Historic EU recovery package signals surge in green bond market

Euro notes

Green bonds are predicted to surge after EU leaders agreed an unprecedented EUR750 billion coronavirus recovery package, 30 per cent of which will be allocated to climate-friendly projects. Analysts at ratings agency S&P say it could boost the size of the global green bond market by some 90 per cent.

The EU’s rescue package will disburse EUR390 billion in grants to member states ravaged by the pandemic, and another EUR360 billion in loans. The EU’s next seven-year budget, worth over EUR1.8 trillion, has also been agreed.

The EU says about 30 per cent of the EUR750 billion will target climate-friendly projects, and according to S&P, this may translate to a potential of EUR225 billion of additional green financial instruments, chief among them likely to be green bonds.

S&P adds that this would make the EU the “largest supranational provider of liquidity for a green safe asset”. 

“Much of the package will likely be financed with EU debt, which will be of great benefit to European banks as lead issuers. A significant portion of green bonds are likely, as the initiative to address global warming continues to develop,” says Sébastien Galy, senior macro strategist at Nordea Asset Management.

Galy notes that this marks an “important moment in the history of the European Union”, given the size of the package and the fact it will be financed by EU bonds.

The EC has previously said that all spending from its coronavirus recovery fund must “do no harm” to its climate goals, but many say this leaves out key factors that go towards a responsible rebuild such as the social responsibility of companies, which has come into sharper focus during the pandemic.

No details have yet been announced about how the fund will be allocated towards specific green projects.

The EUR750 billion recovery deal was struck after weeks of negotiation, as the so-called “frugal” member states opposed the idea of the EU borrowing money to bolster individual states’ budgets, under a common liability. 

German chancellor Angela Merkel said the deal has set the “financial foundations for the EU for the next seven years”.

“Germany putting a stamp of approval on the extension of fiscal deficits for European countries is not only favourable to the euro, but also to eurozone periphery debt and corporate bonds, as it should translate into more demand for European assets,” says Quentin Fitzsimmons, portfolio manager at asset management firm T Rowe Price.