EIB takes digital green bonds back to the future

IFR 2487 - 10 Jun 2023 - 16 Jun 2023
5 min read
Julian Lewis

A pioneering issuer of digital bonds, the European Investment Bank, is extending its experiments with blockchain and distributed ledger technology by hatching Europe’s first digital green bond. Strikingly, the EIB will bring its new landmark in the Swedish krona market – where the World Bank issued the first labelled green bond 15 years ago.

Like its supranational peer, the EIB is also a green bond trailblazer. Its groundbreaking 2007 “climate awareness bond” – the first use-of-proceeds deal – was an equity-linked instrument in euros.

Like its subsequent plain vanilla green bonds, the new issue will also bear the CAB label.

The deal answers the EIB’s call for a step-change in responsible technology. It will be executed through lead managers Credit Agricole and SEB’s “sustainable and open” so|bond system. This is based on a new blockchain validation protocol called “Proof of Climate awaReness” which incentivises participants to minimise their environmental footprint.

“It’s natural for the European Union climate bank that we find ways to reduce the carbon footprint of transactions on blockchain,” said Peter Munro, head of investor relations and sustainable finance at the EIB.

“The mandate was to combine new tech and sustainability. They've pushed us to be a bit more innovative than just issuing a green bond on blockchain, but really to work on the fundamentals of the technology to find something that would make sense in the context of sustainability,” said Eric Busnel, deputy head of SSA DCM at Credit Agricole.

Unlike many proprietary digital bond platforms that now total more than 30, according to the International Capital Market Association's technology directory, so|bond is a decentralised, collaborative system.

“What's pretty new is that there is no platform. There is no platform provider. There are no unique and central actors performing all operations,” said Guenole de Cadoudal, head of the digital assets group at Credit Agricole.

That makes the new issue the first bond that is “truly faithful” to the blockchain spirit of decentralisation, Busnel said.

The new bond will not be fully digital since it involves fiat currency and the Swift system for payments. The project had aimed to use a Nordic central bank digital currency, but that was not feasible.

Even so, the bond’s entire “lifecycle” – primary issuance, secondary trading, coupon payments and redemption – will take place on the blockchain, de Cadoudal said.

The deal continues the EIB’s push in digital bonds and takes it into a new currency – another priority for the project. Its £50m issue via HSBC’s Orion platform in February followed €100m raised digitally through Goldman Sachs’ Digital Assets Platform in December. It also issued the same volume through Societe Generale’s Forge in May 2021.

“We're still in the foothills, but our view is that it's important to be involved early on and test the market and [be a] pioneer,” Munro said. “The understanding needs to be built, along with the issuance framework and infrastructure.”

Not staged

Participants stress that the new issue will not be a “staged transaction”, as one put it. While the likely size will not be benchmark and investors will not be taking major positions, it will go to external buyers and not the leads’ treasury portfolios.

“It shouldn't be purely a set of insiders because then it's too easy to get it right. You need to simulate what it would be like in a normal transaction – just at a smaller scale to keep it all more manageable,” the participant said.

Investors will participate via their custodian banks (or sub-custodians if they do not use Credit Agricole or SEB in the role; future deals will be open to other banks, but the leads are keeping the first to themselves). They do not have to join so|bond themselves.

While not all institutions are yet active in DLT and blockchain, some are deeply knowledgeable already. Among this group, “we have seen a very strong level of interest”, Busnel said.

Just as no maturity or coupon have yet been indicated for the bond, no timing has been confirmed. Those involved emphasised the lead time needed for custodian agreements and other arrangements, pointing to the three months between the first announcement of the EIB’s sterling digital bond in November and its execution.

But indications are that the new issue should be completed before Swedish summer holidays begin with Midsummer on June 23–24. “Not much happens in Sweden after Midsummer,” said one participant.

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