Green bonds part of European Union’s €750 billion package

The European Union is planning to issue green bonds for the first time as part of its recovery plan that involves a €750 billion borrowing spree.

In order to make deep cuts in emissions and raise funds towards achieving climate goals, the European Union will pledge to use green bonds as part of its pandemic recovery plan. European Commission president Ursula von der Leyen said as much as 30% of the €750 billion packages of grants and loans will be raised through green bonds.

Green bonds are a way of raising money environmental-friendly development. These have become a very popular way of raising debt with issuance exploding from $1 billion a decade ago to $263 billion just last year. Many investors and politicians have been asking the EU to use this tool to help Europe’s green transition.

The EU’s current emission target is 40% below pre-1990 levels and there is a clamor to set it to 55% so that they can reach net-zero emissions target by 2050. This transition will require trillions of euros in investment. There is an acknowledgment that the countries may be divided in their ability and ambition to commit to these targets and so it might be difficult to agree to make them legally binding.

The €750 billion recovery plan, designed to help EU members out of the severe economic distress brought on by the pandemic, is the largest such exercise by the EU, allowing borrowing on the international financial markets to fund the “Next Generation EU” project. An additional €150 billion will also be raised to fund government unemployment insurance schemes. These big numbers give Europe the opportunity to become the biggest issuer of green bonds in the world.

There is a big demand in Europe for these bonds. Many countries including Germany, Sweden, France, the Netherlands, and Poland have issued green bonds. Germany’s €6 billion maiden issuances this year was five times oversubscribed. This strong demand and investor appetite would put green bonds on par with sovereign debt, with an attractive yield and maturity profile.

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