The climate seems to be increasingly influencing investment decisions, as environmentally friendly bonds continue to rise.
This step by the EU follows the issuance of Germany’s first green bonds in 2020, with the second bond being planned.
Air pollution is increasing in countries like Germany; the EU wants to reduce carbon emissions.
The European Commission is preparing to issue green bonds for the first time as investors and politicians call on Brussels to increase sustainable debt as part of its 750 billion euro credit injections to finance Europe’s economic recovery from coronavirus.
EU Budget Commissioner Johannes Hahn told the Financial Times that Brussels is “exploring the possibility” of selling sustainable bonds, as part of the unrivalled increase in debt that is likely to begin next year.
Green bonds are created to finance projects that have a positive impact on the environment and climate. They are also a way to raise money for environmentally friendly purposes, and issuance has increased in recent years, with Moody’s estimating that by 2019, a total of $263 billion will be sold worldwide, up from less than $1 billion a decade ago.
“The Commission is exploring the possibility of issuing some of its bonds in formats that demonstrate its commitment to sustainable financing – including social and/or green bonds”.
In July, EU leaders signed an agreement that enabled the EU to raise 750 billion euros (694.5 billion pounds, 888.6 billion dollars) in bonds on the international financial markets. This will finance a “next generation EU” project that will provide grants and loans to help EU countries recover from the negative effects of COVID-19, the Financial Times said.
How are green bonds issued?
As the name suggests, these bonds are created to help finance environmentally friendly projects.
It is important to note that most environmentally friendly bonds are issued as “green” to use proceeds or asset-backed bonds. However, the proceeds from these bonds are earmarked for climate-friendly projects, but are covered by the entire balance sheet of the issuer.
Green bonds are increasingly being considered today. It is estimated that 200 billion euros out of a total of 900 billion euros will be spent on environmentally friendly projects, which is in line with the commitment of eurozone leaders to spend only at least 30 percent of the recovered funds on sustainable funds.
The latest step follows the issuance of Germany’s first green bonds in 2020, with a second bond issue planned.
It is also important to note that the European Investment Fund issued its first green bond in 2007 under the name Climate Awareness Bond. The benefits of such bonds include improving the reputation of investors and supporting sustainability.
The rapid rise of environmentally friendly bonds
Thomas Buberl, CEO of the French insurer Axa, said there is massive demand for green bonds from long-term investors like Axa.
Last year, the EU government signed a pledge to become the world’s first carbon-neutral continent by 2050, requiring trillions of euros of investment.
This week, the President of the European Commission, Ursula von der Leyen, will announce Brussels’ efforts to increase the emissions reduction target for 2030. Germany, Sweden, the Netherlands, France and Poland have issued green bonds.
Green bonds will not come onto the market quickly and the first rounds of bond sales would take the form of conventional debt.