EU recovery proposal could turbocharge green bond market

IFR 2342 - 18 Jul 2020 - 24 Jul 2020
4 min read
Tessa Walsh

The European Union could become the biggest global issuer of green bonds – and the size of the market could nearly double in a short time – if it pushes ahead with a proposal to finance 30% of its €750bn post-pandemic recovery fund with green bonds, according to a report by ratings agency S&P.

An additional €225bn in issuance would boost the size of the global green bond market by 89% compared with 2019, help to create a green pricing curve and boost the euro’s status as a green reserve currency.

"It would be a game changer for the EU to issue €225bn of green bonds," said Marion Amiot, a senior European economist at S&P.

European Council President Charles Michel’s proposal to have 30% of the "Next Generation EU" €750bn fiscal plan target climate-friendly assets is a significant increase on €7.5bn of fresh money announced in the EU’s Green Deal. S&P described it as a "huge improvement".

It would make the EU the main issuer of long-duration safe green assets that could rival German government bonds and help policymakers and central banks aim to "green" the financial system.

"It would definitely be a boost for the euro as a green reserve currency, but even as a reserve currency in general," Amiot said.

Longer-duration instruments would match the expected speed of the post-pandemic recovery as countries struggle to generate revenue to repay funds, and the longer timeframe of climate targets.

Issuance along the maturity spectrum would also create a long-awaited green pricing curve which would also boost issuance and help to regulate pricing, as excess demand has driven up the price of the limited supply of green debt, creating a "green bubble" that can be a deterrent to investment.

"Having a supranational issuer the size of the EU potentially issuing this amount of green bonds could change the dynamic considerably," said Mike Wilkins, head of sustainable finance research at S&P.


At the moment, green bonds make up only 3.7% of the US$6.3trn of outstanding global bonds, which makes it difficult and expensive to build green portfolios. Only 17% of outstanding green bonds were issued by sovereigns, although more sovereigns are expected to issue in the second half of the year, including Germany and Sweden.

"With the EU coming up with this quantum of issuance, you could see a green pricing curve emerging in Europe, where other private sector issuers such as supranationals or financial institutions could price from, which would again facilitate a scaling up of the sustainable debt market," Wilkins said.

A boost in issuance would also help the ECB to invest in euro-denominated green assets, as well as potentially stimulate private sector cash via co-financing projects.


The ECB’s president Christine Lagarde has committed to put green objectives at the heart of the bank’s €2.8trn asset purchasing programme, aided by the new green taxonomy regulation which was approved by the European Parliament on June 16, and aims to create a common standard for green investment.

"If you add all these ingredients together, there is a plausible case to say that this is the direction that this could be heading," Wilkins said.

The EU is meeting this weekend to hammer out the details of the specific green and social content of the recovery fund, which will look at how funds will be allocated to member states and what conditions will be attached to the funding, which could be politically contentious.

“For countries that emit more greenhouse gases for each unit of GDP, some of the funding might come with stronger sustainability conditions attached so as to help decarbonise their economies,” S&P said.

The EU is also considering a carbon cross-border adjustment tax to repay the recovery fund bonds, and is discussing extending its emissions trading scheme to the shipping industry.

ING’s economists expect “some progress towards a compromise, but no final agreement” this weekend, as more time for negotiations is required.