Sustainable Finance and Investments: "Green Bonds: the Sovereign Issuers’ Perspective"

Vittorio Siracusa Banca d’Italia Market Operations Directorate

MIB Trieste School of Management 8 November 2021

Goals for today

Getting familiar with sustainable finance topics Understanding the main features of green bonds and the relative market drivers Raising key discussion points Green bonds: the sovereign issuers’ perspective 8 November 2021

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Premise: global warming…

Monthly global mean temperatures 1851-2020 compared to 1850-1900 averages. Source: Reddit

Green bonds: the sovereign issuers’ perspective 8 November 2021

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…causes climate change…

Green bonds: the sovereign issuers’ perspective 8 November 2021

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…that turns into two sources of cost for the economy 1. Physical (direct) cost: due to disruptions from extreme weather events • Assets are destroyed or damaged • Harm to entities’ balance sheets • Loss of collateral if these assets are financed  potential harm to financial institutions 2. Transition (indirect) cost: due to the impact of the transition to a new, more environmental-friendly economy • Stranded assets, abrupt devaluation of existing capital • Supply chains restructurings • Massive investments in infrastructure needed

 Green finance mostly concerned with financing the green transition Green bonds: the sovereign issuers’ perspective 8 November 2021

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How to address climate change effectively?

Monthly global mean temperatures 1851-2020. Source: Reddit

Green bonds: the sovereign issuers’ perspective ‘Taxi garden’ in Bangkok, September 2021. Source:5Avalon 8 November 2021

Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Financial markets can play a crucial role ‘Every day, about $1 trillion changes hands in the global debt market ecosystem, currently valued at $281 trillion*: ten times the size of the US economy’.

Margaret Kuhlow, WWF Global Finance Practice Leader *includes bond and loans markets

The role of financial markets: 1. Information: providing important inputs for economic and policy decisions 2. Allocation of funds to sustainable investments and promoting technological transition 3. Managing and sharing climate risks Green bonds: the sovereign issuers’ perspective 8 November 2021

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Multiple tools, with green bonds taking the lion’s share Sustainable fixed income tools

Green Bonds (GBs)

Labelled issuances growth: today at $2.3tn

Social bonds

Source: CBI, 2021. Data as of oct-21 expressed in USD

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Redirecting capitals towards selected goals  The UN 2030 Agenda for Sustainable Development (2015) provides 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries  As of 2020, the five most covered SDGs amounted to over 50% of the funds raised in debt capital markets and include: • Goal 3 (Good health and well-being) • Goal 7 (Affordable and clean energy) • Goal 9 (Industry innovation and infrastructure).

• Goal 11 (Sustainable cities and communities) • Goal 13 (Climate action) Source: United Nations, Environmental finance

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

A dedicated study After a brief illustration of green bonds' features, this paper describes the market evolution and identifies the main benefits and costs for sovereign issuers. The financial performance of these securities is then analysed Available on the new series 'Markets, Infrastructures, Payment Systems' which aims at raising awareness of emerging issues while making available the experiences and know-how that reflect the Italian Central Bank's active participation in the construction and management of Eurosystem infrastructures Green bonds: the sovereign issuers’ perspective 8 November 2021

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Green bonds features: exclusive use of proceeds  Purpose: A GB is a fixed income security used to finance eco-sustainable projects which result in environmental benefits  Structure: identical to conventional bonds but with explicit commitment of the issuer to exclusively use the proceeds to finance or re-finance green projects

 Not only investors care about the usual financial characteristics (such as price, coupon, maturity, and issuer’s credit profile), they also assess the environmental allocation of funds  Even if the GB proceeds are raised for specific green projects, the repayment of debt is tied to the issuer and not to the success of the projects. This means that the risk of the project stays with the issuer, rather than with the investor  GBs are increasingly demanded by investors adopting ESG criteria Green bonds: the sovereign issuers’ perspective 8 November 2021

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Green bond doesn’t mean ‘pure green issuer’  One fifth of green bonds have been issued by firms in brown industries  Spanish energy producer Iberdrola: $3.9bn green bonds to finance renewables  …but 85% of its energy from conventional sources

Source: Iberdrola, 2020

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Why buying and selling green bonds?

Some top reasons to… …invest in GBs

…issue GBs Curb climate change

Reputational benefits

Growth of local green market

Ethical obligation

Market signal Fiduciary duty

Reputational benefits

Investment return benefit

Stakeholder expectations Investor demand

Reduce overall portfolio risk

Financial flexibility Reflect asset owners' preferences

Successful for peers

Reduce tail risk

Cheaper pricing 0%

5%

10%

15%

20%

25%

30%

0

1

2

3

Share Source: Krueger, Sautner and Starks, 2020. Survey of 439 institutional investors.

Reasons are not mutually exclusive

4

5

6

7

8

Score Source: CBI, 2021. Survey of 19 Sovereign issuers

Green bonds: the sovereign issuers’ perspective 8 November 2021

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9

Need for standards  Investors must be able to easily identify bonds with climate-related benefits  this highlights the importance of certifications  A variety of certifications have emerged since 2014, all aiming at ensuring the funds are truly directed to green investments  Standardization: non-binding rules that the fixed income industry can follow, totally or partially, on a voluntary base, when issuing GBs  Two main market standards

Green bonds: the sovereign issuers’ perspective 8 November 2021

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ICMA made the first move

Green bonds: the sovereign issuers’ perspective 8 November 2021

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External review to prevent ‘green washing’ Reviewers’ shares in 2020 by number of issuers

Source: Environmental Finance, 2021

Green bonds: the sovereign issuers’ perspective 8 November 2021



Issuers ask an external review to confirm their GBs are aligned to the key features of the ICMA principles



Several levels of review can be provided, ranging from a basic second opinion, to an evaluation by an environmental consultancy firm, or even to a third party assurance



Reviewers usually provide ESG ratings or scores 17

EU establishing a common language for green activities…

Taxonomy regulation  in force since 2020 (part of the 2018 Action Plan on Sustainable Finance)  to be qualified as sustainable, economic activities need to comply with: Six macro environmental objectives

Four requirements 1.providing a substantial contribution to at least one of the environmental objectives 2.causing ‘no significant harm’ to any of the other environmental objectives 3.complying with robust and science-based technical screening criteria (to be finalized in 2022) 4.complying with minimum social and governance safeguards

Green bonds: the sovereign issuers’ perspective 8 November 2021

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…and setting the ground for applying EU standards

EU Green Bond Standards  Regulation proposed in 2021 (estimated adoption in 2022)  Goals: push market growth and fill the investment gap to reach the Paris Agreement target  Not far from ICMA principles, but with some features:  Inclusive: open to all EU and non-EU issuers, including corporates, sovereigns, financial institutions  Voluntary: uniform requirements for any bond issuers that wish to call their bond a ‘EUGB’  Aligned with the EU Taxonomy: 100% of the proceeds must be allocated to taxonomy-compliant assets  External review: mandatory; external reviewers will be registered with the ESMA

integrated with  Corporate Sustainability Reporting Directive (CSRD)  Non-financial Reporting Directive (NFRD)  Sustainable Finance Disclosure Regulation (SFDR) for the financial sector Green bonds: the sovereign issuers’ perspective 8 November 2021

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But fragmentation risk arises from taxonomy competition ‘Taxomania’: numerous taxonomies in development around the world

Sources: CBI, 2021; Ehlers, T., Gao, D. and Packer, F., 2021. ‘A taxonomy of sustainable finance taxonomies’. BIS Papers n.118, 2021.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Can’t stop green bonds growth Significant innovation in debt capital markets, covering 61% of the sustainable bond market Milestones at inception $1.4tn today, 2021E annual issuance growth at +70% EIB issues first GB 2007

ICMA principles

2008

2014

World Bank follows EIB

2015 COP21 - Paris Agreement

Distribution by issuers Corporates 22% Governments 29%

ABS 11% Agencies 17%

Financials 21%

Sources: CBI and UniCredit, 2021. Data as of Jun-21 (issuers) and Oct-21 (growth). Governments includes sovereign and supranational issuers

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Govts, financials and utilities are top issuers Issuers and industries  Governments, financials and utilities are consistently the most substantial issuers of green securities  As of 2020 they had issued $320, $278 and $175 bn respectively, representing 70% of the market  Governments (sovereigns and supranationals) accounting for ~30%  This makes sense as the public and the financial sectors are responsible for financing large-scale transition projects, and utilities are the most advanced in implementing them Source: BloombergNEF, 2021. Data as of Dec-20.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Europe leading the supply, Recovery fund to boost growth  Nearly half of bonds are domiciled in Europe, with Americas, and Asia-Pacific, seeing their market share declining in 2020 and 2021 YTD  EU to issue €250bn green bonds under Next Generation EU, heading to become the largest issuer of green bonds in few years. The inaugural €12bn issuance set a new record

Geographic market share

Geographic supply overview

Focus on Europe

Sources: Bloomberg and UniCredit, 2021. Data as of Jun-21. Green BTP not included

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Multiple currencies, (unsurprisingly) EUR on top Outstanding bonds by currency

2021 YTD issues by currency  Green bonds offered in 31 currencies  € and $-denominated bonds make the 75% of the outstanding. CNY follows  Most recent issues reinforce EUR leadership

Sources: Bloomberg and UniCredit, 2021. Data as of Jun-21.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Rating and tenor  Big bunch of the market concentrated in the Investment Grade space due to the notable share of Governments  Tenor differentiated by industry, with utilities more active on long end*. Nearly 10 years average maturity at issue

Bonds average maturity by issuer industry*

Outstanding bonds share by rating

15% 10% 5%

Government & Supra Energy Consumer Discretionary Technology Communications Investment grade

20%

Financials Utilities Industrials Materials Consumer Staples Health Care

Utilities Consumer Communications Industrials

Sub-invenstment grade

25%

Energy

Materials Health care Technology Consumer Discretionary Financials

0% 0

2

4

6

8

10

12

14

16

Years Source: Bloomberg. Data as of Dec-21. *Governments not included

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Sovereign GBs: great economic and market potential impact ‘Fund managers tell us they went into the green impact fund market and tried to raise money when sovereigns became active in the market.

The market simply was not big enough before. This is evidence that sovereigns catalyse private money’.

Elvira Eurlings, Agent, DTSA, Netherlands

Sovereign green bonds have the power to… Support the growth of local green bond markets by: serving as role models for other types of issuers and setting best practices providing a reference benchmark: anchor for pricing other green instruments bringing new investors into local economies Enhance larger strategic initiatives adopted to address sustainable development goals

Redirect consumers’ savings towards sustainable investmentsmobilize private capital Amplify the transparency in the use of public proceeds and unveil real governments’ priorities

Together with supranational bonds, they represent nearly 1/3 of the GBs market Green bonds: the sovereign issuers’ perspective 8 November 2021

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Sovereign green issues require a stepwise process Most issuers publish ad hoc ‘Green bond frameworks’ some weeks or months before launching the first issue. These documents are usually validated by second party opinions

Source: CBI, 2021

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Multiple (supposed) benefits for sovereign issuers Macroeconomic  Combined with fiscal policy tools (e.g. carbon taxes and emission trading systems), GBs can solve the intergenerational trade-off in climate mitigation policies Financial - public debt management  Broader investor base due to ESG oriented stakeholders  Lower volatility thanks to ‘buy-and-hold’ investors  Better pricing: ‘greenium’ (?)  Average outstanding debt maturity increase as GBs are often extra-long securities Reputational  GBs signal governments’ long run green commitment  Increased visibility  Virtuous cycle: better reputation  better financing conditions, i.e. ‘Halo effect’ (?)

Green bonds: the sovereign issuers’ perspective 8 November 2021

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However some issues remain open  Is there a real additional financing going into public climate-related investments? Some existing investments may simply have been repackaged into GBs rather than into traditional bonds  Public debt management  What effects does the launch of a GB have on existing debt? Trade-off between GBs’ and conventional bonds’ liquidity (especially for small issuers)  What if projected green expenses are not enough? GBs’ liquidity may be affected need for innovative solutions, e.g. German ‘twin model’  Administrative costs: the process leading to GBs issues requires  effective cooperation with multiple stakeholders  coordination between multiple ministries, departments, and external institutions  strong support from the executive leadership Green bonds: the sovereign issuers’ perspective 8 November 2021

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Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Sovereign GBs landscape: Europe steals the show

Note: bonds issued for general sustainable purposes but not fully labelled as green have not been included

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Sovereign green market development: 2021 is a record year 2022

Germany € 6.500

UK € 7.108

Italy € 13.500

(EU) € 12.000

2021 UK € 11.847

2020 Germany € 5.000

2019

France € 11.402

Germany € 6.500

Germany € 6.000

2018 2017 France € 28.874

2016 Issue year

2015 0

5

10

15

Maturity at issuance (years)

Years

20

25

30

35

Notes: Issue year refers to the year of launch of the relative bond. All issues converted in EUR. EU issue included only for illustrative purposes. Data as of Nov-21

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Sovereign green market: key figures and patterns Volume: nearly €150bn outstanding, issued by 18 countries since 2016 Growth  New bonds launched in 2021 more than tripled w.r.t. 2020  UK, Italy and Spain joined the market  However the sovereign green bonds are still a fraction (<2%) of the comprehensive sovereign bonds market Tenor  Ranges from 5 to 32 years with concentrations between 7 and 15 years and between 20 and 25 years  average maturity at issuance is 19 years, higher than non-sovereign green and sovereign non-green bonds (makes sense as green project are typically long-term projects)  Germany and UK issued considerable amounts around the 30-year maturity Currency and geography  € represents 80% of the market, £=13%, $=6% (but may growth with US back in climate talks)  Actually Eurozone has 75% market share (measured by volume) Miscellaneous  Poland and France pioneered the market  Germany is an active issuer on more maturities (as Chile, Poland and Hong Kong, though with lower volumes) and aims to build a green yield curve along the conventional one. UK is likely doing so  Netherlands, Belgium and Ireland are issuing on single maturities Source: author’s elaboration on Refinitiv data as of Nov-21.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Use of proceeds for the main 4 issuers (as of 2020) French OAT

German Bund

Multi-sector Pollution 6,5% 1,0% Energy 8,3%

Living resources 7% Building 37,7%

Adaptation 10,6%

Living resources 23,2%

Transport 12,7%

Adaptation 29,0%

Research and innovation 5%

 Different expenditure patterns  Green projects selected ministerial coordination

Energy 9%

Transport 56%

International cooperation 24%

Building 3,6%

Building 4,0%

inter-

 Release of periodic reports

Pollution 2,5%

Reports

Energy 3,8%

Transport 49,9%

through

 Reports validated by internal and external auditors

Belgian OLO

Dutch DSL

Energy 17,1%

 ICMA or CBI aligned

Allocation Living resources 2,4% Transport 87,6%

Impact

Performance

France Germany Netherlands Belgium

Green bonds: the sovereign issuers’ perspective 8 November 2021

Source: author’s elaboration on data from National DMOs

36

Investor base in the 4 major inaugural issues (as of 2020) German Bund

French OAT Official institutions 7,5%

First tranche syndication

Hedge funds Others 1% 5%

Hedge funds 7,5%

Banks 30,5%

Official institutions 16% Asset managers 28,5%

Banks 19%

Dutch DSL

Broad investor base

Strong presence money investors

Belgian OLO

Official institutions 4% Hedge funds 14%

by

Pension funds and insurers 16% Asset managers 43%

Pension funds and insurers 26,0%

issued

of

real

Hedge funds 5% Banks 15% Pension funds and insurers 33%

Asset managers 33%

Banks 19%

Asset managers 30%

Pension funds and insurers 21%

Official institutions 26%

Green bonds: the sovereign issuers’ perspective 8 November 2021

Domestic and European investors were the most active Source: author’s elaboration on data from National DMOs

37

The debut of the Green BTP  March 2021: Italy issues its first green bond in a €8.5bn syndicated deal  Issue preceded by the release of the ICMA-aligned ‘Framework for the Issuance of Sovereign Green Bonds’ setting out the plan for the green transformation of the economy  Last October a second syndicated placement took place, raising additional €5bn

The bond matures in 2045 and was favorably received by the market: long-term and ESG investors showed particular interest

 Allocation and impact reports will be published annually

Source: author’s elaboration on data from the Italian Ministry of Economics and Finance. Figures refer to the two placements executed so far

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Actual benefits for sovereign issuers Book cover ratio for green and conventional bonds

 Green bonds generally received a higher demand, compared with conventional bonds  44% was allocated to ESG investors on average  In most cases green issues captured new investors, which resulted in four benefits

Green bonds attracted new investors

Expenditures overview

   

Diversification Proof of concept Messaging Greenium

 Most of funds allocated to new projects, but some jurisdictions require all expenditures to be voted in annual parliamentary decisions, so GBs’ proceeds could finance only investments that had already been carried out  issuance and ongoing costs higher than those of conventional bonds, but outweighed by benefits Source: CBI, 2021. Survey of 19 issuers

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Shedding lights on impact reports Most used metrics by project category

 Climate disclosure increasingly important along with financial reporting  necessary to achieve a full integration of sustainability considerations into financial decisions  Impact reports help investors assess the ex-post effectiveness of the measures adopted by issuers, e.g. quantifying the avoided emission of greenhouse gases or the preserved land areas and water volumes with rich biodiversity  However some issues have emerged (in the whole sustainable market):  Climate disclosure is quite fragmented, preventing comparability of green performance across issuers and projects (and taxomania doesn’t help)  Granularity of the information reported is highly heterogeneous  Impact reports not always based on science-based metrics  Difficulty in framing the meaning of absolute figures has led to relative metrics (e.g. year-over-year increase in GHG saved) which tell nothing about the concrete impact on the environment  As data are held by issuers and ESG rating providers, transparency is hindered

Fragmentation, inconsistency and ambiguity cast doubts on issuers’ ESG ratings and credentials, thus limiting the assessment of environmental-related risks and opportunities and weakening the credibility of the green market Sources: CBI, OECD, G20 Sustainable Finance Working Group 2021.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Searching for greenium  Major concern in primary and secondary markets: is there any yield differential between GBs and their non-green peers?  When the yield of a green bond is lower than that of a comparable non-green bond, the differential is called greenium (hence when the yield of the green bond is higher than that of the non-green peer, the greenium is negative)  GBs and non-green bonds are subject to the same market dynamics  apparently there is no reason why greenness should impact the bond’s price  However some aspects lead to pricing differences  The existence of a specific ‘green’ investors’ base turns into excess demand relative to the volume issued (scarcity effect)  The presence of buy-and-hold investors makes GBs less volatile than their non-green peers  By contrast, as issues of green bonds are typically of smaller size compared to those of conventional bonds, the resulting lower liquidity of the former market may be reflected into a lower price (hence a higher yield, due to the illiquidity premium)

THREE RESEARCH QUESTIONS  Is there a price advantage for sovereign issuers in issuing GBs?  Do sovereign GBs outperform their non-green peers?  Are GBs more resilient in periods of financial stress?

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Literature review: no clear evidence of greenium Market (primary / secondary)

Author

Year

Bachelet et al.

2019

S

Barclays

2020

S

CBI

2019

Ehlers and Packer

2017

Fatica et al.

2018

Fender et al.

2019

Gianfrate and Peri

2018

HSBC

2019

Intesa Sanpaolo

2020

Kapraun and Scheins

2019

Morgan Stanley

2020

Zerbib

2017

P

Greenium evidence (yes / no) Y**

Y* Y*

S P

Y** Y***

S P

N

 Existing literature on greenium is built on the comparison of a GB and a similar conventional bond’s yields.  Matching approach  Propensity score matching  Shallow depth of data  lack of advanced methodologies

Y***

S

Y**

P

Y***

P

Y**

 Few research focused on sovereign issuers (Intesa, Barclays)

S

N

S

Y*

P

 Most studies based on multiple-issuer and multicurrency samples

 Pioneering research proved the existence of a significant greenium ( )

Y*** S

P

Y* Y*

S

N

S

Y**

*** substantial greenium; ** lower greenium; *almost negligible greenium.

 Evidence from further analyses* pointed to the existence of a lower greenium ( )  Some more recent studies provided mixed evidence ( )

*Including research subsequent to this study. For instance, Alessi, L., Ossola, E. and Panzica, R. ‘What greenium matters in the stock market? The role of greenhouse gas emissions and environmental disclosures’, Journal of Financial Stability, 54, 2021.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Primary market analysis: data and approach Source and approach  We collected the yield at issue for every sovereign GB issued up to 2020, covering the first issues and the following tranches as well. Data have been drawn from Refinitiv’s Thomson Reuters Eikon  We compared each GB’s yield with the fitted yield of a synthetic non-green security from the same issuer: when the yield of the green bond is lower than that of the non-green bond we record a greenium Processing  The fitted yield was built by linear interpolation of the yields observed in the secondary market on the issue date of the GB  Interpolation was performed on the issuer’s non-green curve, based on bonds’ residual maturity. The selected non-GBs had a sufficiently high outstanding amount and shared the same features of their respective GB except the use of proceeds  The resulting fitted yield is a proxy of the yield to maturity achievable at the time in which the GB was issued Output  The resulting dataset consists of 38 observations for 10 countries, following few restrictions on currency and maturity

Country Belgium Chile Chile Chile Chile Fiji Fiji France Germany Germany Hungary Indonesia Ireland Lithuania Netherlands Nigeria Poland Poland Poland Seychelles Sweden

ISIN code

Maturity

Rating (Fitch/Moodys/S&P)

BE0000346552 US168863DL94 XS1843433639 XS2108987517 US168863DN50 FJ0406990632 FJ0406990624 FR0013234333 DE0001030708 DE0001030716 XS2181689659 US71567RAJ59 IE00BFZRQ242 LT 0000610305 NL0013552060 NGFGB2022S13 XS1766612672 XS1536786939 XS1960361720 XS1885544236 XS2226974504

Apr-33 Jan-50 Jul-31 Jan-40 Jan-32 Nov-30 Nov-22 Jun-39 Aug-30 Oct-25 Jun-35 Mar-23 Mar-31 May-28 Jan-40 Dec-22 Aug-26 Dec-21 Mar-49 Oct-28 Sep-30

AA-/Aa3/AA A+/A1/AAA+/A1/AAA+/A1/AAA+/A1/AAna/Baa3/BBna/Baa3/BBAA/Aa2/AA AAA/Aaa/AAA AAA/Aaa/AAA BBB/Baa3/BBB Baa2/BBB/BBB A+/A2/AAA/A3/A+ AAA/Aaa/AAA B/B2/BA-/A2/A A-/A2/A A-/A2/A nd/B+/nd AAA/Aaa/AAA

Green bonds: the sovereign issuers’ perspective 8 November 2021

Amount oustanding (EUR million) Euro 7,481 US Dollar 2,148 Euro 1,555 Euro 1,269 US Dollar 695 Fiji Dollar 33 Fiji Dollar 8 Euro 27,735 Euro 6,500 Euro 5,000 Euro 1,500 US Dollar 1,248 Euro 5,000 Euro 68 Euro 8,993 Nigerian Naira 28 Euro 1,000 Euro 750 Euro 500 US Dollar 14 SEK 1,940 Currency

First Tranches issue issued date Mar-18 9 Jun-19 2 Jul-19 2 Jan-20 1 Jan-20 1 Nov-17 4 Nov-17 1 Jan-17 11 Sep-20 1 Nov-20 1 Jun-20 1 Mar-18 1 Oct-18 2 May-18 3 May-19 5 Dec-17 1 Feb-18 1 Dec-16 1 Mar-19 1 Oct-18 1 Sep-20 1

44

Primary market analysis: mixed results Evidence on greenium by issuer and tranche Tranche

Belgium

Chile

France

Germany

Indonesia

1

-9.4

1.0

3.5

0.4

1.2

2

-3.2

-2.9

3

-9.2

-5.2

4

-3.0

5

Ireland Lithuania

Netherlands

Poland

Sweden

Mean

-11.1

-3.4

-1.0

-3.9

-10.0

-10.3

-7.8

8.2

-7.6

-2.6

7.0

-10.8

-4.6

-5.6

-7.7

-5.5

-4.6

-12.0

-8.5

-8.4

6

-4.1

-5.6

-4.8

7

-8.4

-7.4

-7.9

8

9.2

6.1

7.7

9

-2.3

-9.4

-5.8

10

0.5

0.5

11

-4.2

-4.2

Mean

-3.9

1.0

-3.8

0.4

1.2

-8.9

1.6

-9.1

-3.4

-1.0

Time evolution of average annual greenium 6

Greenium (basis points)

3 0

-1.5

-3 -6

-1.6 -6.4

-3.8

 Only 9 cases show positive greenium, i.e. a lower yield for green bonds  convenience for the issuer  For the remaining 29 observations the GB’s yield is equal or higher than the fitted yield  Average greenium is -3.8 bps  (small but statistically significant) extra cost for issuers that choose to issue a GB rather than a non-green bond

-4.9

-10.7

 Negative greenium persists over time but gradually declines

-9

-12 2016

2017

2018

2019

2020

Green bonds: the sovereign issuers’ perspective 8 November 2021

45

Primary market analysis: focus on liquidity How does the degree of liquidity of a green bond affect the corresponding greenium?

Average greenium per GB vs. average green bond size 4

-2

Lithuania Germany 2030 Chile Germany Sweden 2025

-4

France

2

Greenium (basis points)

0

 Y-axis: greenium

Poland 2026

Indonesia

 X-axis: a proxy of liquidity (ratio between the outstanding amount of the green bond and that of the closer non-green bond)

Poland 2049

Belgium

-6 -8

Ireland

-10 Poland 2021 -12 10%

30%

y = 2.1706x - 3.7834 R² = 0.0409

Netherlands 50%

70%

90%

110%

130%

GB size (ratio between the GB's outstanding amount and the outstanding amount of the closer non-GB)

150%

170%

 The resulting evidence is in line with previous work: positive, even if weak, relationship between the two variables  Combined with the results presented above, this evidence suggests that so far the (il)liquidity effect has prevailed

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Primary market analysis: findings 1

Answer to the first research question: is there a price advantage for sovereign issuers in issuing GBs?  In the primary market sovereign green bonds are on average slightly more expensive for issuers than their peers (this is consistent with the most recent literature)  The lower performance over conventional bonds is likely to reflect poorer liquidity conditions: as these improve, the extra-cost associated with green issues tends to decline

Green bonds: the sovereign issuers’ perspective 8 November 2021

47

Secondary market analysis: data and approach Source and approach  In order to capture the most liquid and traded portion of the GBs market we restrict the secondary market analysis to the four major sovereign issuers of GBs in the Euro-zone, namely France, Belgium, the Netherlands and Ireland. Again, data have been drawn from Refinitiv’s Thomson Reuters Eikon Processing  For all these countries yields to maturity differentials between green and close non-green bonds remained relatively stable since the issuance, despite GBs looked broadly less liquid in terms of bid-ask spreads

 Looking at yield to maturity may not lead to accurate results, as the duration of green bonds is often greater than that of the immediately longer dated conventional bonds. We therefore adopt an increasingly used approach: looking at the Z-spreads adjusted for the residual maturity. In fact, by pointing at the zero-coupon spreads we isolate the duration effect  Therefore, as for the primary market, we build a synthetic conventional bond by selecting the two conventional bonds with the closest maturity from the same issuer, having exactly the same characteristics (credit rating, payment rank and currency of denomination) except the use of proceeds, which is not green Output  We finally linearly interpolate the two conventional bonds’ Z-spreads at the GB maturity date to obtain a synthetic conventional bond Z-spread that we compare to the actual green bond’s Z-spread Green bonds: the sovereign issuers’ perspective 8 November 2021

48

Secondary market analysis: results Z-spread curves for green and non-green bonds (static example)  The over/under performance of green bonds is investigated by observing the evolution of Zspread differentials along each sovereign curve  In particular, the observed Z-spread of each green bond is compared with that of the synthetic conventional bond, with a specific focus on the Mar-Apr ’20 sell off  Additional empirical analysis on liquidity through panel regressions  The analysis shows the presence of a tiny average greenium of 0.5 bps Source: UniCredit, 2021. Conventional bonds in black, green bonds in green

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Secondary market analysis: findings 2

Answer to the second research question: do sovereign GBs outperform their non-green peers?  Sovereign green bonds tend to trade fairly in line with non-green bonds on the secondary market; the analysis shows limited evidence of a greenium for the selected countries

3

Answer to the third research question: are GBs more resilient in periods of financial stress?  During the Covid-19 crisis, green bonds did not prove to be particularly resilient: bid-ask spreads widened during the financial turbulence in early 2020, consistently with the relative illiquidity of green bonds Green bonds: the sovereign issuers’ perspective 8 November 2021

50

…however green BTP and Bund show a more pronounced greenium  Despite the lower liquidity, since issuance the BTP’s z-spread has been lower than the synthetic z-spread interpolated for the same maturity on the conventional curve. This differential has been equal to 5 bps on average  such evidence may suggest the existence of a specific investor base interested in the green label that is not discouraged by the lower liquidity of the bond

 Similarly, on average the first green Bund has shown a 4 bps lower z-spread compared to its conventional twin  this is likely to be a first evidence of success of the ‘twin model’ Z-spread analysis for the Green BTP

Z-spread analysis for the Green Bund 2030

150

8 Delta Z-Spread (dx), "greenium" if < 0

Interpolated Z-spread for conventional BTPs

Z-spread Green BTP

Average delta

-20

8

6

140

-25

Delta Z-Spread (dx), "greenium" if < 0

Z-Spread Conventional Bund 2030

Z-Spread for Green Bund 2030

Average delta

6

4 130 2 120

0

4 -30 2 -35

0

-2 110

-2 -40

-4 100

-4 -45 -6

-6

Green bonds: the sovereign issuers’ perspective 8 November 2021

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1-nov-21

1-ott-21

1-set-21

1-ago-21

1-lug-21

1-giu-21

1-mag-21

1-apr-21

1-mar-21

1-feb-21

1-gen-21

1-dic-20

1-nov-20

-8

1-ott-20

1-nov

1-ott

1-set

-50

1-set-20

Source: author’s elaborations on data from Refinitiv

1-ago

1-lug

1-giu

1-mag

1-apr

-8

1-mar

90

Agenda

1. Sustainable fixed income market 2. Green bonds features and standards

3. Market overview 4. Spotlight on Sovereign green bonds

5. Sovereign green bonds: relevant experiences 6. Sovereign green bonds financial performance 7. Wrap up Green bonds: the sovereign issuers’ perspective 8 November 2021

Key takeaways  Climate change exposes the economy to physical and transition risks  Financial markets play a critical role to achieve the transition towards a sustainable, ‘net-zero’ economy and offer multiple kinds of securities to do so

 Green bonds are the most popular instrument in the sustainability market: in few years they have grown from a small niche to a more mature and diversified segment, driven by a voluntary standardization of issue practices and the introduction by European policy makers of a shared taxonomy  Growing issuances from Sovereigns set the trend for more green debt sales in all market segments. When compared to conventional securities, green bonds exhibit specific additional burdens, which however do not offset the economic and financial benefits they produce  The overall GB market is characterized by the activity of many buy-and-hold investors. Primary and secondary market analyses do not show the existence of a remarkable and systematic price difference between sovereign green and conventional bonds  The lack of a clear evidence of a cost advantage however does not prevent Sovereigns from entering the market, since the reason for issuing these securities is not just a simple matter of economic convenience  Sovereign GBs, indeed, show a country’s long term commitment to reduce the environmental impact of economic activities and can be extremely useful in combination with other climate policies Green bonds: the sovereign issuers’ perspective 8 November 2021

53

Challenges ahead Climate policies have been and are being discussed in dedicated international fora…

…but meanwhile some questions remain unresolved ‘The fight against climate change and nature loss requires substantial investment to change the way we use and produce energy, how we get from one place to another, how we make and transport things, and how we grow the food we eat every day. Debt capital markets – and the industry's professionals – can help us save the planet and ourselves’…they will?

Margaret Kuhlow, WWF Global Finance Practice Leader (Environmental Finance)

‘As long as financial institutions keep on pouring trillions into fossil fuel activities protecting an investment portfolio from the disastrous effects of climate change is not the same thing as preventing those disastrous effects from occurring in the first place’ Tariq Fancy, former Head of Sustainable Investing, Blackrock (The Financial Times)

 Green finance can also shield against physical risks?

‘When it comes to debt instruments, we're focused on their purpose. We look at how the use of proceeds are managed, how projects are selected, whether they are additional, etc. But the devil is in the detail. That's why there should be a much higher weighting on impact and outcomes compared with policies and procedures’ Andrew Steel - Global Head of Sustainable Finance, Fitch Ratings (Environmental Finance)

 To what extent can investors trust ESG ratings and reporting? What kind of standards do we need to create a purpose-driven economy with impact at its core?

Green bonds: the sovereign issuers’ perspective 8 November 2021

54

Raffaele Doronzo

Vittorio Siracusa

Stefano Antonelli

raffaele.doronzo@bancaditalia.it

vittorio.siracusa@bancaditalia.it

stefano.antonelli@bancaditalia.it

Banca d’Italia Market Operations Directorate Green bonds: the sovereign issuers’ perspective 8 November 2021

55

Green bonds: the sovereign issuers’ perspective 8 November 2021

56

EU Action Plan and timeline of future developments

Sources: European Commission, BloombergNEF.

Green bonds: the sovereign issuers’ perspective 8 November 2021

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German twin model: primary market Retention into own stock (theamount remainsinthehandsoftheissuer)

Issuancevolume

Issuance ofthe conventional security for the same amount (e.g. EUR 4 bn)

e.g.EUR 5bn

First issuance of conventional security (e.g. Jun 2020)

e.g.EUR 4bn

e.g.EUR 4bn

e.g.EUR 4bn

e.g.EUR 4 bn

e.g.EUR 4bn

Tap 1 auction

Tap 2 auction

Tap 3 auction

Auction or syndication of Green twin (e.g. Sep 2020)

Tap 5 auction

Conventionaltwin Identical for bothtwins Different for eachtwin Source: Finanzagentur.

Maturity segment Coupon Interest dates Maturity Issuance volume ISIN

Greentwin 10y 0.00% Annually 15 August,2030

e.g.EUR 25bn DE0001102507

Green bonds: the sovereign issuers’ perspective 8 November 2021

e.g.EUR 4bn DE0001030708

58

German twin model: secondary market The model demands the issuer to play an active role in the secondary market through: 1.Reposand securitieslending, using theown stock of GreenBunds

Finance Agency

Green Bund

 The German Finance Agency has foreseen transactions in repos or lending activities to support the use of the GB as collateral in the interbank market

2.Combined and debt-neutralsale-and-purchase (switch)transactions

GreenBund Finance Agency Conventionaltwin

 The DMO also planned debt-neutral sale and purchase transactions (‘switch trades’) between twin bonds to be potentially triggered by a drop in the price of a GB relatively to the price of its conventional twin Source: Finanzagentur

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Outstanding sovereign green bonds Country

Source: Refinitiv. Data as of Nov-21.

Belgium Chile Chile Chile Chile European Union Fiji Fiji France France Germany Germany Germany Germany Hong Kong Hong Kong Hong Kong Hong Kong Hungary Indonesia Indonesia Ireland Italy Lithuania Netherlands Nigeria Poland Poland Poland Seychelles Spain Sweden United Kingdom United Kingdom

ISIN code

Maturity

Rating (Fitch/Moodys/S&P)

Currency

Coupon rate (%)

BE0000346552 US168863DL94 XS1843433639 XS2108987517 US168863DN50 EU000A3K4C42 FJ0406990632 FJ0406990624 FR0013234333 FR0014002JM6 DE0001030708 DE0001030716 DE0001030724 DE0001030732 USY2836BAN48 USY3422VCR79 USY3422VCS52 USY3422VCT 36 XS2181689659 US71567RAJ59 US71567RAT 32 IE00BFZRQ242 IT 0005438004 LT 0000610305 NL0013552060 NGFGB2022S13 XS1766612672 XS1536786939 XS1960361720 XS1885544236 ES0000012J07 XS2226974504 GB00BM8Z2S21 GB00BM8Z2V59

Apr-33 Jan-50 Jul-31 Jan-40 Jan-32 Feb-37 Nov-30 Nov-22 Jun-39 Jun-44 Aug-30 Oct-25 Aug-50 Aug-30 May-24 Feb-26 Feb-31 Feb-51 Jun-35 Mar-23 Jun-51 Mar-31 Apr-45 May-28 Jan-40 Dec-22 Aug-26 Dec-21 Mar-49 Oct-28 Jul-42 Sep-30 Jul-33 Jul-53

AA-/Aa3/AA A+/A1/AAA+/A1/AAA+/A1/AAA+/A1/AAAA/Aaa/AAA na/Baa3/BBna/Baa3/BBAA/Aa2/AA AA/Aa2/AA AAA/Aaa/AAA AAA/Aaa/AAA AAA/Aaa/AAA AAA/Aaa/AAA AA+/AA3/AAAA+/AA3/AAAA+/AA3/AAAA+/AA3/AABBB/Baa3/BBB Baa2/BBB/BBB Baa2/BBB/BBB A+/A2/AABBB/Baa3/BBBA/A3/A+ AAA/Aaa/AAA B/B2/BA-/A2/A A-/A2/A A-/A2/A nd/B+/nd A/Baa1/AAAA/Aaa/AAA AA/Aa3/AAAA/Aa3/AA-

Euro US Dollar Euro Euro US Dollar Euro Fiji Dollar Fiji Dollar Euro Euro Euro Euro Euro Euro US Dollar US Dollar US Dollar US Dollar Euro US Dollar US Dollar Euro Euro Euro Euro Nigerian Naira Euro Euro Euro US Dollar Euro SEK GBP GBP

1,250 3,500 0,830 1,250 2,550 0,400 6,300 4,000 1,750 0,500 0,000 0,000 0,000 0,000 2,500 0,625 1,375 2,375 1,750 3,750 3,550 1,350 1,500 1,200 0,500 13,480 1,125 0,500 2,000 6,500 1,000 0,125 0,875 1,500

Amount First issue oustanding date (EUR million) 10.430 Mar-18 2.001 Jun-19 1.955 Jul-19 1.269 Jan-20 1.294 Jan-20 12.000 Oct-21 34 Nov-17 8 Nov-17 28.874 Jan-17 11.402 Mar-21 6.500 Sep-20 5.000 Nov-20 6.000 May-21 6.500 Sep-21 863 May-19 863 Jan-21 863 Jan-21 431 Jan-21 1.500 Jun-20 1.079 Mar-18 647 Jun-21 6.101 Oct-18 13.500 Mar-21 68 May-18 10.708 May-19 22 Dec-17 1.000 Feb-18 750 Dec-16 500 Mar-19 13 Oct-18 5.000 Sep-21 2.011 Sep-20 11.847 Sep-21 7.108 Oct-21

Green bonds: the sovereign issuers’ perspective 8 November 2021

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Green BTP: Management of proceeds

Source: Italian Ministry of Economics and Finance.

Green bonds: the sovereign issuers’ perspective 8 November 2021

Secondary market analysis

.

Green bonds: the sovereign issuers’ perspective 8 November 2021

Secondary market analysis

Green bonds: the sovereign issuers’ perspective 8 November 2021

OECD sees low correlation among ESG ratings

Source: OECD, ESG Investing and Climate Transition, 2021.

Green bonds: the sovereign issuers’ perspective 8 November 2021