Erste Asset Management Investment Blog

Austria goes green

Austria goes green
Austria goes green
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First green bond from the Republic of Austria in high demand

Green bonds have been on the capital market since 2007. Their issue proceeds are used to (re-) finance environmental projects. The European Investment Bank, which calls its bonds “climate awareness bonds”, was the pioneering institution in this field. In recent years, the momentum on the green bond market has picked up considerably, both in terms of market depth and market scope. The ranks of supranational issuer were soon joined by utility companies that financed their renewable energy projects with green bonds. They were complemented by regions, cities, and financial service providers that also started issuing their bonds, which led to sharp growth of this young market segment.

States were late to the party

States (i.e. governments) were relatively late in issuing green bonds and funding environmental projects that way. In 2017, France and the Fiji Islands were among the first issuers. At almost EUR 32bn, the French green bond is currently by far the biggest issue. In 2018, Poland and Ireland followed suit. Since 2020, Germany has issued three green bonds as “twins” to conventional bonds (i.e. same maturity and same coupon of 0.0% due to the low interest rates).

ESG (Environmental, Social, Governance), Source: Bloomberg, data as of end of March 2022

After months of preparatory work, the development of the relevant framework, and obtaining a second party opinion (i.e. the external auditing of the implementation of the market standard, the Green Bond Principles), the Republic of Austria issued its first green bond on 24 May 2022. At an issue volume of EUR 4bn, it joined the top 20 of global green bonds right away. The issue of the bond, which expires in May 2049 and has an annual coupon of 1.85%, was a great success. The underwriting banks recorded total orders of about EUR 25bn. In contrast to many issues in previous years, this bond was not issued at a “greenium” (i.e. at a higher price than existing, conventional bonds), but actually slightly cheaper. The Republic of Austria has been awarded the second-highest rating by the three big rating agencies, i.e. Standard & Poor’s, Moody’s, and Fitch (AA+ and Aa1, respectively), partially with a positive outlook.

Austria as sustainability leader

Globally speaking, Austria is also a leader in terms of sustainability rating (ISS ESG: 7th; Sustainalytics: 9th) and UN SDGs (Sustainable Development Goals) index (6th). With a share of 1.3% of green investments in terms of annual GDP, Austria is among the global leaders on the basis of the Austrian Green Bond Framework.

Whereas in the case of conventional bonds, the issuer can freely dispose of the proceeds, he has to describe exactly what the funds will be used for in accordance with the Green Bond Principles in the case of green bonds. The allocation has to be confirmed, and the environmental impact of the financed projects has to be reported. Green government bonds such as the ones issued by the Republic of Austria thus support the establishment and development of the market for green state finance.

Republic has to report on the use of the proceeds

In order to provide investors with the utmost level of transparency and with an overview of the progress made and the positive environmental impact achieved, the Republic of Austria commits to publishing a report on the use of the proceeds from the green bond issue (“allocation report”) from the first year after the year of the initial issue and to update it annually.

In addition, the Republic will – subject to the availability of the relevant data – also publish an impact report at least every two years until full allocation of the proceeds, with the first report scheduled for year two after the initial issue.

The majority of the proceeds will go towards clean and sustainable transport, e.g. the expansion of the railway network. The proceeds from the green bond will also fund projects in energy efficiency such as intelligent grids and energy storage, wastewater management, the expansion of renewable energy, sustainable land use, and biodiversity. These projects mainly pursue the following SDGs:

  • SDG 6 – Clean Water and Sanitation
  • SDG 7 – Affordable and Clean Energy
  • SDG 9 – Industry Innovation and Infrastructure
  • SDG 11 – Sustainable Cities and Communities
  • SDG 13 – Climate Action
  • SDG 15 – Life on Land
Source: Austrian Treasury, data as of end of March 2022

Throughout the rest of the year, the Austrian Treasury wants to tap the very short end of the yield curve as well. The idea is to offer investors green Treasury bills with maturities of less than a year, which is unlike what many other countries do.

The ERSTE RESPONSIBLE BOND GLOBAL IMPACT fund invested in the green issue

Erste Asset Management subscribed to the issue of the first green Austrian government bond and bought green bonds for the ERSTE RESPONSIBLE BOND GLOBAL IMPACT fund.

ERSTE RESPONSIBLE BOND GLOBAL IMPACT is a global bond fund that invests in green bonds, climate awareness bonds, and certified social bonds. The focus of the investment decision is on the measurable impact on the environment or on society.

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited.

For further information on the sustainable focus of ERSTE RESPONSIBLE BOND GLOBAL IMPACT as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE RESPONSIBLE BOND GLOBAL IMPACT, consideration should be given to any characteristics or objectives of the ERSTE RESPONSIBLE BOND GLOBAL IMPACT as described in the Fund Documents.

Advantages for the investor

  • Investment in selected bonds of sustainable (ethical) issuers.
  • Additional external certification of the bonds provides additional security of the sustainable approach – avoid “greenwashing”.
  • Global diversification of issuers and currencies.
  • Price gains possible if interest rates fall.

Risks to be considered

  • Rising interest rates can lead to price declines.
  • Deterioration in credit ratings can lead to price declines.
  • Due to the investment in foreign currencies, the net asset value of the fund can be negatively impacted by currency fluctuations.
  • Capital loss is possible.
  • Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.

For a glossary of technical terms, please visit this link: Fonds-ABC | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.

RESPOND TO THE ARTICLE

Senior Fund Manager, Erste Asset Management

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