The European Investment Bank aims to aid integration and development of EU member states, and has launched ‘climate awareness’ bonds as part of its strategy. Edward Russell-Walling talks to director-general Bertrand de Mazières.

No-one else had the grit to do it so the EU’s own bank has been the first to take the passporting provisions of the Prospectus Directive and exploit them to the full. The European Investment Bank’s (EIB) ‘climate awareness bond’ – another pioneering event – has been marketed simultaneously in all 27 EU member states.

Set up by the Treaty of Rome in 1957, the EIB is ‘owned’ by EU member states; all new members are obliged to subscribe to the bank’s capital. So its objectives are the EU’s own, and this ground-breaking bond issue aims to further several of them.

The bank raised about €50bn in funding during 2006 and plans to maintain that level this year and next. About 80%-90% of issuance is in three core currencies, the euro (40%), US dollar (20%-30%) and sterling (20%).

“The size of our issuance is fairly significant,” notes EIB director-general Bertrand de Mazières, a former CEO of Agence France Trésor. “If we were a state, we would have the fifth largest sovereign programme in the EU. Our euro funding alone puts us on a par with medium-sized European states like Greece and the Netherlands.”

Lending programmes

The EIB mandate is to contribute towards the integration and development of member states by funding appropriate projects. Following the direction of EU policy, one of its current objectives is to develop lending programmes in the field of energy, embracing renewables, efficiency and security. Another theme, which runs through all the bank’s activities, is sustainable development and, hence, environmental protection.

As a cheerleader for integration, the EIB has also led the way in breathing life into the provisions of the Prospectus Directive. “Though it has been in effect since 2003, the directive is still uncharted territory for most issuers – even most regulators,” says Mr de Mazières. “But if no issuer took the lead by turning text into practice, European regulation would not move ahead.”

So it was that, a year ago, the bank launched the first EPOS (European Public Offer of Securities) in the form of a 10-year inflation-linked bond, marketed in each of the 12 eurozone states. Targeted at retail as well as institutional investors, it raised E1bn. The climate awareness bond takes that a step further and, styled EPOS II, has been launched in every EU country at the same time.

Its structure and purpose are unique. The five-year, guaranteed bonds pay no coupon, but return 100% of the capital at maturity. The return will, however, be linked to a new environmental index created specially for the issue, the FTSE4Good Environmental Leaders Europe 40 Index. Even if the index performs poorly, investors will receive a minimum added 5% of their principal on redemption.

One novel feature is that the proceeds will be ring-fenced for lending to renewable energy and energy efficiency products. “Investors know that if they subscribe money it will be used for these specific purposes, and this earmarking of funds will be monitored by external auditors,” says Mr de Mazières.

An even more exotic novelty is that, on maturity, investors will have the option (but not the obligation) to use some of their returns to buy and cancel EU carbon dioxide allowances, thereby reducing the available capacity for future emissions. This would be an act of pure philanthropy but one that, as Mr Maziéres points out, is difficult for individuals to do on their own.

Emissions reduction

In this way, the bond issue links back to the Action Plan adopted by the European Council earlier this year, setting three targets by 2020: a 20% share of renewable energy in total EU consumption; a 20% saving in energy consumption; and a reduction of at least 20% in 1990 levels of greenhouse gas emissions.

At the time of writing, the issue was still in its month-long marketing phase, led by Dresdner Kleinwort, Merrill Lynch and UniCredit. Each bond has a face value of €100, making them accessible to retail as well as institutional investors. EIB will say only that it expects the issue to be of “benchmark size”, but a syndicate of 15 distributing banks has already undertaken to subscribe to €600m of the paper, setting it up to be the largest-ever index-linked bond.

“We’re happy with the level of positive interest and sympathy being shown,” says Mr de Mazières. “It has provided an opportunity for many rich and interesting meetings with investors. There are those accounts who are required to make socially responsible investments, but there has also been good feedback from some retail distributors. It’s a product that attracts the eye.”

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