Green Bond, unfinished revolution. The EU is the 'great absentee

An instrument with an essential function for the sustainability policies of its issuers and certainly at the centre of investors' interest, but which still fails to break through on the markets as one might expect. It is a still mixed picture that can be drawn for European green bonds in the light of the dynamics photographed by the ECB at the end of last year. On paper, bonds used for environmental projects still represent by far the predominant part of the broader category of sustainable debt (also including social, sustainable and sustainable-linked bonds) with a quota equal to 65% of the approximately EUR 1,400 billion of a market that has more than tripled since the end of 2020.

However, when one considers only the green bonds placed by Eurozone governments, one discovers a world that is proceeding more slowly. This is underlined by an analysis conducted by Intesa Sanpaolo, which points out that 2023 ended with a value of around 60 billion of bonds linked to environmental issues placed on primary markets by eurozone sovereigns, which is only slightly higher than the 50 billion of the previous year. 2024 started along the same lines, with the same slow trend and issuances of 15 billion in the first two months, while the projection for the whole year is a"modest" increase to 66 billion. 

In short, an initial phase of rapid growth between 2019 and 2021 (when supply grew from 20 to 50 billion) has been followed by a substantial stabilisation brought about by several factors. "The rise in energy prices following the 2022 crisis has led to an increase in the cost of renewable energy, which has incentivised governments topostpone investments in environmental projects," explains Federica Migliardi, strategist on fixed income at Intesa Sanpaolo, also noting how the central banks' tightening of rates last year led to "a drop in investments as a result of the tightening of credit standards, which hit clean energy investments the hardest".

A further regulatory element linked to the European Union's introduction of the Recovery Resilient Facility, which stipulates that 37% of the resources of the National Recovery and Resilience Plans (NRPs) must be allocated to climate projects, and in fact represents an alternative source of financing for governments for environmental projects. "The two sources of funding are complementary: the more EU funds are allocated to climate projects and the less is spent on green bonds," confirms Migliardi, who links the expectations for limited supply growth in 2024 precisely to the incidence of the latter factor. "States will have to accelerate the implementation of the NRPs in order to guarantee the disbursement of EU funds, which will therefore limit the need for financing through bonds linked to the environment," explains the analyst, thus indirectly introducing a further key element: that of the role of theEuropean Commission itself as issuer.

The EU is theoretically destined to become the first supranational issuer of green bonds, since 30% of the funds for the Next Generation Eu programme will be financed through green issues, but in practice it is still the 'great absentee' of the market: to date it has only 48 billion green bonds to its credit and has not yet made any placements of this type in 2024. The obstacle is again linked to the issue of procedures, because the main factor influencing Eurobond issues is the level of implementation of the NRPs by the Member States, which is certainly not proceeding at a rapid pace. Only France has completed 73% of the targets, while on average the 26 countries have achieved a very low 20%, thus also affecting the progress of the EU funding programme. A recovery in emissions in the second half of the year is to be expected, but not necessarily enough to close the gap: "the target of 50 billion for 2024 is optimistic," admits Migliardi, "and we expect a billion offer to be realised.