ESG News: The sovereign effect on European sustainable debt issuance

13 January 2021

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Caroline HaasManaging Director and Head of Sustainable Finance, Financial Institutions and SSAs

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When governments take the lead, others follow. The recently-announced green gilt has raised hopes for broader growth in the UK sustainable corporate bond market, because sovereigns have shown themselves to have a “knock-on effect”: they clearly set an important example, have direct influence with their country’s corporates and, more broadly, can meaningfully increase available liquidity for sustainable debt through their issuance.

What evidence have we seen so far of this “knock-on effect” on a country’s wider sustainable bond market? In Table 1 below we look at various countries’ sustainable finance issuances 12 months before and after their governments announced their foray into the market. Specifically, we considered issuance from corporates, financial institutions and municipalities.
 

We can identify three dynamics in the European market

  • Market stimulation effect: Inaugural sovereign green bond issuances have led to an increase in the number of ESG1 issuances in almost every country, except for the Netherlands. For Belgium and Ireland, the inaugural sovereign green bond issuance kick-started the first trickle of issuances in the home market, while in more developed markets, such as France and Germany, the inaugural sovereign green bond issuance encouraged a greater number of domestic issuances (see Chart 1 below).
 
CHART 1: # Green and Social bond issues 12 months before and after an inaugural sovereign green bond issuance

Source: NatWest and Dealogic

*3 months before and after the announcement of an inaugural sovereign green bond

  • Market entry effect: A rise in the number of debut green and social bond issuers partly drove the increased volumes.  This suggests that green sovereign bond issuance can help encourage new organisations to enter this market. As Chart 2 below highlights, this effect is particularly pronounced in the French, Swedish and German markets.
 
CHART 2: # Debut green and social bond issuers 12 months before and after inaugural sovereign green bond issuance

Source: NatWest and Dealogic

*3 months before and after announcement of inaugural sovereign green bond

  • Market diversification effect: In several more mature sustainable debt markets, such as France and the Netherlands, sovereign green bond issuances resulted in a larger number of unique issuers (see Chart 3 below), helping prevent the market being concentrated amongst a smaller group of names. While this hasn’t necessarily led to an increase in absolute supply numbers, it has strengthened the resilience of the sustainable debt market.
CHART 3: # Unique Green and Social bond issuers 12 months before and after an inaugural sovereign green bond issuance
Source: NatWest and Dealogic
 
*3 months before and after the announcement of an inaugural sovereign green bond
 
Of course, sovereign green bond issuance isn’t automatically a “magic bullet” for every country as the apparent non-effect on various economies, such as Poland, illustrates. It may also simply be the case that sustainable debt issuances take longer to emerge after a sovereign has set the scene: in Belgium, corporate sustainable bonds, such as the likes of Cofinimmo and Fluvius, needed nearly two years after sovereign issuance coming to market.
 
What do these examples tell us? Well – like the ancient city of Rome – green bond markets aren’t built in a day, but sovereign green bond issuance can certainly help.
 
Thanks to Gregory Efthimiou for helpful research assistance

Source: NatWest and Dealogic. Includes all corporate, financial institution and municipality debt.

*3 months before and after announcement of inaugural sovereign green bond

1 ESG Environmental, Social & Governance

Green bonds
ESG
Sustainability
Europe

 
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