Germany saw good demand for its first-ever green bond on Wednesday (2 September), in a landmark moment for Europe’s climate-focused finance drive.
Germany raised €6.5 billion from the 10-year bond, after investors queued up for over €33 billion, its finance agency said in a statement.
“With today’s issue of the government’s first green bond, we have taken an important step towards significantly strengthening Germany as a sustainable finance location,” German deputy finance minister Joerg Kukies told Reuters.
Even at this early stage, “Germany is well on the way to becoming a benchmark issuer in the field of sustainability bonds,” according to German public bank LBBW analyst Elmar Voelker.
A further bond issue is planned before the end of the year.
The green bonds are “twin bonds”, issued alongside conventional federal bonds with a similar maturity and rate of return. They include a unique feature where investors will be able to swap the green bonds for an otherwise identical conventional bond, to help mitigate any liquidity concerns.
Moody’s analyst Matthew Kuchtyak said the approach is “innovative” and “should help alleviate investor concerns around the liquidity of the green offerings.”
“It is a welcome move and certainly in terms of growing the size of the green bond market this is a landmark day,” said Eila Kreivi, head of capital markets at the European Investment Bank’s finance division. She pioneered the launch of the world’s first “green” bond in 2007.
Germany is looking to become a key player in eco-friendly finance and last year announced it would launch the bonds in the second half of 2020 as part of its efforts to combat climate change.
Berlin has earmarked spending of 54 billion euros to 2023 as part of a climate package that includes introducing a carbon tax to cut greenhouse gases by 55 percent by 2030 compared with 1990 levels.
“Germany is preparing for a comprehensive structural change towards a sustainable and climate-friendly economy.” the agency said. “This not only contributes to combating climate change and protecting the environment, but also increases the country’s overall innovative strength and competitiveness.”
Germany’s decision to issue a variety of maturities should help central banks and bank treasuries become more active in the green bond market, said Tanguy Claquin, head of sustainable banking at Credit Agricole’s investment banking arm, which structured Germany’s bond.
The European Central Bank recently opened the door to use its bond buying programme to pursue green objectives.
“Clearly, there was a segment of the market that was missing, which was the benchmark, short to mid-term maturities… an area where there is a large investor category that was not so active in the green bond space, which will now have more possibilities to enter the market,” Claquin said.
Previous euro zone issuers, like France and the Netherlands, have focused on selling one, long-dated green bond of around 20 years and upsizing it over the years.
Every time it sells a green bond in future, Germany will also increase the size of the conventional twin on its own books.
With two otherwise identical bonds, investors are watching how the new green bond fares compared with its conventional twin.
The bonds priced for a yield of -0.463%, meaning investors paid a 1 basis point premium compared with the conventional twin. That confirmed expectations the bond would come at a premium for investors hoping to bolster their green credentials.
Germany hopes to raise up to €11 billion from green bonds this year, with a second bond planned. France has issued around €27 billion worth of green bonds in the past three years.
In the secondary market, German 10-year bond yields fell to their lowest in over a week at -0.48%, in their biggest daily fall since early June.