Denmark, one of the last European sovereigns still outside the green bond market, has dumped a complex plan to offer strippable green certificates in an inaugural green bond deal and will instead adopt Germany’s twin bond approach. However, the country will enter the market next month through an auction, in contrast to its neighbour’s debut deal which came via syndication.
Denmark will add a green twin to its 0% November 2031 benchmark bond on January 19. This will follow the sovereign specifying the size and scope of its green bond programme in its usual pre-Christmas funding announcement this month.
Its disclosed DKr11bn (US$1.7bn) of eligible 2021 green expenditures indicate potential annual volume, although 2022 may be a particularly strong year. Denmark’s framework – which Cicero Shades of Green assigned its strongest “Dark Green” rating – permits the current and previous year’s expenditures to be funded through green bonds.
Like the European Union’s NextGenerationEU programme, the Danish framework seeks to be aligned as closely as possible to the EU’s taxonomy of sustainable activities and Green Bond Standard – though neither of these is finalised.
“It was important to secure that the framework we came out with is also relevant in the future,” said Martin Wagner Toftdahl, head of monetary policy operations and government debt at Danmarks Nationalbank. He added that the central bank had made a “great effort” to ensure alignment.
Jacob Michaelsen, head of sustainable finance advisory at Nordea, said: “That really is a step-up from most of the sovereigns that we've seen."
Expenditures on the country’s world-leading sustainable agriculture sector are excluded from the framework. Renewable energy (especially wind), electric vehicles and rail transport are the main eligible areas, although Denmark’s subsidies for electric vehicles could still be challenged over manufacturers’ supply chains under the taxonomy’s “Do No Significant Harm” requirement.
Dutch divergence
Auctioned green bonds may take longer to establish greeniums, bankers argue. Demand can also be inconsistent. Recently Germany had to retain nearly half of a green Bund auction.
But Denmark is unconcerned about the distribution method’s impact on investor appetite or pricing. “We can make the issuance according to the demand on the day,” said Wagner Toftdahl. “We are optimistic there will be large demand.”
While it is “reasonable to assume” that the deal will achieve a greenium, the sovereign's primary reason for issuing is to be “part of establishing a green capital market”, Wagner Toftdahl added.
Denmark also hopes to widen its investor base by attracting new buyers. Unlike the only other sovereign to enter the market via an auction, the Netherlands, it will give no preferential allocations to ESG investors.
BNP Paribas, Danske Bank and Nordea acted as advisers, with Nordea as structuring adviser.
Cannibalisation concern
As a smaller sovereign with limited borrowing needs, Denmark initially hatched a novel approach to avoid green bonds cannibalising its offerings and harming their liquidity. Since early last year it had advertised a scheme to offer separately tradeable green certificates alongside conventional government bonds, with the two together constituting a Danish sovereign green bond.
While this found some support, many were critical. One senior DCM banker termed the scheme “unhelpful, not ideal” for its potential to accommodate bonds being “green one day and not the next” due to the freedom to detach the warrant and trade it separately.
Danmarks Nationalbank has now dropped its description of the scheme from its website. The Danish central bank manages government borrowing on behalf of the finance ministry.
Instead, Denmark will use what Wagner Toftdahl describes as the “proven concept” of the twin bond.
However, he does not rule out reviving the scheme. He sees “commonalities” between it and twin bonds and still views it as “a good approach”, he said.
Neighbouring laggards
Despite Nordic investors’ strong support for green bonds, underscored by the key role of a group of Swedish institutions in driving the first World Bank issue in the format, the region’s sovereigns have been notable laggards. Sweden only entered the market last year, while Finland has yet to issue green bonds.
The latter hopes that “investors remain assured of high ESG quality of nominal Finnish government bonds, given the level of ESG rankings for Finland and ambitious government targets in this field,” said Anu Sammallahti, deputy director, funding, liquidity and investor relations at Finland’s State Treasury. Its strategy is to support its benchmark bonds’ liquidity in the face of monetary policy measures weighing on this.
Moreover, Norway – an atypical issuer so cash-rich it only issues government bonds to maintain a yield curve for the rest of the market – has ruled out any entry into the green bond market for now. According to the Norwegian debt office, which is also run from the central bank, “the government has no plans to issue green bonds or any securities labelled green”.
The finance ministry could decide otherwise in the future, a Norges Bank spokesman said.