Germany is expected to sell its first ever green government bond next week, in a deal investors predict will boost the market for debt linked to spending on environmental projects.
The German finance ministry told investors on a call on Thursday that it planned to raise up to €6bn from the sale of a new 10-year bond, according to two people on the call. The syndication is the start of a programme that aims to raise up to €12bn this year and would eventually lead to the country issuing two, five and 30-year green debt.
The proceeds are earmarked for green projects, with the government identifying €12.7bn of eligible expenditure in its 2019 federal budget, ranging from the construction of new railways and bike lanes to research into renewable energy. Angela Merkel, the German chancellor, has repeatedly stressed that spending on climate protection should play a central role in Europe’s recovery from the coronavirus pandemic.
Germany is not the first country to issue green bonds, a class of debt that has mushroomed in recent years amid a clamour for assets linked to environmental, social and governance aims — so-called ESG investing. Assets in funds with “sustainable” goals have swelled to above $1tn globally, more than doubling in the past three years, according to Morningstar. France sold its first sovereign green bond in early 2017, which was followed by a slew of other issuances from European countries including the Netherlands, Ireland and Poland.
Germany’s green bond sale could be the most significant development yet for the sector, despite Berlin’s late arrival to the market. The country’s debt is considered the safest in the eurozone, and serves as a risk-free benchmark for bonds across the bloc. Sales of German bonds will establish a reference point for pricing green debt across a curve of maturities, which could encourage more governments and companies to enter the market, according to fund managers.
“Until now you don’t have a true risk-free asset in the green bond space,” said David Zahn, head of European fixed income at Franklin Templeton. “Most countries in this space have issued one or two bonds, but nobody has a curve. Building a full curve will help corporate green bond issuers by acting as a reference.”
Alexander Schubert, senior portfolio manager at Union Investment, said the move was “very important, because it has a signal effect”: it should encourage other issuers, be they corporations and governments, to issue green and sustainability bonds.
Next week’s issue is likely to draw strong interest from investors, he added. “You will see a great appetite for these bonds.”
Germany’s green bonds will be “twinned” with a conventional security of the same maturity and coupon. Once the bonds have been sold, investors will be able to swap their green bonds for the conventional equivalent at any time, a structure designed to allay fears that smaller, less liquid green securities would trade at a lower price.
The ministry will seek to ensure the price of the green twin is always at least that of the conventional bond, by purchasing green bonds if it falls below that level.
The bond lined up for next week is expected to price at a similar yield to its twin, which currently trades at minus 0.46 per cent.