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The German Treasury attracted more than €30bn of bids for up to €6bn of 10-year debt, in a deal seen as a landmark step in the development of Europe’s green bond market that will help establish a benchmark for pricing other green transactions.
But it has also reawakened questions about this type of debt, with some investors saying it does little to incentivise governments to increase funding for environmental projects. “Germany has low enough borrowing costs to begin with, and I would like to think the German government would go ahead with investments in green technology and infrastructure regardless of this issuance,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “All you are doing by giving some bonds a green label is making the rest of your debt a little bit browner.”
Issuance of green bonds has exploded in recent years, as fund managers hunt for assets linked to environmental, social and governance criteria that are increasingly important to some clients. A total of $263bn of this type of debt was sold last year, up from less than $1bn a decade ago, according to figures from Moody’s. Germany follows the likes of France, Poland, Ireland and the Netherlands, which have tapped the market in recent years, and Sweden earlier this week.
European politicians including German chancellor Angela Merkel have emphasised that the funding for the Covid-19 recovery should have a green tinge. Column chart of Global green bond issuance ($bn) showing Rapid rise of green bonds The Jülich research group in Berlin estimated that Germany’s plan to become carbon neutral by 2050 could cost as much as an extra 1.1 per cent to 2.8 per cent of gross domestic product a year — underlining the massive level of funding the transition is likely to require.
Germany’s green bond programme will involve up to €12bn in issuance this year, across a range of maturities from two to 30 years. The finance ministry has outlined €12.7bn of qualifying expenditure from last year’s budget, covering everything from the construction of new bike lanes to research into renewable energy. However, this spending is not necessarily conditional on the issuance of green debt. Sabine Mauderer, a member of the Bundesbank’s executive board, said it was important that green bonds encourage the financing of new projects, as well as bankrolling the previous year’s budget. “The new green Bund is already fostering a political debate about green projects — here I see things changing,” she said. “The signalling effect of these new bonds will be important, but the main change needs to be made in the real economy.”