German sovereign innovates with its Bund’s inaugural green twins

The massive investors’ appetite for Green Bonds was once again illustrated with the German Federal government inaugural Green Bond issuance. The EUR6.5 bn German sovereign Green Bond transaction launched on September 3rd was 5 times oversubscribed with an order book exceeding EUR 33bn. The Green Bond with a maturity of 10 years and a coupon of 0.00%, was priced 1 basis point below the “conventional” 10-year German Federal government Bond with a yield equating to -0.46%. The issuance paves the way for more liquidity, transparency and supply on the Green Bond market in the European Union. According to Germany’s Federal Ministry of Finance, the issuance of this debt is part of a long-term strategy to make green budget spending more transparent and strengthen the country’s position in the sustainable finance sector.

Germany's Green Bond could have a significant impact on the Green Bond market. The country's debt is considered being the least risky in the European Union. It also serves as a risk-free benchmark and this role could be replicated on the Green Bond market. Moreover, this inaugural green transaction is already the second largest Green Bond issued by a European Union country (largest one being France green OAT).

 

Context

Germany, a long-awaited entrant in the sovereign Green Bonds segment, has finally taken the plunge. After Poland's first sovereign bond in the European Union in 2016, followed by several countries including France, Belgium, Netherlands, Luxembourg and Ireland amongst others. It is now the turn of the German government to propose a Green Bond, only a couple of days after the inaugural Green Bond issuance from the Swedish Treasury.

In line with its commitments to achieve the Paris agreement’s objectives and its Climate Action Plan for 2050[1], Germany will issue EUR12 bn total worth of Green Bonds in 2020. A 5-year maturity transaction is expected later in the year. This ambitious choice is commensurate with the government’s medium-term plan to cut greenhouse gas emissions in Germany by at least 55% by 2030 compared to 1990 levels.

The bond will finance the German Federal Government's expenses and exclude any expenditures already included in other government-backed entities such as the energy efficiency sector for buildings, already financed by the KWF Green Bonds.

It will focus on five sectors in line with the draft EU Green Bond Standard and mapped to the 6 environmental objectives of the EU Taxonomy (see our latest EU taxonomy updates here) :

1. Transport: improve and promote clean and more environmentally friendly transportation systems
2. International cooperation: assist emerging market and developing countries in their transition towards a more environmentally friendly economy and support international cooperation in that field  
3. Research, innovation, awareness raising: support and facilitate knowledge and innovation about climate and environmental matters
4. Energy and industry: accelerate the transition towards an economy that largely runs on renewable energies and towards a more environmentally efficient use of energy and other resources 
5. Agriculture, forestry, natural, landscape and biodiversity: invest in climate-resilient forests and natural landscapes, and development of organic and environmentally friendly farming practices

 

The Green Bond will, for example, enable Germany to finance the maintenance and development of federal railway infrastructure, the use of hydrogen, subsidies to promote low-carbon agriculture and encourage ecological and organic practices, and German financing to the UN's Green Climate Fund that amounts to $1,68bn (third largest contributor after the United Kingdom and France)[2].

Impact reporting will be published between one and three year following the respective issuance according to the government's framework.

 

A Green Bond for a second step in Germany's ecological transition

Even if Germany has made progress in the decarbonization of its electricity sector (in 2019, renewable energies represent more than 40% of Germany gross electricity production, an increase of 8.4% comparing of 2018 power production), as highlighted by Climate Action Tracker, there is significant room for improvement for the ecological transition of the country[3]. For example, in the transport and heat production sectors, which account for two thirds of primary energy consumption[4] in the country. The share of renewable energy is still low in these two sectors with less than 9% for the transport sector[5].  With new expenditures mentioned in the use of proceeds section of its Green Bond Framework such as support for electric mobility or subsidies for the purchase of zero-emission vehicles, Germany demonstrates its willingness to catch up in the transport sector. In addition, KfW Green Bonds also support financing to Green buildings, including energy-efficiency of existing assets, further strengthening Germany’s commitments in this field.

 

Who is the twin?

The twin bond concept is a new concept introduced by Germany in the Green Bond Market. Investors in German Green Bonds will be allowed to swap their holdings with a conventional German government bond with the same maturity and coupon whenever they want. According to the German Federal government, the twin bond mechanism will increase the marketability of Green Bonds and facilitate access to liquidity in the still-marginalized Green Bond market.

The ability to compare two bonds from the same issuer with an equivalent maturity and coupon intends to provide more transparency to the market particularly in identifying the green premium potential of Green Bond.

 

Efficient timing

The Green Bond issuance comes when Chancellor Angela Merkel has clearly announced its willingness to support green projects in Germany notably in the context of the EUR130 bn recovery plan following the economic crisis linked to covid-19 that features at least EUR40 bn climate-related spending[6]. 

 

A collaborative effort

The Green Bond is the result of a long lasting global governmental effort that has been able to select and analyze together the key decisions for the Green German Federal securities, including the validation of the framework or the selection of eligible projects in the budget.

A Core Green Bond Team (CGBT) was created, under the responsibility of the Minister of Finance, which includes the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety as well as the Federal Republic of Germany’s Finance Agency. Its objective is to manage all the operational risks of the Green German Federal securities.

For each eligible green expenditure, the CGBT works with the relevant department to select projects based on the Green Bond Principles (GBP), public taxonomy and previously published federal expenditure documents.