Sovereigns gripe about decline of greenium

IFR 2511 - 25 Nov 2023 - 01 Dec 2023
6 min read
Julian Lewis, Luke Acton

With the fat greeniums they once enjoyed having now largely evaporated, some European sovereigns are starting to fret over the value of issuing green bonds. Germany, the sector’s largest issuer, and Ireland are the first to raise the matter publicly since the product went mainstream in 2020 and 2021.

"I cannot tell what a fair greenium is. But I know one thing: zero is unfair," said Thomas Weinberg, head of trading and issuance at Bundesrepublik Deutschland Finanzagentur, which handles Germany's bond issuance. “Something is going wrong here.”

He was speaking on a panel at the Association for Financial Markets in Europe’s recent European government bond conference in Brussels.

Having become the market’s largest sovereign green issuer with an annual programme of as much as €15bn–€17bn, Germany has seen its greenium shrink. Having ascended to 5bp and higher in some cases in late 2021, it has declined to 1bp–2bp across much of the sovereign’s green yield curve.

“Transparency [over bond proceeds’ allocation and impact] and the risk attached to that should be mirrored in the price of a green bond," Weinberg said.

It was a view shared by Anthony Linehan, deputy director for funding and debt management at Ireland’s National Treasury Management Agency. “If there's absolutely [no greenium] on issuance, why would we undertake all the work and risk that's involved in issuing a green bond?" he asked the AFME conference. “There has to be a reward to the issuer.”

Value for money

Despite the greenium decline, which has affected most sovereigns as green supply has risen and especially as focus on liquidity has intensified this year, investors still appear to assign some additional value to sovereign green bonds. Germany’s largest outstanding green issue, the €10bn 2050, traded at 2.69% on Thursday, according to Deutsche Bundesbank data – 2bp inside its conventional twin. The €9.5bn 2030 green Bund was also 2bp inside.

Moreover, the sovereign’s green curve shows some larger greeniums. Germany’s shortest outstanding green bond, the 2025 Bobl, closed as much as 5bp inside its twin on Thursday, while the more recent 2027 green Bobl was at a 3bp premium.

Conversely, though, the 2031 green Bund was trading flat to its twin at 2.48% and the newer 2033 and 2053 green issues were only 1bp inside their twins at 2.54% and 2.75%, respectively.

Germany’s updated green bond presentation in April described it as a “permanent issuer” of the product – though Wednesday’s announcement that it is withdrawing from the inflation-linked sector, where it has a similar volume of debt outstanding, could lead some to question this stance.

One example of a sovereign borrower effectively withdrawing from green issuance – or at least declining to build a curve – already exists. Triple A Sweden has not issued the product since it completed the "initial government assignment to issue a green bond”, as the National Debt Office put it in a November 2021 investor report.

Best interest

France, the pioneer of sovereign green issuance with an unmatched €62bn outstanding, has seen a particularly notable decline in its greenium from as much as 20bp on its landmark 2039 OAT verte a year ago to a single-digit figure now.

But a spokeswoman for Agence France Tresor affirmed multiple benefits from the product. “AFT issues green bonds to support the development of sustainable finance and its contribution to the green transition, in line with the government’s policy, but also to respond to market demand and diversify the investor base. This strategy of issuing bonds regularly in a flexible manner to meet investor demand enables [AFT] to issue debt in the best interests of the taxpayer.”

Belgium has achieved what Maric Post, director of treasury and capital markets at the Belgian Debt Agency, terms “marginal” greeniums of 1bp–1.5bp on its green OLOs at launch, but also tighter secondary market and auction pricing than on conventional bonds. “We do feel we gain some benefit from that,” he said.

While direct pricing benefits were part of the UK Debt Management Office’s decision to enter the market, a spokesperson also cited other “important benefits” such as a more diversified investor base. “We have seen [this] in practice with some investors with ESG mandates involved in the Gilt market for the first time, which we believe is supportive of our green Gilt and wider programmes,” the spokesperson said.

Fiduciary duty

Investors, especially those in the US, often cite their fiduciary duties in explaining their unwillingness to pay substantial greeniums, although some also acknowledge benefits from greater transparency and reporting that can justify paying up for some sovereign bonds.

In an interview, Amundi’s head of fixed-income SRI processes Alban de Fay said a greenium of up to 5bp is acceptable on ESG bonds generally. He argued that anything higher would hinder the asset manager’s duty to maximise returns.

Kim Sang Liu, senior government bond portfolio manager at APG Asset Management, also stressed that obligation and added a point about environmental leadership: “Especially for governments it is important, even more than for a commercial issuer, to do the right thing. And that means issuing green bonds even without having a financial incentive as a reward."