Four questions on green bonds, of which the EU will become the world’s largest issuer

Posted on Oct 13, 2021 3:54 PM

As announced, Brussels is stepping up on green finance. On Tuesday, the European Union raised 12 billion euros in debt when issuing its very first green loan, which drew a record 135 billion euros in investor orders. This “green” bond should finance projects linked to ecological transition.

The issue of this bond is the first in a long series. The European Union will soon be the first issuer of “green bonds”. As part of its recovery plan, the European Commission has in fact planned to issue more than 200 billion green bonds over the next few years. That is a fifth of the size of the current market.

What are these green bonds? How long have they been around? What is their place in the world market? What does the arrival of the EU change in this market? Answers in CQFD, the educational format of Les Echos.

1. What is a green bond?

The green bond, or green bond, is a debt security “issued on the market by a company or a public entity to investors to enable it to finance its projects contributing to the ecological transition” can we read on the site of the Ministry of Ecological Transition.

These bonds, taken out by investors – who lend money and receive coupons, i.e. interest – operate in the same way as conventional bonds (loan term, payment of interest, risks ). They are nonetheless distinguished by “detailed reporting on the investments it finances and the green nature of the projects financed”, specifies the site.

2. How much do green bonds weigh in the market?

First issued in 2008 by the World Bank, these bonds have since mobilized billions of euros around the world. In recent years, more and more economic players have greened their debts. And the green bond market has grown at great speed.

In 2019, it jumped nearly 50% from the previous year, according to Bloomberg data. It then represented more than 200 billion euros. In 2020, the sector is exploding, totaling more than 300 billion euros. This year, the surge continues unabated, with green bond issuance reaching $ 424 billion in September, according to Bloomberg data. By way of comparison, at the global level, the States in 2020 totaled well over 60,000 billion euros of outstanding debts. Green bonds are therefore still quite marginal on the bond market.

3. What does the EU’s entry into the green bond market change?

By wishing to become the “world leader in sustainable finance”, Brussels is revolutionizing the green bond market, announcing that it wants to raise no less than 250 billion euros in green bonds in a few years – a third of the European recovery plan in response to the health crisis. This plan requires Member States to devote at least 37% of their national recovery plans to greening the economy, with the environmental objectives set by the 27 as part of the “Green Deal”.

France was until now the main issuer of green bonds, with more than 35 billion euros of green bonds issued since 2017. Germany followed with 17.5 billion euros. Belgium, Italy, the Netherlands and the UK have also joined the movement in recent years. And new European states and companies should still join in the dance.

4. What are the limits of green bonds?

If there is a definition of principle linked to green bonds, the international community has not agreed on a precise standard. France, for its part, set up its own label, that of “energy and ecological transition for the climate”, in 2015. Likewise, the EU has defined a framework, providing for reporting and control mechanisms. and evaluation by the Commission and independent auditors on the green investments made.

So that the qualification of the green bond is up to whoever issues it. This can lead, for some, to abuse it, raising the question of the effectiveness of “green bonds” in their initial mission. This lack of framing, pointed out by many players in the field, raises concerns about the risk of greenwashing – this marketing strategy which gives an eco-responsible image to an initiative which is not really so.

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