Green bonds attract investors with price gains

Italy now also has a government bond that takes sustainability criteria into account. The demand is high and the delivery times are sometimes very long. Germany will soon be luring with a new issue.

The European bond market is not yet as green as in the Italian Dolomites.

ASo at the beginning of March the time had come for Italy as well: The southern European country issued its first green bond, which was issued according to sustainable criteria. At 24 years, the title has the longest term of all green euro state titles and was significantly oversubscribed with a volume of 8.5 billion euros: Orders totaling 80 billion euros were received. Around 90 percent of the funds are to flow into projects for energy efficiency, environmental protection, transport and biodiversity. The first preliminary considerations for such an issue were made in 2019, when the second half of 2020 was mentioned as a possible issue date. However, the market turbulence during the corona pandemic delayed planning.

Italy stood out not only in terms of maturity, but also in terms of bond yield: the spread is around 12 basis points above that of the conventional 20-year bond. The comparison is not easy, as there is currently no comparable bond with the same term. “We believe this is an important milestone for the green bond market as Treasury portfolios invest heavily in Italian government bonds,” said Bram Bos, Green Bonds Portfolio Manager at NN Investment Partners. “The market for green bonds is growing faster and faster, and the significant increase in government bond issues gives more investors the opportunity to green their portfolios.”

More and more European states are planning such bonds, known as green bonds, or have already issued them. Last year, Germany and Luxembourg joined the ranks. The German bond generated record demand for green bonds in September 2020: the € 6.5 billion title was in demand at € 33 billion. All EU states have now increased their green emissions volume to a good 80 billion euros. The sustainability segment remains a niche market with a share of one percent.

For investors, of course, the most exciting question is how the return will develop. This can be seen particularly well in the German green government bond, as there is a “twin” here with an identical term until 2030. According to Landesbank LBBW, a “green premium” is already emerging here, which is expressed in a higher return discount. In the German case, this is around 4 basis points. The same can be seen in the sustainability investments of France and Belgium.

Germany is planning the next green government bond in May – with a term of 30 years and the longest term in the euro zone. The hottest next debut candidate is likely to be Spain, whose finance ministry had also given initial considerations in this direction at the end of 2019. But Great Britain is also promising.