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Green Bunds as a Catalyst for Climate Policy

D.he German state took its time with its first green loan. Euro countries such as France and the Netherlands have long since issued green government bonds with great success, but nothing has come from the most important issuer in the euro area. That should change soon: In September, the federal government will issue its first green federal bond for 4 billion euros and with a term of ten years, as has long been known.

Another five-year title is to be added in the fourth quarter, so that the total volume this year can reach up to 11 billion euros. The starting shot was given on Monday by Jörg Kukies, State Secretary in the Federal Ministry of Finance. Together with Rita Schwarzelühr-Sutter, Parliamentary State Secretary in the Federal Environment Ministry, and Tammo Diemer, Managing Director of the federal finance agency responsible for debt management, he presented the “green framework”.

This includes the expenditures in the federal budget that are to be financed with the green federal bonds. Kukies wants to avoid any suspicion of so-called greenwashing. The financial market understands the green color to be projects that are declared sustainable but are actually not. The State Secretary, who was previously Germany’s head of the investment bank Goldman Sachs, is primarily concerned with transparency and clear rules for sustainable spending.

He can also take inspiration from the state development bank KfW, which is one of the largest issuers on the market for these debt instruments with green bonds of 23 billion euros in circulation. The KfW documentation on the use of funds from green bonds is considered to be extensive and detailed.

Clean traffic and efficient energy consumption

As Kukies pointed out, the green bonds should serve as a catalyst for more investment in a green economy. This would finance budget expenditures aimed at clean transport systems, reducing CO2 emissions from vehicles, the transition to a largely renewable energy economy and more efficient energy consumption. Research for a more sustainable future should also be funded. A total of 12.7 billion euros in green spending has been identified.

The fact that the federal government had to take so long to prepare its first eco-bond is also due to the complex structure of a twin bond. For every green security there is a conventional bond with the same term. The difference in returns between the two stocks can then be derived from this. In addition, large investors can exchange the green securities for conventional ones at any time, with which the finance agency wants to guarantee the high liquidity of government bonds also in the sustainable segment.

This is met with approval on the market. The similar design features made it possible to directly determine a green premium, praises Mario di Costa, bond specialist at the Swiss asset manager Bantleon. So far, there have always been marginal differences in terms of terms, coupons or interest dates.

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