On October 12, 2021, the European Commission (EC) issued its very first NextGenerationEU green bond, raising a total of € 12 billion which will be used exclusively to finance green and sustainable investments across the EU. More than 11 times oversubscribed – the final order book exceeded 135 billion euros – the issue is a solid launch for the NextGenerationEU green bond program and its plan to issue up to 250 billion euros in ‘similar bonds by the end of 2026. With 29% of investors coming from the UK, the issue also underlines the depth of liquidity in the UK and its continued position as a leading center for global investment .
The timing and success of this first NextGenerationEU green bond are important, as it was scheduled just a few weeks before COP26, the United Nations climate change conference to be held in Glasgow from October 31 to November 12, 2021. Adopted in September 2021 and fully compliant with the Green Bond Principles of the International Capital Market Association (ICMA), the NextGenerationEU Green Bond framework is designed to achieve the following goals, among others:
-
Confirm the EU’s commitment to sustainable finance
-
Strengthening the role of the EU in sustainable financial markets
-
Provide a wide range of investors with access to new liquid, highly rated green assets that can diversify their portfolios
-
To energize the green bond market as a whole and serve as an inspiration to other issuers.
Under NextGenerationEU green bonds, funds are to be used for nine broad categories of spending, including energy efficiency, clean energy and climate change adaptation. A minimum of 37% of each recovery and resilience plan must be devoted to the green transition and the EC will report on how the funds have been spent (allocation report) and what the funds have achieved (report impact).
The NextGenerationEU Green Bond marks a monumental shift for issuers and other market players in ever-changing financial and financial markets and represents a new step in the collective efforts of international bodies to support green projects around the world. For example, since its inaugural issuance in 2008, the World Bank has issued more than 160 green bonds in nearly two dozen currencies for a total of around US $ 15 billion. In the private sector, sustainability bonds have also become fashionable in recent years. Unlike green bonds, sustainability bonds have no restrictions on the use of products; the coupon paid to investors is linked to the achievement of specific performance objectives, such as CO reductions2 emissions and increased use of energy from renewable sources.
The high level of interest in this first NextGenerationEU green bond issue and the announced plan by the EC to issue many more green bonds over the next five years:
-
Underline the EU’s determination to fully meet the challenges of combating climate change and to achieve the goal of climate neutrality by 2050 through the deployment of a historic recovery plan to stimulate the economy of the EU.
-
Confirm that EU climate policy goals and investor expectations are fully aligned on climate issues.
-
Demonstrate that green bonds are an effective instrument to channel private capital to finance climate investments.
While the transaction is a welcome development in the overall growth of the green bond sustainable finance market, there is also a significant push to structure these transactions to:
-
Determine the benefit for issuers of a green bond label / certification, by accessing a significantly lower cost of capital compared to bond issuance without a green label.
-
Develop global and standardized green definitions and a set of global taxonomies, disclosures and principles, such as the European Green Bond Standards (EUGBS), which will help ‘commoditize’ these transactions to increase market confidence, identify responsible financial structures and ensure legal consistency of transaction conditions.
-
Establish independent certification of alignment and compliance which will become a requirement for the purpose of labeling a bond instrument as “green”.
-
Define the representations and warranties, commitments and events of default relating to alignment and compliance with principles, reporting obligations and other commitments that will become standard in green bond documentation.
Developing any or all of the above will be essential to support sustainable and faster growth of the green bond market towards the achievement of global climate goals.
For its part, the UK government recently announced that large corporations will be required to disclose climate financial information from April 2022. In doing so, the UK will become the first G20 country to make such disclosures mandatory for its largest companies, in line with recommendations from the Financial Stability Board (FSB) Working Group on Climate-Related Financial Reporting (TCFD).
In conclusion, to achieve climate neutrality by 2050, issuers, investors, regulators and the legal community will need to coordinate widely over the next few years to catalyze market growth. While the EC’s green bond transaction is a clear sign of its commitment and ambition, companies will be watching closely the detailed policy proposals that follow.
For a number of sectors, a difficult transition could be looming. For others, there are obvious opportunities, especially as European governments and central banks seek to boost public and private sector investment in new and emerging technologies. Perhaps David Attenborough was right when he said at recent COP26 meetings: “We are, after all, the greatest problem solvers that ever existed on Earth.[…] If by working separately we are forces powerful enough to destabilize our planet, by working together we are certainly powerful enough to save it.
