The European Union could become the biggest issuer of green bonds in the world, nearly doubling the current size of the market, if it doesn’t backtrack on its proposal to finance 30% of the €750bn recovery fund through green bond issuance
According to S&P Global Ratings in the report The EU Recovery Plan Could Create Its Own Green Safe Asset, the promised additional €225bn (£204.6bn) in green bond issuance would represent an 89% increase in the size of the global green bond market compared with total issuance in 2019.
Marion Amiot, S&P Global Ratings senior economist, said: “EU green bond issuance on such a large scale would help respond to a fast-growing ESG investor base. A larger pool of green assets would also help policymakers and central banks toward their aim to green the financial system.”
The move would make the EU the largest supranational provider of liquidity for green safe assets, S&P added. By comparison, the European Investment Bank (EIB) has issues just $33.7bn (£26.9bn) in green bonds since 2007.
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One of the main hurdles to boosting investment in sustainable asset is the small size of the green bond market, according to S&P. in fact, this market represents just 3.7% of total global bond issuance, making it difficult for investors to build this into their portfolios.
And since the Covid-19 pandemic, green bond issuance has been on the decline, according to a recent report from DBRS Morningstar. This year to the end of March, this figure has dropped 36% compared to the same period last year to $66.6bn.
The increased issuance by the EU would help the European Central Bank (ECB) and others to invest in euro-denominated investment-grade green assets – a market that remains small, with just 17% of all green bonds issued by sovereigns.
But S&P said it would also “stimulate private sector green bond issuance, since the EU tends to leverage private money for its investments, for example by co-financing projects with the private sector”.
This news follows ECB’s president Christine Lagarde’s commitment to put green objectives at the heart of the Bank’s €2.8trn asset purchasing programme, which was welcomed by the asset management industry.
The green finance market is also expected to receive a boost from the new Green Taxonomy regulation, approved by the European Parliament on 16 June, which aims to establish a framework to facilitate sustainable investment.
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Lack of detail
However, S&P noted that the “details are still missing” on specific green and social content of the EU’s recovery fund, specifically on how funds will be allocated to member states, or what conditionality will be attached to this funding.
“For countries that emit more greenhouse gases for each unit of GDP, some of the funding might come with stronger sustainability conditions attached so as to help decarbonize their economies,” S&P said.
“The EU Commission has also cited the possibility of a carbon cross-border adjustment tax as a means to repay the recovery fund bond issuances as they come due, although this could be difficult to implement.
“The EU is also discussing extending its emissions trading scheme (ETS) to the shipping industry, which could also be a source of financing.”
Meanwhile, another key question is whether there is a need to accelerate the EU’s net zero carbon ambition, with concerns the current 55% emissions reduction target by 2030 will not be enough to reach the Paris Agreement goals. S&P said: “There have been calls for a 65% reduction to be the new target. The more ambitious the EU carbon neutrality goal becomes, the more likely it is that extra funding will be required for green technologies to help meet the transition to net zero by 2050.”