Exchange.

The Climate Bonds report said stock exchanges with dedicated green bonds segments increase the instrument’s visibility and their listing requirements promote transparency and market integrity.

The Luxembourg Stock Exchange has the largest dedicated green segment in Europe with 170 listings according to the study, consisting of 148 green bonds, 16 social bonds and 6 sustainability bonds. Nasdaq Stockholm is the second largest with 80 and Borsa Italiana in third place with 56.

Anne-Charlotte Eliasson, Nasdaq Nordic

Ann-Charlotte Eliasson, head of Nordic fixed income listings at Nasdaq, told Markets Media in March that she sees an opportunity in listing green bonds. Last year €1.7bn  was raised on the Nasdaq Nordic Sustainable Bond Market, up 81% from 2016.

Sustainable bonds can list on the Nasdaq Stockholm main market or the smaller Nasdaq First North Bond Market. To be eligible, issuers need to meet the relevant criteria which Nasdaq has developed in cooperation with Sustainalytics, the producer of environmental, social and corporate governance research.

“In 2015 we launched a specific segment on sustainable bonds to make them more visible,” added Eliasson. “We would like to improve liquidity and we are considering whether an index would help.”

Eliasson continued that Nasdaq is collaborating with Finland to launch a new sustainable bond market this year and has high hopes of launching a segment in Denmark next year.

Martina Gruber, Clearstream representative on Deutsche Börse Group’s Sustainability Board, said in a blog last month that green bonds are increasingly on investors’ radar.

She highlighted the new partnership between Deutsche Börse’s Accelerating Sustainable Finance Initiative and the Green Finance Cluster Frankfurt of the Ministry of Economic Affairs for Hesse to make greater use of market expertise in sustainable finance.

“The objective of the new “Sustainable Finance Cluster” is to ensure the sustainability of national and international financial market structures in the future,” she added.

Related articles

  1. Outsourcing "is no longer a taboo word," Linedata EVP Anup Kumar says.

  2. Tradeweb-CodeStreet Deal Aims to Pool Liquidity

    With Lindsey Spink, Co-Head of Global Fixed Income Trading, American Century Investments

  3. White paper identifies initial steps financial organizations can take to protect themselves. 

  4. It’s time to assess technology users' needs holistically, rather than granularly at the application level.

  5. With Natacha Dezert and Aman Mehta of BNP Paribas Securities Services.