(Source: European Commission)
How did the first NextGenerationEU green bond issuance go?
The European Commission has today issued the first NextGenerationEU green bond, thus raising €12 billion to be used exclusively for green and sustainable investments across the EU. This represents the world’s largest green bond issuance ever.
The 15-year bond due on 4 February 2037 was more than 11 times oversubscribed, with books exceeding €135 billion. On that basis, we have achieved excellent pricing conditions.
Today’s issuance thus represents a promising start to the NextGenerationEU green bond programme of up to €250 billion by end-2026. With NextGenerationEU green bonds, the EU is set to become the world’s largest green bond issuer by far, providing a significant boost to sustainable finance markets as well as funding a greener EU recovery from the pandemic.
Why is the EU issuing green bonds?
President von der Leyen first announced the European Commission intention to issue 30% of NextGenerationEU green bonds in her State of the Union address of 2020. This intention comes of a strong motivation to implement the Green Deal and confirms its commitment to sustainable finance. This move will:
- Bring a new highly rated and liquid green asset to the market, allowing a wide range of investors access to green investments;
- Enable the European Commission to access a wider range of investors;
- Allow investors to diversify their portfolio of green investments with a highly rated liquid asset, thereby potentially accelerating a virtuous circle of sustainable investments;
- Further boost the green bond market and serve as an inspiration to other issuers;
- Strengthen the role of the European Union and of the euro in the sustainable finance markets.
What is the link between the recently adopted EU green bonds standard and the NextGenerationEU Green Bond framework?
The Commission has prepared a robust and credible framework for the NextGenerationEU green bond issuances. It is based on the International Capital Markets Association Green Bond Principles (ICMA GBP), while catering for the specific structure of the programme where, inter alia, spending authorities are separate from the issuing institution. This framework provides the necessary guarantees to investors that the proceeds will be used for green investments.
It is already clear that the framework is making a step forward towards the use of the Taxonomy. The framework is aligned, to the extent feasible, with the EU Green Bond standard.
The Commission proposal for an EU Green Bond standard has been adopted on 6 July 2021. It will only enter into force at a later stage, after adoption by the European Parliament and the Council.
On the other hand, to finance the recovery, the EU has started issuing green bonds already building on a tailored framework reflecting the modalities of NextGenerationEU.
To cater for this difference in timing the EU institutions agreed to act early and introduce elements of the EU taxonomy – into the rules governing the Recovery and Resilience Facility already in December 2020. In this way, the EU has aligned, where feasible, the criteria for green spending under the Recovery and Resilience Facility with the EU taxonomy, while also allowing a broader set of green investments to be financed via the Recovery and Resilience Facility.
How will the NextGenerationEU green bond framework guarantee that the proceeds from the NextGenerationEU green bonds are used for a truly green objective?
The largest share of NextGenerationEU – or about 90% – will go to the EU’s main recovery instrument, the Recovery and Resilience Facility (RRF). Under the RRF rules, every Member State has to dedicate at least 37% of their national Recovery and Resilience Plan – the roadmap to spending the RRF funds – to climate-relevant investments and reforms, with many Member States planning to do more than required. The investments supporting the green transition have gone through intense scrutiny during the approval process of Member States’ Recovery and Resilience Plans to ensure that they are truly green.
These expenditures will be tracked using EU climate coefficients, where expenditures are assigned a score (0%/ 40%/ 100%) based on their contribution to the climate. The list of eligible climate-related activities can be found in Annex VI of the RRF regulation. These EU climate coefficients have integrated, where feasible, technical screening criteria of the EU Taxonomy.
Crucially, climate-relevant investments need to fulfil the Do No Significant Harm criteria, ensuring that the investments are green and produce no negative effects.
Under the RRF rules, Member States will report to the Commission the green expenditures that they make. The Commission will then use that information to show to investors how the green bonds proceeds have been used to finance the green transition.
What kind of reporting has been foreseen to guarantee to investors that proceeds from the NextGenerationEU bonds will be used for green investments?
In line with standard practice, the framework will report on both allocation and impact, describing how the green bond proceeds have been spent and what has been achieved with them.
For the allocation reporting, the Commission will use Member States’ data on spending on green projects. The reporting will be organised around nine categories as identified in the NextGenerationEU Green Bond Framework. These are: Research and innovation activities supporting the green transition, Digital technologies supporting the green transition, Energy efficiency, Clean energy & network, Climate change adaptation, Water & Waste management, Clean transport & Infrastructure, Nature protection, rehabilitation and biodiversity, Other. Energy efficiency, clean transportation and clean energy will have the largest share of all.
On the basis of data by the Member States, the Commission will disclose how the proceeds of the NextGenerationEU green bonds have been allocated to different investment categories and Member States. An independent external auditor will verify the allocation reporting.
The report on the environmental impact of the green bonds investments will enable investors in NextGenerationEU green bonds to gauge the beneficial impact of their investment. Impact reporting will be a cross-Commission exercise, drawing on the wide expertise inside the institution. To ensure that the impact reporting is meaningful, unbiased and accurate, the European Commission will rely on independent expert advice. The modalities for the independent assessment of the impact reporting will be finalised and announced in due course.
Could you give us examples of projects that will be funded through NextGenerationEU green bonds?
The funds from the NextGenerationEU green bond issuances will be used to finance green and sustainable projects under Member States’ Recovery and Resilience Plans.
A minimum of 37% of every Recovery and Resilience Plans is devoted to the green transition, with many Member States striving to do more, so there are many projects in the plans which would be eligible for financing via the NextGenerationEU green bonds.
Member States Recovery and Resilience Plans contain all reforms and investments, including the ones that will be financed by green bonds. The plans are publicly available online.
Eligible projects from the already approved plans include a research platform for energy transition in Belgium, or the construction of wind power plants on land in Lithuania.
How are the NextGenerationEU green bonds expected to impact the financial markets?
The NextGenerationEU green bond programme will turn the European Union into the biggest green bond issuer worldwide.
By bringing such a sizeable green, safe asset to the market, the Commission will provide access to the green bond market to a wide range of investors. At the same time, the European Commission will be able to diversify its investor base, tapping the pool of dedicated green investors.
The boost that the green bond market will receive should inspire other issuers to issue green bonds as well and allow investors to diversify their green portfolio with a safe asset, thereby stimulating demand and supply.
How will the issuance of NextGenerationEU green bonds help in achieving the EU climate targets such as 55% reduction by 2030 and climate neutrality by 2050?
The NextGenerationEU green bond proceeds will finance the climate-relevant investments (at least 37%) of Member States’ Recovery and Resilience Plans. These plans must be consistent with national energy and climate plans. Therefore, investments in NextGenerationEU green bonds will be directly contributing to achieving national climate plans.
In addition, NextGenerationEU green bonds aim to further bolster the European sustainable finance markets, by potentially further increasing much needed financial flows to green economic activities.
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