Borrowing costs

Can Green Bonds Lower Government Borrowing Costs?

Finance Minister Grant Robertson said the government could save money by issuing green bonds in place of some New Zealand government bonds.

In other words, he thinks the government could pay less interest on the debt it issues if it guarantees investors that the money they lend will be used to finance environmentally friendly projects.

Robertson last week announcement the Treasury’s debt management office plans to start issuing green bonds in place of some regular bonds from the end of 2022.

He could not yet say how much of the annual issuance would go to green bonds, or how long the bonds would be.

But speaking to, Robertson said there is evidence that investors, especially those with shorter-term horizons, are willing to pay a premium, or “greenium,” for debt. used to fund sustainable initiatives.

Robertson said demand for green bonds is high, with green bond issues from other sovereigns being oversubscribed.

ANZ NZ Chief Sustainability Officer Dean Spicer agrees, saying investors are starting to accept about five to 10 basis points of lower yields on green debt compared to ordinary debt issued by the same transmitter.

He noted that sustainable finance is being mainstreamed, with 10 sovereign bond issuers entering the sustainable debt market in the three months leading up to September. Spicer said there are now 32 issuers of sovereign green bonds.

Indeed, the United Kingdom has issued in recent months 16 billion pounds of green bonds; his last program seeing his order book oversubscribed 12 times.

Fisher Funds head of fixed income David McLeish was less convinced than Spicer that investors would accept lower yields on green bonds – “at this point”.

He noted that investors always ultimately consider the creditworthiness of the underlying issuing entity. It is the same whether the debt is allocated to a “sustainable” goal or not.

However, McLeish said things could change over time if there is a larger pool of capital pursuing a smaller number of green bonds.

ANZ NZ senior strategist David Croy stressed that green bonds would further diversify the Crown’s funding program. He said it was good for the government to tap into different parts of the market and satisfy investor appetites.

While Robertson noted the potential financial benefit of catering to this investor appetite, he denied that green bonds were a gimmick.

He said they would add a layer of control to the government’s “green” spending initiative, as green bond issuers must adhere to international guidelines.

McLeish said, “Some of the governance surrounding qualifying as a green bond, and some of the initiatives funded by this debt, has improved over the past few years. There is a lot more rigor around what qualifies as a green bond and are worthy uses of this capital.

“But they [green bonds] still vary, and there are many differences between jurisdictions and industries. “

Robertson has indicated that he wants the government to set up a panel to select projects to be financed by green bonds. Ultimately, this will need to be aligned with the budget process.

The Debt Management Office will unveil more details on green bonds in mid-2022.

In the meantime, it will update its provisional debt issuance program on December 15. This will be published at the same time as the Treasury’s semi-annual economic and budgetary update.

McLeish expected the Treasury to scale back its planned debt issuance program because Covid-19 has not hit the economy as badly as initially thought.

However, he said there remains a question mark as to when the cost of responding to climate change will reach / to what extent the costs will be charged upstream or downstream.

The government Emissions reduction plan, which he is legally required to publish by May 31 of next year, will likely provide more clarity on this. Its release is expected to align with the 2022 budget, which Robertson says will focus on the climate.

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