Who are sovereign green bonds advertising to?

The main point of a government issuing green bonds is to communicate a message — just like with other special bond formats. But are these messages reaching the right audience?

  • By Owen Sanderson
  • 13 Nov 2018
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Government bonds increasingly come in flavours other than vanilla, as finance ministries advertise their credentials in new and exciting areas of the capital markets. But the target audience for the advertisements is curiously vague.

Sovereign green bonds do not have a long history, but they are growing rapidly. Poland pipped France to the post to become the first sovereign green bond issuer in December 2016. Since then, countries including Nigeria, Belgium, Indonesia and Ireland have followed suit. The Netherlands has said it will join them in 2019.

The reasons for the trades vary, but issuing is essentially always a political decision, taken at ministerial or even cabinet level. 

There are few purely financial benefits, as markets now stand, to issuing a green bond, though it may help attract some additional investors — at a substantial cost in time to the government, which has to assess and identify relevant expenditures, design a green bond framework, employ external advisers and verifiers, market the deal to green investors and listen to their feedback, and then report annually on how the money was spent.

Another potential inefficiency is that green bonds may be smaller and hence less liquid than standard bonds, if the country cannot find a large volume of green assets. So far, this remains more of a theoretical objection than a reality. But it could be a problem for smaller issuers, and some worry that carving out part of their issuance programme for green bonds might cut liquidity in existing deals.

France and Belgium have estimated that they have saved enough money in tighter spreads on their green bonds to cover the costs.

Above all, however, sovereign green bonds are a powerful symbol. Typically drawing glowing press releases from finance ministers, not just the low key DMO announcements that might attend a new conventional bond, they give governments a way to parade their green credentials — and offer green investors fairly liquid and risk-free assets.

We’ve seen this movie before, though. Before green and sustainable finance became the topic du jour for sovereign issuers, other markets, such as Islamic finance and renminbi bonds, captured the attention of a handful of finance ministries.

The UK, Luxembourg, Hong Kong and South Africa, none notable for their Islamic orientation, all printed sukuk in 2014, just as it seemed the Islamic finance market was on the verge of a breakout into the mainstream.

A UK DMO spokesperson said at the time: “The sukuk issuance is part of the government’s long-term economic plan to make Britain the undisputed centre of the global financial system and the Western hub for Islamic finance.”

The exercise can't have hurt, surely — but the £200m sovereign sukuk came a day after the DMO had printed a £5bn conventional Gilt. The comparison suggests any funding benefits of the sukuk were strictly limited.

The same rash of enthusiasm characterised offshore renminbi, which, again in 2014, seemed like the future of any self-respecting financial centre. The UK issued a renminbi deal which, by conventional Gilt standards, was laughably small, at roughly £300m-equivalent. This time, too, the government made pronouncements about how this sovereign symbol heralded the growth of a vibrant offshore renminbi market in London.

Not all the sovereigns that have followed suit chose to list their bonds at home, as the UK did — several have issued in the dim sum market — but most have done deals smaller, and more expensive, than their domestic issues or previous foreign currency deals.

Sovereign bonds are indeed an important underpinning of financial market development, but the shortcomings of these special bonds, compared with their conventional cousins, is substantial. To the extent that they do help the country, they help because they are a symbol.

But this gets to the heart of the matter. If nearly everyone who knows bond markets can see the shortcomings, to whom are these bonds supposed to advertise? The general public know and care little about the details of sovereign debt management, except when it goes spectacularly wrong.

But professionals are able to look through the symbolism. For decision makers considering where to locate new market infrastructure or raise new finance, the existence of a token green or other special bond from the sovereign is just that — a token gesture.

This is not to deride governments that make this call. As with companies that decide to issue green bonds, the very process of preparing the deal helps to tie the finance function to the broader goal of sustainability. In most organisations, the part which controls the purse strings has the power — green bonds offer a way to link that to a moral mission.

But the public demonstration purpose is less clear. If governments want to parade their green credentials to voters, there are plenty of ways to do so — and green bonds are some of the least efficient.

  • By Owen Sanderson
  • 13 Nov 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 162,498.05 705 8.03%
2 Citi 160,009.61 642 7.91%
3 Bank of America Merrill Lynch 131,789.43 523 6.52%
4 Barclays 127,011.96 491 6.28%
5 HSBC 105,841.39 530 5.23%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 12,912.95 35 6.65%
2 BNP Paribas 12,334.48 61 6.35%
3 UniCredit 11,196.47 58 5.77%
4 Citi 9,580.75 37 4.93%
5 Deutsche Bank 8,953.95 35 4.61%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 5,454.13 25 10.54%
2 JPMorgan 4,866.13 28 9.40%
3 Goldman Sachs 4,280.20 20 8.27%
4 Citi 3,649.88 23 7.05%
5 UBS 3,602.23 16 6.96%