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Germany publishes green bond framework for ‘twin bond’

‘Green bund unlikely to trade significantly below the price of conventional bunds’


Elena Johansson

The German government has published a green bond framework for its first sovereign green bond, which it plans to issue twice this year and annually going forward.

It revealed that the use of proceeds will cover five main sectors: (1) transport; (2) international cooperation; (3) research, innovation and awareness raising; (4) energy and industry; and (5) agriculture, forestry and natural landscapes.

Twin bonds

The government will issue ‘twin bonds’ to create transparency on its green spending, it said, and establish a green yield curve.

Jörg Kukies, state secretary at the German Federal Ministry of Finance, commented: “In this way, we are creating strong momentum towards a more robust sustainable finance market.

“Our innovative ‘twin bond’ approach is designed to attract new investors and issuers to the green bond market and thus act as a catalyst, channelling more investments into a greener economy.”

The twin bonds were first announced in June this year and aim to raise a maximum of €12bn in 2020, a press release said.

One issuance, planned for September, will have a maturity of 10 years and pays a coupon of 0% while the other, planned in Q4, is likely to be five years (its coupon is currently unknown).

A spokesperson at Germany’s state development bank KfW told Expert Investor that even a coupon of 0% is attractive for investors.

“Especially during times of stress and high volatility investors tend to look for a safe haven. German sovereign bonds are one of the globally most well known and liquid AAA issuers, hence have a special attractiveness for investors even if they offer only low or negative yields. Also the lack of alternatives keeps them unchanged attractive,” the spokesperson said.

Liquidity and pricing

The twin bond concept means that each green bond will have a non-green counterpart with the same maturity and coupon.

Investors will be able to exchange every green German bond with a regular sovereign bond, increasing their tradability, especially in cases when the green bond market could face liquidity issues due to its still limited size.

Alexander Schubert, senior portfolio manager at Union Investment, said that the twins only differ in price and will help clarify whether green bonds have a green premium.

“This high degree of comparability is so far unique on the capital market, and it will be exciting to see how the capital market will price this new paper,” he told Expert Investor.

As investor demand for green bonds has been high, they have been priced higher than conventional bonds.

Jacob Michaelsen, head of sustainable bonds at Nordea Markets, said: “Investors value green bonds higher than normal bonds. [But], at the end of the day, I will be looking at the size of the green book relative to the non-green book rather than the price differential.”

Schubert explained: “Due to this [twin bond] exchange option, the green bund is unlikely to trade significantly below the price of conventional bunds, otherwise arbitrage will set in by using the exchange option.”

Green investments

The German green bond applies international standards, such as the Green Bond Principles of the International Capital Market Association (ICMA), the government said.

The issued securities will be assigned to government expenditures of the preceding budget year, which means that they will be refinanced afterwards, and with accompanied green bond reporting.

Rita Schwarzelühr-Sutter, parliamentary state secretary at the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, commented: “With its climate package, the German government has set the course towards huge investment in green and climate-friendly technologies.”