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EU green bond behemoth raises common asset hopes

Green european union flag as a mark of organic bio food or ecology.

Attracting over €135bn of orders, the EU’s debut green bond was a roaring success that will bring greater liquidity to the green bond market and, with €238bn more to be issued, reinvigorate expectations of a EU common asset

The EU sold the largest ever green bond this week, launching its participation in a market where it intends to issue some €250bn over the next five years, becoming the world’s biggest green bond issuer.

The bond raised €12bn — narrowly pipping the UK’s two week old £10bn green bond debut for the top spot. There were more than €135bn of orders — another record — and, while the practice of investors inflating orders to ensure they get bonds allocated is well known, it is clear there is huge demand for green EU paper.

The EU’s arrival is a key development for the green bond market. A spokesperson from EM investor NN IP called it a “very big milestone” for the market and said: “The deal increases the size and liquidity of the green bond market significantly, and is likely to stimulate more issuers to sell green bonds in the future.”

Its bonds will likely have a use beyond their value as an investment. “It helps with risk management,” said a green bond portfolio manager. “If I run a corporate green bond fund, having high quality green public sector bonds is helpful because it means they can offset additional risk.”

Of course, sovereign green bonds can fulfil a similar role. Sean Kidney, CEO of the Climate Bonds Initiative, said: “We’ve had a lot of sovereign supply, so investors are better supplied with high-quality assets than ever. The fact is that there is still not enough to meet demand though. I speak to investors who would start up green bond funds if there were more assets to buy.”

France, Germany, Italy and Spain have all established green bond programmes in Europe and the total of green sovereign supply is set to keep climbing.

France has the largest volume of outstanding green bonds, with some €38.2bn issued since it launched the framework in 2017. For Germany, the total is €21bn. But with the EU’s ambitions for €250bn, it will soon overtake the sovereigns and could quickly become a key foundational component of green investors’ portfolios.

Scarcity of high quality euro assets is still a concern for investors around the world, which the arrival of the EU as a major borrower should help alleviate.

“Since the EU began, there has been talk of the construction of a common Eurobond asset,” said Antonio Cavarero, head of investments at Generali. “The EU’s deal shows that there is huge demand for that kind of product.”

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