EU Green Bonds

Sustainability objectives in terms of a clean and environmentally-friendly future are at the core of the post-pandemic projects globally. European authorities are taking this commitment to another level, dedicating 37 percent of the 750 billion euros in the Next Generation EU to the so-called "green projects."

Ursula Von der Leyen publicized this agenda since the beginning of her European Commission presidency. The crisis triggered by COVID-19, and the much-needed public intervention in post-pandemic recovery is seen as the right occasion to make an impact.

Although politics has often betrayed such kinds of promises, a light of hope comes from the "green bonds," that will finance the sustainability agenda. These securities will provide over 225 billion euros, 30 percent of the total resources to be gathered by the recovery plan. Some further explanation is needed to clarify how they work, why they will be issued, and their impact on the environment and international relations.

A bond is a loan in which one party, for example, a state or an enterprise, borrows money (bond issuer), and one other part lends (investor). The issuer uses the funds to finance projects such as investment in infrastructures for corporate bonds and public expenses for government bonds, repaying the investor interest, and the sum lent. There is only one principal, yet essential, difference in the green bonds: the resources raised will finance projects exclusively with positive environmental impact. As during the wars, states issued bonds to finance the struggle; today, in a context of global awareness about the environmental crisis, these instruments can be a useful tool to face the challenge. Furthermore, being placed and sold by reliable private institutions or governments, green bonds will be assets as safe as the "normal ones" with the added advantage for investors to participate in creating a sustainable future. Even though the benefit may seem trivial, markets hold enterprises accountable for the social impact of their actions, and sustainability reports and attention from stakeholders to the environmental issues make this investment form attractive.

One may wonder of the possibility for issuer’s to raise funds through these bonds without investing in sustainability. Although the critique may have a foundation, the ICMA principles constitute guidelines accepted by the market, and the issuer puts at stake its reputation and possibility to raise capital in the future using the Green Bond definition. Europe is taking their regulation further, emanating the TEG guidelines based on the shared market standards and moving to full law-binding regulation.

This has resulted in the Green Bond market's steady growth over the last decade, whose potential is growing. The private sector currently dominates it, but the European Union issuance will almost double its size, making it more liquid and further boosting such products' demand.

The EU has pledged to cut emissions by 40 percent by 2030. The Green Deal had set out a roadmap to potentially raise the target to 55 percent, an objective that seems more likely to be achievable given the resources already committed to the plan, the ability of member states to choose to issue their green bonds and make investments beyond the Next Generation EU itself.

The program would place Europe as a global leader in the sector of sustainable finance, altering political dynamics as a result. The European commitment in the sector seems serious, and compounded not only by the promised release of green bonds, but also by the issuance of social bonds - with potentially positive social impact - in the SURE program. The Biden administration’s stance on climate, and the Chinese sustainability efforts, are also a feature of their ongoing power struggle. Europe can play a fundamental role and be an innovator and first mover with the exact path defined by the green bonds.

Committing resources in such a direction may be a game changer, especially considering the fact that world powers’ climate policies have shifted in the last few years. The release of such financial contracts is a pledge towards global financial markets, and the general public in which the European Union puts its reputation at stake. Thus, other world powers may follow suit in advancing similar initiatives.