Regulation driving demand for green bonds

When it comes to sustainability, institutional investors are frequently pioneers. “We estimate that today almost 20 per cent of assets are already invested with ESG considerations in mind”, says Daniel Knoblach, General Manager of Super Global GmbH. “As far as green bonds are concerned, the proportion is likely to be even higher, as many investors are required to satisfy an ESG quota.”

Environmental, Social and Governance (ESG) considerations have become a top priority for institutional investors as their impact on institutional investment continues to grow. “We issue green bonds across the entire ESG spectrum and observe very strong investor interest”, Knoblach states. “Usually, they are fully subscribed shortly after issuance.”

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Particularly smaller green bonds of up to 50 million are presently being purchased at a rapid rate. According to Knoblach, “it is crucial for institutional investors to prevent their quotas from becoming a cluster risk. Therefore, smaller bond shares are frequently mingled in.” Currently, demand is significantly greater than supply.

Legislators have also contributed to the success of green bonds: “Financial instruments that raise capital to reduce or avoid climate damage or environmental destruction are given preferential treatment”, Knoblach points out. “This includes, for example, the requirement for financial institutions that purchase green bonds to provide less equity as collateral.”

“Our green bonds are audited by an independent body (SPO) to exclude greenwashing”, explains Knoblach. This allows investors to concentrate on verified investments within the still-limited offering. But these second-party opinion providers, primarily ESG rating agencies, have limited capacities. “Pent-up demand will diminish over the next three to four years”, Knoblach predicts. “Then, ESG rating agencies will also increase their capacities.”

The stalemate will persist, however, for the time being. “Many institutional investors have set ESG quotas for themselves”, Knoblach adds. “These are usually not static but increasing over the years.” This is to ensure that companies meet their sustainability goals by a specific date.

The elevated demand for green bonds benefits their issuers. In addition, this accomplishes the EU’s objective of fostering innovation and courage in the sustainable transformation of the economy. Projects in green infrastructure, renewable energy or social projects are only made possible by private sector capital.

The form of issuance permits numerous variations. In addition to conventional bonds with fixed or variable interest rates or asset-backed securities, securitisations are gaining attention at the present time. The creditworthiness of green bonds issued in traditional bond form is contingent solely on the issuer’s creditworthiness and not on the project itself. For example, green bonds issued as bearer bonds are more closely tied to the success of the initiatives. With this structure, investors assume a portion of the project’s risk, but are typically rewarded with more attractive coupons.