A world's first for France and its €4bn green inflation-linked bond (OAT€i)

3 - minute read

Natixis acted as Joint Bookrunner for the issuance of a long 15yr Inaugural Green Inflation- Linked Bond for the Republic of France [1]

On May 25th, France treasury (Agence France Trésor) issued the first ever Green Inflation-Linked Bond. The €4bn and long 15 year bond was priced at +12 bp over the OAT €I 0.10% 2036, representing a tightening of 3 bp from guidance, and a limited new issue concession of 2 bp, thanks to a total demand over €27bn. The bond was indexed to the Harmonised European consumer price index (excluding tobacco).

The strong investor demand came from a granular investor base (~230 investors), split mainly over France (29%), the UK (20%), the Nordics (12%), Italy (8%), Asia (7%) and Germany (4%). More than half of the bonds were allocated to Green Investors according to the Bookrunners.

Given markets’ volatility and as inflation is running even higher than expected in the eurozone (annual inflation up to 8.1% in May 2022 according to Eurostat), the hedge against inflation offered to investors was welcomed. Moreover, inflation-linker portfolio managers were happy to beef up their portfolios with a green asset.

France launched its green bond program in 2017. The total outstanding of the 3 Green OAT is now € 49.37 bn (as of June 1st 2022). These bonds will be tapped within the limit of the total Green expenditures for 2022 which amounts after this OAT€i to 10.73 bn (15 - 4.27 bn) [2].

With €49.37bn (as of June 1st 2022) issued under the green format, France comforts its lead on global sovereign markets (Figure 1). France is also a long-lasting issuer of Inflation Linked Bonds (since 1998) and now the first to issue a Green Inflation-Linked Bond.

Figure 1: Green debt outstanding amounts for developed countries

Source: Natixis

As stated in the Green Bond Framework, green OATs target State budget spending on climate change mitigation and adaptation, biodiversity protection and pollution control, in line with the Energy Transition and Green Growth Act as well as France's commitment to implement the Paris Agreement.

The Bond’s rationale relies on the capital allocated to green expenditures which is adjusted to the daily inflation reference index on settlement date (01/06/2022) [3]. Indeed, the capital allocated to green expenditures at issuance is therefore based on the nominal adjusted by this “inflation supplement”. On June 1st 2022, the inflation reference index [4] on this “OAT EI 2038” was 1.0674, meaning that France will allocate 4 x 1.0674 = € 4.27bn to green expenditures. It will similarly adjust the nominal by the accrued inflation each time the bond will be tapped.  As developed in the Annex to the Framework, France has adopted a “greater environmental integrity” by linking allocated Green Expenditures and the nominal adjusted to inflation.

In the end, this inflation-linked green bond will fund environmental expenditures, while protecting investors against the risk of inflation according to AFT.

The link between the energy transition and inflation is garnering attention

Inflation has been at the core of 2022 French presidential election. Voters’ first preoccupation in this troubled period was purchasing power. Environment and climate change are one of the main concerns as well [5]. These concerns are linked. One cannot lastingly address one, without addressing the other. Sustainable finance approaches and products must help conciliating these concerns and AFT’s Green inflation linker is doing so.

3 main phenomena [6] linking inflation and climate change can be highlighted:

• Fossilflation: On the short term, dependance on fossil fuels and disordered transitions towards low carbon energy mixes materialize in primary energy markets’ volatility.
• Climatefliation: Supply chains disruptions caused by climate change physical consequences (ex: severe droughts) put an upward pressure on prices (soft commodities).
• Greenflation: Increasing demand for renewables, electric vehicles and batteries pull prices of critical metals along when unmatched by supply (copper, aluminum, cobalt, nickel, etc.).

These three climate-related phenomena are of different nature, but all have the same consequence: variation in prices and often, inflation (See more in our newsletter article, Greenflation, the new normal?).

AFT’s green inflation-linked bond is a first step toward the integration of these phenomena in sustainable financial products. AFT’s already innovative approach could even go further in its reporting, linking inflation, allocated expenses and the energy transition. One expects the future impact reporting of Green OAT to analyze how some programs (re)financed through the proceeds raised help cushioning inflation effects, especially by shielding modest households (interlinkages between inflation, fuel poverty and decarbonization, with an emphasis on the notion of co-benefit, see our analysis of France’s resilience blueprint in our last newsletter).