German Green Bonds: What’s all the fuss about?

Germany is issuing the first in a series of green bonds in September.

On Monday (24 August), the German government confirmed plans to raise €11 billion (£9.9 billion) for cleantech and energy projects through the issuance of a green bond.

The initial planned issuance, next month, will be Germany’s first foray into the green bond market, with the proceeds used to support the country’s sustainable finance programme.

In the announcement, deputy finance minister Joerg Kukies said the initial bond will be worth €4 billion when issued in September, while the remaining debt will be issued in the fourth quarter of 2020.

“From now on, the German government will issue green federal bonds every year. In this way, we are creating strong momentum towards a more robust sustainable finance market,” Kukies said.

“Our innovative twin bond approach is designed to attract new investors and issuers to the green bond market and thus act as a catalyst, channelling more investments into a greener economy.”

Fixed income investment managers have welcomed the announcement of Germany’s arrival to the green bond market, heralding the move as great news for investors. But with yields so incredibly low due to fiscal measures taken in response to the global pandemic, where exactly is the benefit?

What’s good about them?

“If the market becomes developed with a sufficient number of issuers, maturity spectrum, proper covenants, and liquidity, it can be expected that green bonds might outperform over time,” says Jim Neuman, chief investment officer of Sussex Partners.

“Treasury departments and green project sponsors will be the beneficiaries and will be able to get better terms.  These better terms then promote a virtuous green circle.”

Neuman’s views are echoed by many of his peers, such as Alexander Schubert, a senior portfolio manager at Union Investment.

“We take a very positive view of the Federal Government’s commitment to issuing green bonds and have expressed this in talks with the Finance Agency in recent years,” he explains.

Schubert particularly approves of the German government’s decision to “twin” the green bonds with traditional bunds. The thinking is that investors will be more willing to embrace these new securities if they know they can swap them for conventional bunds, should they need to for liquidity purposes.

“The Green Federal Bond has the same characteristics as an outstanding conventional Federal bond. The ‘twins’ therefore only differ in price. As a result, it is immediately apparent what premium the capital market attaches to the green twin,” Schubert says.

“A positive green premium should thus be directly apparent from the positive price difference between the green and conventional Bunds. This high degree of comparability is so far unique on the capital market, and it will be exciting to see how the capital market will price this new paper.

Why might they fail?

Despite great enthusiasm from some supporters, green bonds still make up a very small percentage of the global fixed income market overall. Investors who are new to these bonds may be hesitant to snap up the newly issued securities straight away.

Part of this reluctance may be driven by political factors, says Neuman.

“If the process gets politicized, and partisan, as it is in the US it will not be successful,” he says. “Rationale, measurable impact, and reasonable commercial justification will be critical.

Despite these notes of cautions, other market experts say that the German government’s decision to proceed with a green bond programme may have longer-term benefits to investors and capital markets more broadly – particularly in the wake of the global pandemic.

“The WHO identified that climate change will affect infectious disease occurrence and so the introduction of green bonds in the current Covid-19 climate is exceptionally well-timed,” says Paris Jordan, head of consulting at Murano.

“This, coupled with the need of governments to encourage financial activity to support their economies, results in an environment that is incredibly favourable towards this incredibly relevant new issuance.”

Jordan added that they have witnessed sustainable investment approaches “flourishing” in recent months when compared to non-sustainable approaches and suggested that this may lead to “both new and renewed interest” across investor types.

“Ultimately, the German government couldn’t have picked a more opportune time to issue their first green bond,” she concluded.