Financing green transition: European experience

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The “green recovery” transition process is an expensive endeavor: hence the European Commission tries to find most effective ways to finance it. Thus, more than two years after the start of the green bond issuance, the borrowing has brought about €50 billion to the market to become the world’s largest green bond program.  

   The Commission will fund up to 30% of NextGenerationEU, NGEU program by issuing some “borrowings” within the NGEU “green bonds”; which is making the EU (and the Commission) the largest green bonds issuer in the world. After adopting the NextGenerationEU Green Bond framework in September 2021, the Commission started with the issuance of the first NGEU green bonds in October 2021. After more than two years after the inauguration of the green bond issuance, the borrowing has brought about billions to the market with the potentials to make the “green transition” happen.

“Green” recovery instruments
NextGenerationEU is a temporary recovery financial instrument of more than €800 billion to support the EU-wide recovery-resilient transformation both in post-pandemic period and in assisting the states development in building greener and more digital societies.
To finance a complex NextGenerationEU program, the European Commission (on behalf of the EU member states) will raise from the capital markets around €800 billion by the end-2026, which is translating into borrowing volumes of an average of about €150 billion per year. The necessary funding for the program is expected to be acquired under the best possible market conditions with a diversified funding strategy.
More on strategy in: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/how-eu-issuance-works_en

   This strategy relies on a mix of long- and short-term issuance via syndicated and auction formats to enable the Commission to raise funds flexibly and on the most advantageous terms under prevailing market conditions. The 15-year bond due on 4 February 2037 was more than 11 times oversubscribed, with books exceeding €135 billion showing a wide range of investors’ interest in the European “green bond”.
The “strategy’s approach” combines the use of different funding instruments and techniques with open and transparent communication to market participants. It is characterized by: – multiple funding instruments (EU-Bonds and EU-Bills) to maintain flexibility in terms of market access and to manage liquidity needs and the maturity profile; – combination of auctions and syndication, to ensure cost efficient access to the necessary funding on advantageous terms; – structured and transparent relationships with the banks supporting the issuance program (via a Primary Dealer Network); and – clear communication with the markets through, i.e. annual borrowing decision; bi-annual funding plan, to offer transparency and predictability to investors and other stakeholders; and quarterly investor newsletter.
This “unified funding approach” will remain the Commission’s main “tool” in reaching the financial markets for other expected borrowing, as stipulated in the EU’s financial rules and regulations. All of the Commission’s borrowing operations are encoded in a robust governance framework, which ensures coherent and consistent execution.
It is interesting that the “investors’ geography” is quire varied though concentrated in the European continent: from the UK with 29 percent, the Nordic countries -12 percent, Benelux and France (each with 11 percent), Germany with 10 percent and Italy with 9 percent; other European states -7 percent and the rest of the world -4 percent, etc.

General source: Commission press release (October 2021) at:
https://ec.europa.eu/commission/presscorner/detail/en/IP_21_5207

EU green bonds: financial advantages
NextGenerationEU green bonds are generating numerous advantages for the EU, the capital markets and the market for sustainable finance in particular.
The first NextGenerationEU green bond was issued in October 2021immediately raising €12 billion to be used exclusively for the EU-wide green and sustainable investments; the world’s largest green bond issuance ever during a short period of time.
With NextGenerationEU green bonds, the EU has become the world’s largest green bond issuer providing a significant boost to sustainable finance markets as well as funding a greener EU recovery from the pandemic. With the strong over-subscription rate and excellent pricing conditions this issuance represented a promising start to the NextGenerationEU green bond program of up to €250 billion by the end-2026.
Source: https://ec.europa.eu/commission/presscorner/detail/en/IP_21_5207

   As the Commission acknowledges, the NextGenerationEU program’s “green bonds” are having the following advantages: – confirming the Commission’s commitment to sustainable finance; – bringing a new, highly rated and liquid green asset to the market; – helping the Commission access a wider range of investors; – allowing investors to diversify their portfolio of green investments with a highly rated liquid asset, potentially accelerating a virtuous circle of sustainable investments; – boosting the green bond market and serve as an inspiration to other issuers; and – strengthening the EU’s role and the common currency euro in the sustainable finance markets, both within the EU and outside.
Reference to: https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/nextgenerationeu-green-bonds_en

   The funds from the NextGenerationEU green bond issuance will be used to finance green and sustainable expenditures under the EU Recovery and Resilience Facility. Eligible investments from the already approved national recovery-resilience plans, NRRPs include a number of energy transition facilities, construction of wind power plants and renewables. A minimum of 37% of every NRRP has to be devoted to the green transition; many member states striving to do more.

Conclusion
Full implementation of NextGenerationEU financial components and measures through the green bonds can reduce greenhouse gas emissions by 44 million tons per annum, equivalent to 1.2% of the EU’s aggregate greenhouse gas emissions. These are the results of the first comprehensive quantification of the expected climate impacts of the NextGenerationEU green bonds allocation published in a special report at the beginning of December 2023.
https://ec.europa.eu/commission/presscorner/detail/en/ip_23_6170

   More than two years after the start of the green bond issuance, the borrowing has brought about €50 billion to the market with the potential to become the world’s largest green bond program.
The NGEU green bonds’ allocation shows that the bonds are backed by a significant pool of projects and climate-related investments in the national recovery-resilience plans, NRRPs: i.e. from clean transport to infrastructure and energy efficiency, eligible for green bond financing with a total volume of €190 billion.
Everybody knows the transition process in “green recovery” is going to be expensive; so everybody wants to know, e.g. how much does it cost, where to get money and who shares the burden?
The European “green deal” is both the law and a political program; in the latter there are numerous vested and conflicted interests involved, e.g. industrial lobbyists, traditional farmers, etc. in the EU institutions and the member states. The Commission succeed in winning support for its climate ambitions, passing measures to speed up the green energy transition, boosting the circular economy, increasing carbon sequestration, addressing EU-wide deforestation and creating a carbon border tax, to name a few. As well as more easy to adopt legislation on limiting packaging wastes, setting new standards for trucks’ CO2 emissions and certifying other carbon removals.
We hope that the green bond issuance and billions of euros in borrowing to the member states’ markets would provide for needed potentials to make the “green transition” happen.

 

 

 

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