In July, the European Investment Bank looked to address the demand for socially responsible investments by launching the largest ever euro-denominated green bond using the bank's mini-benchmark programme, ECoop. Its green thinking proved to be clever thinking, when the initial deal size had to be increased to satisfy demand.

In 2007, the European Commission set out a range of targets to improve Europe’s environmental footprint. Known as 20-20-20, they comprised a 20% reduction in greenhouse gas emissions from 1990 levels, ensuring that 20% of Europe’s energy comes from renewable sources and improving energy efficiency by 20%.

The European Investment Bank (EIB), as the EU’s non-profit long-term lending arm, plays a central role in these ambitions. Shortly after the 20-20-20 plan got under way, therefore, the bank launched the first ever climate awareness bond, the proceeds of which were earmarked for renewable energy and energy efficiency projects.

Since then, the ‘socially responsible’ bond market has developed across Europe and more than €12bn-worth of bonds has been issued. Nonetheless, the market has remained fragmented and illiquid, posing a challenge to many would-be investors.

Earlier this year, the EIB decided to address this issue. “We could see there was demand among institutional investors for green bonds of larger size and liquidity, but in recent years most deals have been launched in a rather ad hoc fashion and there was no real benchmark for investors. We wanted to create one to fill this gap,” says Aldo Romani, deputy head of funding at the EIB.

Drawing attention

The EIB has a €70bn funding programme and many of its bond transactions are in the €1bn-plus category. The climate awareness bond was rather different, however. “We wanted to test the water and use the deal to see if such a transaction was of value for investors looking for SRI [socially responsible investment] products,” says Mr Romani.

In this context, the bank’s mini-benchmark programme, known as ECoop, seemed to offer a logical solution. Opened in the wake of the financial crisis, when volatility grew to record highs, the ECoop programme allows the EIB to issue smaller-sized deals with lower execution risk that still have mini-benchmark characteristics.

“These transactions are at least €500m in size and are structured in such a way that they can be re-opened by issuing further lines of at least €250m at a time at the investors’ request. This means the deals can build up considerably in size if investor demand is there, an approach that can suit socially responsible investors’ needs over time,” says Mr Romani.

Given its substantial funding programme, however, there is a danger that even sizeable EIB bonds can be issued and go virtually unnoticed. The bank was keen to ensure this did not happen with its first mini-benchmark climate awareness bonds.

“We hoped that the bond would attract attention because it is now up to socially responsible investors to signal whether they want this market to develop. The EIB has signed about €30bn of loans to renewable energy and energy-efficiency projects over the past five years and it is therefore potentially in the best position to live up to their requests,” says Mr Romani.

The bank decided therefore to adopt a twin-pronged approach to innovation, making its bond the largest ever euro-denominated green bond and issuing it in paperless form, with settlement via Lux CSD, the Luxembourg clearing operation. “This was the first paperless issue under Luxembourg law, and it was the first green mini-benchmark bond in euro,” says Mr Romani.

Striking a balance

Work on the deal began in earnest in April, when new legislation was introduced in Luxembourg, allowing paperless issuance. EIB chose four lead managers: Bank of America-Merrill Lynch and UniCredit had worked on the 2007 inaugural climate bond, while Crédit Agricole Corporate and Investment Bank and DZ Bank have been at the forefront of the ECoop programme.

Initially, discussions focused on a €500m transaction, with a maturity of seven years, priced in line with similar ECoop deals. “The average maturity for climate-themed projects is 15 years, but most climate-themed bonds have a maturity of five years at most. The lead managers had identified the largest potential investor demand in the seven-year range, so that tenor was the one we targeted. A longer maturity might have been nice, but further out France currently trades wider than the EIB and this creates problems for some potential investors,” says Mr Romani.

The seven-year deal, carrying an annual coupon of 1.375%, proved highly popular. Launched in mid-July, just before the summer holidays began in Europe, the deal was raised from €500m to €650m to satisfy investor demand.

“We were very happy with the deal on several fronts. First, we were able to do it at all. Second, we did it in fully dematerialised format. Third, we have revitalised the green market in euros and provided SRI investors with what they wanted. And fourth, we used the ECoop approach for distribution, which is the most promising in terms of transparency of pricing and the further gradual development of a fruitful dialogue with socially responsible investors in the euro,” says Mr Romani.

Some 60% of the bonds were bought by SRI investors with the rest acquired by mainstream institutions and banks. Looking ahead, EIB intends to maintain an ongoing dialogue with investors to assess demand and see if there are ways to improve its green approach.

“The deal may grow in size and, if required by actual investor demand, we may issue further bonds of the same kind in the future, possibly with longer maturities. For now, however, our first mini-benchmark climate bond already allows investors to combine SRI with EIB risk in a more liquid way than in the past and we are very pleased with that,” says Mr Romani.  

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