11/08/2021
Italy’s launch into the green bond space means another new sovereign issuer for long-term investors
Italy became the latest sovereign issuer of green bonds earlier this year after raising €8.5bn with its first “Buoni del Tesoro Poliennale (BTP) Green” designed to support its transition to a carbon-neutral economy.
Around 530 inventors took part in the fundraising, making it the biggest debut sovereign green bond by a European issuer to date. More than half of the issuance (53.1%) was allotted to fund managers, while another quarter went to long-term investors, including pension funds, insurance companies and central banks. The bond matures on 30 April 2045 and has a 1.5% annual coupon.
Why does this matter?
After a drop-off in issuance during the Covid-19 pandemic, Italy’s BTP Green launch shows the growing appetite for green sovereign bonds from investors. It will likely be followed by the entrance of other European countries into the space. Both Spain and the UK are planning green sovereign bond launches to take advantage of demand among more ESG-aware investors.
Italy’s green transition
The BTP Green was launched as part of the country’s commitment towards meeting the European Commission’s target of becoming carbon neutral by 2050 and supporting the goals set out by last year’s European Green Deal.
Sovereign green bonds will finance Italy’s environmental objectives outlined in the EU Sustainable Finance Taxonomy, including climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems. The proceeds of the BTP Green will also help Italy support the United Nations’ 2030 Sustainable Development Goals (SDGs).
Under the green bond framework, eligible categories for expenditure include:
Eligible expenses must be included in the Italian state budget, and a report entitled the “Italian Sovereign Green Bond Allocation and Impact Report” will be published annually to update investors and the public over the management and allocation of the BTP Green bonds’ proceeds and their environmental impact.
Meanwhile, the framework will be reviewed regularly to ensure it remains aligned to ICMA’s Green Bond Principles, the EU Taxonomy for Sustainable Activities, and future EU Green Bond Standards.
Default risks
While Italy is the EU’s third-largest national economy, the country has struggled with its finances in recent years. As such, it has a lower credit rating than many of its peers.
Standard & Poor’s credit rating for Italy stands at BBB, two notches above junk, with a stable outlook. Moody’s credit rating, meanwhile, was last set at Baa3 with a stable outlook, just above non-investment grade status. And Fitch’s credit rating for Italy was last reported at BBB- with a stable outlook, also one notch above non-investment grade.
The Italian Ministry of Economy and Finance has also established an inter-ministerial committee that meets semi-annually. It will ensure expenditures meet eligibility criteria established by its green bond framework.
Investor appetite
There was strong demand for the Italian green sovereign bond, with subscriptions of €80bn for an €8.5bn issue. And while a ‘green premium’ has become a feature of some issues, this did not happen with BTP Green. Nevertheless, there is a strong demand for green bonds among European investors.
Around one-third (32%) of global investors surveyed by the HSBC Sustainable Financing and Investing Survey 2020 are currently buying green and sustainable bonds, and 44% of these respondents expect to increase purchases. Another 45% expected to keep their allocations steady.
Furthermore, in its 2019 ESG Global Investor Survey, NatWest – a lead manager in the issue alongside BNP Paribas, Crédit Agricole, Intesa Sanpaolo and JP Morgan –found an even split between those who wanted more issuance from sovereigns and financial institutions and those who favoured more corporate issues.
The Climate Bonds Initiative’s 2019 Green Bond European Investor Survey also found that respondents with 1% or more invested in green bonds already are more likely to prefer more sovereign exposure. However, respondents also expressed higher demand for issuance from developed market sovereigns over emerging markets, likely related to higher risk, currency restrictions, lack of liquidity, and possible lower transparency, according to the Climate Bonds Initiative.
Allocation trends
After central banks cut interest rates during the Covid-19 pandemic, the low yields offered in much of the fixed income space have failed to entice investors.
Developed market fixed income allocations are expected to fall among institutional investors, according to the annual Schroder Institutional Investor Study 2020, down to an average allocation of just 25% from current levels of 26%.
Emerging market debt allocations are expected to remain stable at 8%. Nevertheless, with ESG investors accounting for almost half of the BTP Green issuance, yields may not be as big a draw for green bond investors.
Research in Finance is conducting a study of fund selectors in major asset management markets across the continent. The Research in Finance European Fund Selector Study (EuroFSS) is a new six-monthly study designed to help asset managers track investment trends at a pan-European and country-level, offering insights on fund picker attitudes. To find out more contact Richard Ley, Toby Finden-Crofts or our lead researcher on the project Annalise Toberman.
Richard has over 16 years experience within the financial services market. Having begun his career working in international media across the financial sections of some of the worlds leading newspapers.
