The European Central Bank and European Commission plan to significantly increase the size of the market for environmentally friendly bonds, potentially supporting the wider acceptance of sustainable finances and improving the transparency of this burgeoning market.
The European Central Bank said it will purchase sustainability-linked corporate bonds as part of its quantitative-easing program and accept them as collateral for loans to commercial banks, the Wall Street Journal reports.
The ECB’s announcement follows the European Commission, the executive branch of the European Union, which said it would fund a third of its coronavirus recovery fund with green bonds, or €225 billion of issuance, the equivalent to $262.56 billion. The European Commission will be the world’s largest issuer of green debt, or effectively doubling the current size of the market.
“Having a portion of the recovery fund issued in green bonds locks in that commitment that at least 30% has to go to green projects,” Trevor Allen, a sustainability research analyst at BNP Paribas, told the WSJ. “You also have an ECB that looks like they’re fully aligned with this vision of the European Commission.”
Sustainability-linked bonds are debt securities that have their coupon rates linked to a company’s environmental impact. The bonds are cheaper if the company reduces measures such as carbon emissions, energy usage, and water consumption. The cost of debt rises, though, if the company fails to meet these measures.
On the other hand, green bonds work differently. The money raised from the bond sale is will be used for environmental projects. Some observers have pointed out that companies have access to slightly cheaper capital with green bonds compared with conventional debt due to high demand.
“If the value is there, these are the exact types of companies—with vision, governance, clear priorities for capital allocation—that we want to back,” Mitch Reznick, head of sustainable fixed income at Federated Hermes, told the WSJ. “And that, increasingly, our investors want us to back.”
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