The scale of the forthcoming labelled issuance has significant potential to develop the green-bond market as a whole, European market participants say. The first EU green-bond syndication is expected in mid-October.

The EU unveiled its green-bond framework on 7 September. Member states are also submitting recovery and resilience plans (RRPs) to the European Commission, detailing planned reforms and investments to 2026. These RRPs form the basis upon which the EU gives disbursements from the NGEU’s recovery and resilience facility (RRF), as well as the EU’s green-bond use of proceeds.

At a press conference on 7 September, EU commissioner, Johannes Hahn, said: “The NGEU green-bond framework will play an important role to finance the mandatory share of 37 per cent of climate expenditure under the RRF. Member states are eager to fulfil this goal. Many national plans go far beyond this and even allocate up to 60 per cent to measures that support climate objectives.”

The EU assigns a climate coefficient of 100 per cent, 40 per cent or zero to projects in member states’ RRPs and this corresponds with the percentage of funding for the project that is eligible for EU green-bond disbursements and issuance. The coefficients are informed by the EU taxonomy’s technical-screening criteria where feasible.

The framework includes nine eligible expenditure categories, including research and innovation for climate transition, clean energy and climate adaptation. It is aligned with the International Capital Market Association’s Green Bond Principles and, to the extent possible, the upcoming EU standard for European green bonds.

While the EU has not issued green bonds under its previous programmes, it is not new to labelled issuance. Social-bond issuance entirely funded its support to mitigate unemployment risks in an emergency programme. Jean-Christophe Machado, euro rates and derivatives strategist at Natixis, says EU social bonds were well received and played a role in developing the market, which was still relatively small in early 2020.

The green-bond market is much more developed and already well supported by supranational, sovereign and agency issuance, particularly in Europe. But Mark Byrne, syndicate at TD Securities, expects the EU’s green-bond programme will nonetheless be a significant driver of progress.

“One of the big issues for investors in green bonds has always been overall supply and the difficulty of increasing portfolios year-on-year. The EU’s green bonds will be large, liquid, rates instruments with everything high-grade investors could want from a green bond, as well as providing a template for other borrowers to follow,” Byrne explains.

Green-bond issuance in Europe has also steadily built a reliable pricing advantage, best exemplified by Germany’s twin-Bund approach. Machado says the unique dynamics of Germany’s green bonds have led to a consistent premium of 5-7 basis points. He expects EU green bonds to attract a more conventional premium of 2-4 basis points.