German Green Bonds: when governments put their money where their mouths are

On the 24th August, the German government confirmed their plans to raise €11 billion (£9.9 billion) through the issuance of their first green bonds. 

The planned tranche, in September, will be Germany’s first green bond market issuance, with the proceeds used to support the country’s sustainable finance programme including cleantech and green energy projects.

Initially the government, as confirmed by the deputy finance minister Joerg Kukies, said the initial issuance will be worth €4 billion with the remaining debt being released in the fourth quarter of 2020.

Kukies confirmed: “From now on, the German government will issue green federal bonds every year. In this way, we are creating strong momentum towards a more robust sustainable finance market...our innovative twin bond approach is designed to attract new investors and issuers to the green bond market and thus act as a catalyst, channelling more investments into a greener economy.”

Fixed income investment managers have welcomed the announcement of Germany’s arrival to the green bond market, heralding the move as great news for sustainable investors. 

All green bunds?

The German government is not issuing these new green bonds in isolation. It would make sense that the decision to issue both green bonds and traditional bunds means they can slowly make this adjustment without shocking (or confusing) the market. It appears that the thinking is that investors will be more willing to embrace these new securities if they know they can swap them for conventional bunds, should they need to do so.

Ideally a positive green premium should be apparent when the two bunds are compared but it will be interesting to see how the market prices these and monitor this premium over time.

Will they fail or succeed?

Despite great enthusiasm from some supporters, green bonds still make up a very small percentage of the global fixed income market overall. Investors who are new to these bonds may be hesitant to snap up the newly issued securities straight away because of this unknown.

However, although there may be some cautiousness, the German government’s decision to proceed with a green bond programme may have longer-term benefits to investors and capital markets more broadly – particularly in the wake of the global pandemic.

For example, the WHO identified that climate change will affect infectious disease occurrence and so the introduction of green bonds in the current Covid-19 climate is exceptionally well-timed.

This, coupled with the need of governments to encourage financial activity to support their economies, results in an environment that is incredibly favourable towards this incredibly relevant new issuance.

It is of no surprise of those who have been watching the sustainable investment market that more instruments are being issued. In recent times market participants have witnessed sustainable investment approaches flourishing when compared to non-sustainable approaches. Thus, this German Green bond issuance may lead to both new and renewed interest across investor types.

Ultimately, the German government couldn’t have picked a more opportune time to issue their first green bond.

Demonstrating alignment with shifting demographics

What is most reassuring to us sustainable investors is the decision of the German Federal Government to issue green bonds undoubtedly signals to the financial markets that sustainable approaches are important to them. This display of support will go a long way to the continual development of the sustainable financial markets reinforcing that regulation and policy are not the only devices Governments have in their toolkit. 

These green bonds offer investors reassurance that the projects being funded are directly related to climate change solutions; seeing the Government actively participating in the development of the sustainable markets demonstrates a clear commitment to sustainability – after all, actions speak louder than words.