Large market interest in Swedish green bonds

On 1 September, the Swedish Debt Office (Riksgälden) issued Sweden’s first green government bond via syndication, with SEB as one of the leading banks and the structural adviser, according to SEB’s Nordic Alert. According to the government plan, SEK 20 billion was issued for which the total interest exceeded SEK 47 billion. According to a press release from the Swedish debt office, 72 individual investors participated. 62% of issuance was from Sweden, 18% from the UK, and 15% from the EMEA region. By investor category, 46% were pension funds, 33% asset managers and 9% insurers. SEB noted that SEK 20 billion of government debt was significant, given the overall level of debt being raised in recent years. In 2019, only SEK 30 billion of SEK denominated bonds were issued by Sweden.

The following day, The FT reports that Germany raised €6 billion of 10-yr debt in an offer that was 5 times oversubscribed. The yield was expected to be 0.01 percentage points below the yield on a conventional bond.

Mundus Comment

Although it is a positive that there is a strong underlying demand for green bonds, raising debt this way raises a number of questions. Sweden’s government presents a lengthy prospectus explaining the rationale and what the funds are to be used for, and the bonds have been labelled ‘dark green’, the highest rating available from Cicero, which rates green bonds. However, there is no tangible net climate positive that arises from them. Essentially the current activities of the Swedish government have been divided into two buckets. Those that can be claimed to be strongly climate positive will be funded by the dark green bond. The rest are financed the usual ways – by taxation or standard government bonds. In addition, the bonds will be paid back out of general taxation revenue, most of which will remain non-green over the 10 year period of the bond.

The exercise could be accused of being mere branding. Alert to this, the government points at another rationale – the green bond was not issued to raise extra money for green projects. Rather, it was to support the development of the green bond market. Is this a fair claim? Possibly, in that the government has now placed a large volume (SEK 20 billion) of green bonds, denominated in SEK, attracting global attention to the method. In addition, the market price for this is transparent, so other commercial projects can see what the price of the green bond is before deciding on their financing strategy.

But the contortions that Nordic governments are going through to develop green financing can stretch the point, as highlighted by Bloomberg, reviewing a Danish proposal for green bond. Bloomberg explains that any green bond can be thought of as a regular bond, plus a promise to do green stuff. The regular part of the bond should price at regular terms. The difference between the green bond and the regular bond is therefore the ‘greenium’.  Pricing of green bonds from France, Ireland and Belgium shows a ‘greenium’ of about 0.01% or 0.02% to fund environmental projects over regular projects, which the German sale appears to have confirmed..

But for Denmark, which doesn’t issue a large volume of green bonds, the interest in its green market could be low. Denmark thinks to overcome this by issuing a regular bond, with a green certificate packaged with it. The regular Danish bond would be identical to other debt raised by Denmark, and would therefore trade exactly the same. The green certificate is a new independent instrument, which the market can find a price for if investors choose to trade it after buying the package. 

Germany has solved the liquidity issue another way. Its bonds will be “twinned” with an equivalent conventional bond. Investors will be able to swap their green bonds for the conventional equivalent at any time, ensuring that they don’t lose in holding a bond for its greenness. The ministry will ensure the price of the green twin is always at least that of the conventional bond, purchasing green bonds if it falls below that level.

The Bloomberg opinion wryly observes that the Danish green certificate solution leads to the bizarre situation in that “The green certificate is a zero-coupon bond with zero redemption at maturity. Hence, there are no financial commitments or corporate actions connected with the certificates.” In plain English, this means that there is no financial value whatsoever in holding the certificate, and no green actions performed through its creation. Anyone paying money for it, must be doing so for another reason. Truly financial engineering taken to the extreme, which Bloomberg points out with clarity and humour. Anyone paying money for the certificate, must be doing so for another reason. Green branding perhaps?

Sweden has considered this and tried a different approach, and the Germans have yet another third solution.