Germany’s first sovereign green bond draws huge demand as ‘twinning’ strategy addresses investors’ liquidity concerns

ESG

Germany has joined a growing pool of sovereign issuers of green bonds with the launch of a EUR6.5 billion green bond, which was more than five times oversubscribed by investors, who placed over EUR33 billion in orders.

The 10-year bond is expected to be followed by a second German issuance, as the AAA-rated country plans to raise up to EUR11 billion from green bonds in 2020. 

The issuance is being hailed as an “important milestone” for the green bond market, because of the position of German government bonds as a reference point in capital markets.

Other European nations entering the market include Sweden, which recently issued a SEK20 billion green bond, with Spain and Italy expected to place bonds later this year.

German green bond issuance “has typically lagged other markets”, according to Joshua Kendall, senior ESG analyst at Insight Investment. Kendall expects that the Federal government’s leadership will encourage other German issuers from the public and private sectors to follow suit. 

“Daimler, for example, has announced its inaugural green bond, too. Germany, like other European countries, has aggressive environment targets and impact bond issuance will help accelerate decarbonising the economy."

The proceeds have been earmarked to go towards sectors including transport, energy, and agriculture, as Germany approaches its target of reducing carbon emissions by up to 95 per cent by 2050.

The bond was issued with a coupon of 0 per cent, meaning it offers a yield of -0.46 per cent, slightly below that of a conventional bond with a similar maturity.

Aegon Asset Management, which bought into the recent green bond, calls the size of the issuance “remarkable”. 

“Germany also tested the existence of the so called “greenium” – the extra spread that investors would want for green bonds versus regular bonds. For this purpose, the bond shared the characteristics of an existing regular German bond, both in coupon and maturity,” notes Jesús Martinez, portfolio manager at Aegon.

Germany’s recent green bond was unusual in that it has been “twinned” with an equivalent conventional bond, to avoid the negative effect of lower liquidity of green assets compared to conventional ones. 

The ministry will purchase green bonds if the price ever falls below that of a conventional bond, in order to support the price of green assets.

“Although the initial pricing was set as flat versus its twin bond, the amount of interest among investors allowed for a basis point downward review in the bond’s spread. Germany is expected to issue another green bond in the coming months in its ambition to build a European green yield curve,” adds Martinez.

Bram Bos, lead portfolio manager Green Bonds at NN Investment Partners, says it is an “important milestone” in the green bond market, and looks favourably on the German government’s “innovative” solution to twin the bond. 

“We think this concept is a much better option than the concept currently being explored by the Danish government, which is looking to issue separate green labels or stickers which could be attached to any conventional bond,” adds Bos.

Nevertheless, Bos notes that Germany’s green bond framework is “not as clearly aligned with international standards like the Green Bond Principles and the EU and Climate Bond Initiative taxonomies as some other green government bonds”.

He says that a large portion of the green bond proceeds may be allocated to trains and rail infrastructure, which could also include the freight transport of fossil fuels. 

The framework fails to include a ‘do no harm’ assessment, which is one of the pillars of the EU taxonomy and EU Green Bond standard. “However, we also see some positives and commend the German government’s ambition to only allow green hydrogen production in the eligible use of proceeds. Green hydrogen is produced using only renewable energy and the German renewables market is well placed to develop this exciting industry innovation and make it cost competitive,” concludes Bos.