EIB gears for change

European Investment Bank executed the first green use-of-proceeds bond 15 years ago and since then this format, extended to include sustainability bonds, has come to represent close to half of its funding programme. Aldo Romani, head of sustainable finance, and Jorge Grasa, senior funding officer in the finance directorate of EIB in Luxembourg, discuss the year past and the future of the bank’s bond programmes.

How did European Investment Bank (EIB)’s funding strategy change as the economic and geopolitical environment evolved over 2022?

GRASA EIB started 2022 on a strong footing, with issues in several markets. The first deal of the year was a A$1.5 billion (US$1.1 billion) Kangaroo Sustainability Awareness Bond [SAB], the largest sustainable SSA [supranational, sovereign and agency] trade ever issued. This bond was voted Kangaroo Deal of the Year in the KangaNews 2022 awards. An EIB CAB [Climate Awareness Bond] deal won this category in the KangaNews 2021 awards. This shows how EIB’s credibility in the field of sustainability funding is increasingly supporting EIB’s borrowing programme also beyond the EU markets.

About one-third of the funding task was completed by the end of January and nearly 50 per cent was done by the end of the first quarter. EIB wants to frontload at the beginning of the year to capture the market’s dry powder and to be strongly positioned, in case the market experiences hiccups later in the year.

In 2022, EIB also adjusted the structure of deals in favour of more benchmark deals, which represented roughly 70 per cent of the 2022 programme. This included sustainability funding, with CABs and SABs issued in Euro Area Reference Note and full-size US dollar benchmark formats for the first time. This helped secure volume and manage cost and duration against the volatile backdrop.

EIB typically targets a seven-year average maturity. How is the shorter duration experienced in 2022 affecting EIB’s funding programme?

GRASA In the Australian dollar market, the lack of international demand – particularly from Japanese investors – has made longer-duration bonds more difficult to execute, although EIB did manage to do a couple of 10-year trades.

The bank did not encounter difficulties in getting its average target duration of about seven years and we expect 2023 to be somewhat similar. As in previous years, EIB has relied mainly on the euro market to reach its target duration. EIB’s core currencies can bring bigger volumes in longer maturities and the bank can look for shorter maturities in other markets such as Australian dollars and sterling.

In 2022, EIB’s Kangaroo issuance was down from 2021 levels (A$2.5 billion to mid-December compared with 2021’s total of A$3.4 billion). But 2022’s total is still substantial when compared with previous years. Is Australian dollar funding on a longer-term upswing as a component of the overall issuance task?

GRASA I do not think it has peaked and I expect to see more opportunities. There has been a good showing of domestic investors in EIB’s Australian dollar deals and the bank is pleased with their participation. EIB is committed to this market and expects the volume to be similar in 2023, depending on investor demand and the terms available.

“The development of New Zealand is very positive and EIB’s engagement with domestic investors has been encouraging, notably against the background of increasing interest in sustainability aspects. EIB hopes the inclusion of New Zealand government bonds into the FTSE Russell World Government Bond Index encourages more international participation, but we expect this will still be a market very much driven by domestic accounts.”

How did geographic demand for EIB’s Kangaroo bonds change over 2022?

GRASA Domestic participation was very strong in the first weeks of the year and then it became more selective – local investors participated in trades when they saw a pickup against ACGBs [Australian Commonwealth government bonds], asset swap levels, or they had surplus cash to invest. This did not change throughout the year.

Japanese participation, however, was much lower compared with previous years. We saw some demand in bonds issued in the mid-part of the curve, but not around the eight-year or longer end, which in previous years has been driven mainly by Japanese demand.

EIB’s issuance of New Zealand dollars continued to increase in 2022, with a NZ$475 million (US$335.7 million) deal, up from 2021 issuance of NZ$250 million. How have Kauri market funding conditions changed?

GRASA The development of New Zealand is very positive and EIB’s engagement with domestic investors has been encouraging, notably against the background of increasing interest in sustainability aspects. EIB hopes the inclusion of New Zealand government bonds into the FTSE Russell World Government Bond Index encourages more international participation, but we expect this will still be a market very much driven by domestic accounts.

EIB’s CAB and SAB programmes are well-established – only 25 per cent of the bank’s Australian dollar issuance was in conventional format in 2022. Is the sustainable investor base “stickier” than in conventional deals?

ROMANI In Australia, the interest in sustainability has grown structurally in the past two years. We have witnessed this clearly in the dialogue with investors since entry into force of the EU Taxonomy Regulation in 2020. What is also important is the growing awareness that differences exist between bonds – not all green, social and sustainability [GSS] bonds are the same.

This is one of the reasons behind the recent news that the Australian government is joining the International Platform on Sustainable Finance (IPSF). This platform, launched by the EU in 2019, is working on a “common ground taxonomy” for more comparability across products and borders. This development also applies to New Zealand, already a member of IPSF. The New Zealand Centre for Sustainable Finance was very attentive to EIB’s experience in the operationalisation of evolving EU legislation on sustainable finance during our visit to Auckland in May 2022.

This phenomenon is not limited to the domestic investor base. For example, we receive regular calls from Japanese investors asking us about EIB’s taxonomy alignment strategy and how the CAB and SAB programmes are developing in this context. Their attention to such developments has grown enormously over the last three years. So, when it comes to EIB’s CABs and SABs, there seems to be scarcity value.

Will this trend continue?

ROMANI There has been more labelled issuance recently, which is positive. EU regulation is increasing transparency and accountability. As the EU’s climate bank, EIB has taken a very clear stance. This entails in the first place our own goal of contributing substantially to the European “green deal”.

Another important aim is to signal the necessity of more interoperability between complementary approaches in different jurisdictions. Furthermore, we lead by example in the application of the EU Taxonomy Regulation.

Elevated verification for investors via the Reasonable Assurance (ISAE 300) of our CAB and SAB Frameworks was a natural decision already in 2016. Adding the commitment to a gradual alignment with the expected EU Green Bond Standard seems to have benefited the relative value of our bonds and could stimulate demand going forward.

What are EIB’s plans for the evolution of the CAB and SAB programmes?

ROMANI The relevance of sustainability funding on the total borrowing programme of the bank has grown over the course of 2022, with about 45 per cent issued in either CAB or SAB format. This is up from around 7-8 per cent in 2018/19.

These bonds are allocated exclusively to EIB’s financing activities contributing substantially to EU sustainability objectives, in line with evolving EU legislation on sustainable finance. The growth of CAB issuance is, therefore, the direct result of growing disbursements contributing substantially to climate change mitigation. These disbursements have comprised around 30 per cent of EIB’s total disbursements to mid- December 2022.

CAB and SAB eligibilities are being progressively extended to reflect to capital markets EIB’s broader commitment, in its Climate Bank Roadmap 2021-25, to progressively align EIB’s tracking methodology for green finance with the EU Taxonomy. In 2021, EIB aligned the technical screening criteria for substantial contribution of its CAB allocations with those proposed by the European Commission’s Technical Working Group for sustainable finance in 2020.

In 2022, we have aimed for full alignment with the technical screening criteria for substantial contribution put in place by the first EU climate taxonomy delegated act in January 2022.

So 2022’s issuance volume is not the result of past allocations based on past criteria, it rather evidences new allocations based on current criteria. This is a core feature of EIB’s green and sustainability bonds.

At this stage, CABs are at the forefront, because they have a focus on climate change mitigation and this relates to the rules that came into force in January. At the same time, we are in the process of applying the logic and structure of the EU taxonomy and its technical screening criteria in all those SAB-eligible areas where an official taxonomy is not available.

How do you help investors monitor EIB’s progression in these fields?

ROMANI We have made the whole aligning process fully transparent in the CAB and SAB Frameworks. In the frameworks published in 2021, we disclosed for the first time all the technical screening criteria for substantial contribution used for allocation. We are repeating the exercise in 2022, with tables that compare the criteria used in the past with those used today. In this way, investors are able to monitor concrete progress year after year.

The 2021 CAB and SAB frameworks are about to be published. In addition to substantial contribution, going forward we are also planning to extend the analysis to ‘do no significant harm’ and minimum safeguards. We expect to do this with reasonable assurance.

Adequate calibration of the criteria will be essential for the establishment of increasingly viable solutions in the coming years. In this context, the ‘triangulation’ between the EIB finance and project directorates and the external auditors in the context of their reasonable assurance exercise is key to producing results that have a factual value for investors. This highlights the importance of GSS bonds as stable and reliable instruments of communication with stakeholders, at a time when the impact of new legislation on nonfinancial disclosures on issuers’ total asset portfolios is under detailed assessment.

In this field, analysis cannot be limited to regulatory aspects: implications for best practice, other supervisory and central bank guidance or requirements, as well as investor expectations also warrant consideration. Uncertainty is inevitable as we transition to new criteria, and we have proved that it can be managed effectively within the context of well-structured GSS bond frameworks with focus on the substance underlying the label.