EU Programmes Expansion Limits Green Bonds Investment
A recent report identified a 27% decline in Green, Social, and Sustainable (GSS) bond issuance between the first halves of 2021 and 2022. MainStreet Partners, a London-based ESG Advisory and Portfolio Analytics firm, found the decline through analysis of how corporations and governments are receiving capital from investors.
Green bonds are fixed-income investments devoted to financing new and existing projects or activities with positive environmental impacts. Green bonds can be issued by governments, organizations, and companies. These bonds can help fund renewable energy such as wind, solar and hydro, recycling efforts, energy efficiency, pollution prevention and control, green buildings, sustainable water and wastewater management, clean transportation, and sustainable forestry.
Since 2007, green bonds have been a popular investment, with an average annual growth rate through 2020 of 95%.
Green bonds work just like any other corporate or government bond. Borrowers issue these securities to secure financing for projects that will have a positive environmental impact. A green sovereign bond is simply a green bond that has been issued by a sovereign government.
ENTER EU GSS BONDS
A European Union-issued Green, Social, and Sustainability (GSS) bond, such as the InvestEU Next Generation Fund, is a temporary instrument designed to help repair the immediate economic and social damage caused by the COVID-19 pandemic. The InvestEU programme is intended to boost sustainable investment, innovation, social inclusion, and job creation in Europe.
The InvestEU funds raised for GSS bonds are earmarked for eligible projects: climate and environmental projects in the case of green bonds; projects related to health and education, affordable housing or food security for social bonds; and a mixture of green and social projects in the case of sustainability bonds.
GREEN BONDS SHORTAGE
The GSS bond report by MainStreet Partners showed that EU government programmes, paired with long permission times, are including some green bond projects that would otherwise be financed through sovereign green bonds. Basically, the same projects are being targeted by the EU programmes and sovereign governments for grants and loans, causing governments to find it less necessary to issue their own green bonds to fund these projects. This could have contributed to the reported 27% fall in share of GSS bonds issued by sovereigns between the first six months of 2021 and 2022.
The study found that without greater growth in the number of available green projects, this may lead to a smaller number of green projects for governments to fund.
In terms of issuance, Emerging Markets (EM) were a positive surprise this year; comparing the first nine months of 2022 to 2021, EMs issuance fell less than the global market (-24% vs -31%). Rising global interest rates and volatile markets have weighed heavily on both the supply and the demand of bonds, but less so in emerging markets.
Researchers also expect regulation to have a positive impact on issuances, increasing issuers’ transparency and investors’ confidence.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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