The German government has stepped up its commitment to sustainable capital market financing with a plan to issue its first green bonds – or Grünen Bundeswertpapieren – in September.
Alexander Schubert, senior portfolio manager at Union Investment, told IPE that issuing green bonds goes beyond legal requirements to underpin the credibility of the government on issues such as climate change, energy transition and biodiversity.
He said this move “should continue to provide great support for the segment of sustainable capital market financing, which has grown strongly in recent years, and convince other issuers to deal intensively with these issues”.
Jana Desirée Wunderlich, head of capital investment at Hannoversche Kassen, agreed, saying the state should play “a role model and a function of guidance”, which it can signal through the issuance of green bonds.
Union Investment has expressed its “very positive view” on the government’s intention to issue green bonds through a dialogue with the German Finance Agency in recent years.
Investors seemed to have embraced the idea to drive social and ecological transformation as in May German chancellor Angela Merkel addressed the international community to step up efforts to protect the environment.
Hannoversche Kasse is in favour of green government bonds too, but remains wary of the coupon. “We generally do not invest in bonds with a 0% coupon,” Wunderlich added.
According to the plan released by the Finance Agency in June, the government will issue “twin bonds”, green bonds and conventional bonds, with a 10-year maturity and an identical coupon of 0%. They will only differ in price. The government expects to cash in between €8-12bn for 2020.
“We generally do not invest in bonds with a 0% coupon”
Jana Desirée Wunderlich, head of capital investment at Hannoversche Kassen
The move is seen as a first step to experience with the new instrument, and at the same time to observe capital market interactions between conventional and green bonds.
In this context, Schubert said it is important that the capital market curve for conventional bonds does not become fragmented. Conventional bonds are the safest and most liquid instruments in the euro bond market, he added.
To avoid different funding curves, the government is offering an option to convert green bonds into conventional bonds.
“Due to this exchange option, the green bond is unlikely to trade significantly below the price of conventional bonds, otherwise arbitrage will set in by using the exchange option,” he said.
The German government plans to issue a second tranche of green bonds in Q4 with a five-year maturity.
Wunderlich said the first issue is only a start, adding that ideally the money raised will be deployed into sustainable projects.
But Schubert noted that the federal budget is subject to the ‘universality principle’ or Gesamtdeckungsprinzip.
“This means that funds borrowed – whether green or conventional – are used to cover the expenses of the overall budget without differentiation in the use of the funds based on legal requirements,” he concluded.