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Stirred, Not Shaken

Finimize

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What’s going on?

Europe issued its first-ever green bond to record demand on Tuesday, which makes you wonder if there’s a more popular Bond in the world right now.

What does this mean?

Green bonds – those used to raise money for environmentally friendly projects, like clean transport and energy-efficient buildings – have been proving popular with an increasingly eco-minded investor base. In fact, the market grew by 95% (1) a year between 2007 (the year the first green bond was issued) and the end of 2020, when the total amount raised also hit the $1 trillion mark.

The European Union (EU) has stayed out of the space until now, but that all changed when it issued $14 billion worth of green bonds on Tuesday. Trouble was, it completely underestimated demand, with investors putting in $156 billion worth of orders – the most for green bonds ever (2). Sit tight, y’all: the EU’s planning to sell nearly $275 billion more over the next few years.

Why should I care?

The bigger picture: Money talks.

These green bonds are caught in a virtuous circle right now. See, high demand for the assets pushes up their price and drags down their yields, which subsequently brings down their interest rates. This, at a time when the equivalent traditional bond’s yield – and in turn interest rate – is higher. That means issuers can raise funds for green projects much more cheaply than they can non-green projects, which incentivizes them to think more sustainably.

Zooming out: Green bonds have banks’ blessing.

Talk about the gift that keeps on giving: data from Bloomberg shows investment banks have earned $3.6 billion in fees this year from helping sell bonds advertised as “green”, “social”, or “sustainable”. Compare that to the $1.6 billion they’ve made doing the same thing for fossil fuel companies, and banks might be happy enough for this trend to keep accelerating.

Originally Posted on October 12, 2021 – Stirred, Not Shaken

Sources:

1: https://www.climatebonds.net/market/explaining-green-bonds

2: https://www.reuters.com/business/sustainable-business/eu-starts-sale-debut-green-bond-ifr-2021-10-12/

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