EU-driven government schemes are 'cannibalising' sovereign green bond projects

EU-driven schemes are reducing the pool of available projects to be financed by sovereign issuers' green bond programmes, which poses a risk to European sovereign issuers, a new report has found. 

The Green, Social and Sustainability-linked (GSS) bond report by MainStreet Partners showed that EU government programmes, paired with long permission times, are "cannibalising" some green bond projects that would otherwise be financed through sovereign green bonds, reports Investment Week.

The study found that without a greater growth in the number of available green projects, this may lead to a smaller universe of fundable green projects for governments to fund.

As a result, governments may find it less necessary to issue its own green bonds to fund these projects, which could lead to a decrease in issuance given that the same projects are targeted for EU grants and loans.

This could have contributed to the fall in share of GSS bonds issued by sovereigns between the first six months of 2021 and of 2022, the study said.

In terms of issuance, emerging markets were positive surprise this year.

Volumes compared to 2021 were lower, but by a smaller margin than most other regions, and issuers are getting more comfortable with high-impact structures, such as Belize's blue bond. 

The report also found that half-yearly global GSS bond issuance reached $418bn as of the end of June, which represents a year-on-year decline of 27% compared to H1 2021. 

Rising global interest rates and volatile markets have weighed heavily on both the supply and the demand of bonds, but less so in emerging markets. 

Emerging markets borrowers issued a total of $41bn up to Q3 of 2022, a 24% decrease compared to Q3 of 2021, a much more contained fall compared to that of the overall market, which slumped by 31%.

This encouraged the already steady rise in the proportion of EM bonds to the total, which peaked at 11% in H1 2022, making GSS bonds no longer a niche product in these regions.

Jaime Diaz Rio Varez, Research Analyst at MainStreet Partners, said: "2022 has been a turbulent year for the bond market, and GSS bonds have not been immune." 

"Despite the lower-than-expected issuance volumes, there are current and upcoming dynamics that may positively influence the overall market in the longer term."

Researchers also expect regulation to have a positive impact on issuances, increasing issuers' transparency and investors' confidence.

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