Four of Denmark’s biggest pension funds have indicated they are receptive to investing in a new type of green sovereign bond, the pioneering design of which has just been outlined by the country’s central bank.

Danmarks Nationalbank said it and the ministry of finance are looking into the possibility of green issuance where the bond and the green premium can be traded separately.

The innovative sovereign debt instruments are being devised as a way to issue sought-after green government-backed paper while at the same time ensuring “a continued well-functioning and liquid market for Danish government bonds”, the bank said, announcing the plans last week.

The main part of the bond would be a standard government bond – giving it the advantage of being more liquid than a green bond – with a separately-tradeable green element sold alongside, which can be kept attached where a green bond is required.

Countries with larger funding needs than Denmark had already issued sovereign green bonds, “but in ways that may challenge liquidity for small sovereign issuers such as Denmark”, the bank said.

Models they used either fragmented government issuance programmes, or put big demands on the amount of green spending, it explained.

“A liquid government bond market is essential, as a high degree of tradability means that investors are willing to pay a higher price for the bonds, implying reduced funding costs for the Kingdom of Denmark,” the central bank said.

All else being equal, it said, the larger the bond size, the more tradable it was.

While a conventional sovereign green bond comprised two commitments – one financial in terms of coupon payments and redemptions, and one commitment that spending on green projects at least matched the bond proceeds – in the new model, these commitments are split, or stripped, into two, the bank added.

Danmarks Nationalbank

“A liquid government bond market is essential, as a high degree of tradability means that investors are willing to pay a higher price for the bonds”

Danmarks Nationalbank

“Buying a package of a conventional government bond and a green certificate will enable investors to support the green agenda to exactly the same extent as if they had bought a conventional sovereign green bond,” it said.

The bank stated work on the idea would continue until a final political decision on green issuance was made.

Pension funds await final details and pricing

When asked by IPE for their reaction to the plans, Danish pension funds – big investors in bonds and with growing requirements for environmentally-friendly assets – were cautiously receptive to the idea as outlined.

Jan Ritter, head of liability hedging and treasury at the country’s largest pension fund ATP, said: “We need to see the specific characteristics of the product as it has not yet been issued.

“However, from a general point of view it could be an interesting product development issuing green bonds through a green certificate and at the same time maintaining the liquidity in the bond series,” he said.

Danica Pension is also positive about the idea.

Poul Kobberup, the Danske Bank subsidiary’s investment director, told IPE: “We have participated in some of the green bond issuance this year from Ireland, the Netherlands and the World Bank, and I have also had a chat with the Danish central bank about this.

“They have to think about the liquidity issue, and here they have found a way to get enough liquidity into these bonds. Now we will have to see how the market reacts,” Kobberup said.

The success of any first issue could depend on the pricing, he said. “If someone thinks it’s worth 10 basis points (above standard government bonds) then that could be a problem,” he said.

Kobberup said Danica Pension sees the green bond plans as a definite step in the right direction.

“But every time you invest in something you truly believe is a green investment, you have to take a really good look at it,” he added.

Jesper Nørgaard, deputy chief investment officer of Sampension, said the pension fund is positive regarding the idea, but has not yet decided whether it would participate in such bond issues.

“We believe the idea is well thought out – it’s a transparent pricing of the issuers ’green’ efforts and it retains the liquidity of the overall bond issuances,” he told IPE.

Sampension understands that other European sovereign debt offices have considered the same model, he said, notably the German Finance Agency.

“They are currently expected to pursue a related but different approach,” said Nørgaard.

A spokesman for Danmarks Nationalbank said Denmark was the first country with this model, as far as it was aware.

Sampension recently invested DKK300m in green bonds issued by Ireland and Germany.

At PFA Pension, head of ESG Andreas Stang said that as an investor, which had no target for green bonds within its fixed income investments, this new type of green bond could present a profitable opportunity.

“We could invest in these,” he told IPE. “What would then be interesting is if we would see value growth from holding the green certificate.

“If you assume more investors who need green investments will be coming to the markets in next few years, then there should be a premium for holding the certificate in few years’ time,” he told IPE.

Investors could potentially buy the certificate alone and match it to other debt issued by the same sovereign, he said, even though it was designed to apply to specified issuances by Danmarks Nationalbank.