By Alex Struc, Portfolio Manager, co-Head PIMCO ESG Initiative.
Alex Struc, Portfolio Manager, co-Head PIMCO ESG Initiative.
France has issued its first sovereign green bond – a milestone for global investors who are exploring or emphasizing assets focused on ESG (environmental, social and governance) principles.
Green bonds are a form of financing issued by corporations, agencies and now sovereigns with the aim of mitigating environmental concerns. Since the first green bond was issued in 2007 by the European Investment Bank, the size of the green bond universe has reached roughly $250 billion (according to PIMCO and HSBC research) and is expected to grow as nations and organizations align their practices with their commitments under the 2015 Paris Climate Agreement.
Focus on financing environmental projects
How can a sovereign bond be green? In a sense, France’s green bonds fit into the existing sovereign bond ecosystem: The new issue is designed to share the same quality rating as its other comparable sovereign issues and to be equally as liquid.
However, the new issue will also follow the green bond principles as defined by the International Capital Market Association (ICMA) – meaning the bonds enable capital-raising and investment for new and existing projects with environmental benefits. Using the bond proceeds to finance activities linked to armament, nuclear and fossil fuels is also prohibited.
Some sceptics may argue that only 7% of the bond issue’s proceeds are pencilled in for new (rather than existing) investments, and that the expected €13 billion identified as eligible proceeds in 2017 is small in comparison with other sovereign offerings or with overall French GDP. However, this number still represents around 5.2% of the outstanding green bond market and is substantially larger than green issues from any corporate.
Furthermore, the French Treasury is committed to providing transparency into its green spending by publishing details on expenditures across sectors, agents and types of activities deemed as green. This type of disclosure is not customary for any investment grade issuer, let alone a sovereign. France’s attempt to shed light on its green activities in a credible manner is a major step forward in this regard – and could serve as a template for others.
Raising the bar with longer duration
Corporate and agency green bonds to date have focused on intermediate (five- to seven-year) maturities, which mainly reflect companies’ desire for visibility on originating “green” collateral. France is raising the bar by issuing a long bond (maturing in 2039), which is indicative of the nation’s ongoing commitment to sustainable developments.
France’s green bond – which is dedicated to environmental projects and excludes certain restricted activities – is a direct response to the growing demand from investors looking to align their portfolios with their beliefs in ESG principles. The overall attractiveness of the bond from an investment perspective should be put in context of final pricing relative to other French debt in addition to its green credentials.
Other sovereigns are likely to follow France’s example, and with it the ESG evolution looks set to continue.