Wide Angle Shot: EUR as leading ESG currency, self-reinforcing trends at work

The euro is establishing itself as global ESG (issuing) currency. We take a closer look at several inherently self-reinforcing trends reinforcing this development. Europe and relevant EU institutions have the chance to secure a leading role for the euro in an important global capital market segment and at the same time to do something meaningful from a higher perspective.

Strengthening the international role of the euro is a strategic objective of the European institutions, and the ECB regularly addresses the issue (see its report on the international role of the euro). With regard to the international role of the euro and its future prospects, we currently see three important and partly interdependent trends that we would like to highlight here.

Solidified euro area architecture + low interest rates = EUR as issuing currency

Firstly, it can be clearly stated that the euro plays second fiddle to the US dollar in almost all relevant dimensions of international important or, at most, is close to the greenback in partial dimensions. In dimensions such as currency trading or foreign exchange reserve management, the euro is well behind the US dollar in terms of use. There have also been hardly any significant changes here in recent years. Secondly, it can be said that the international use of the euro has been rather stable in principle in recent years. In some areas there are signals that the international acceptance of the euro, especially on capital markets and among international investors, is also slightly increasing again. This certainly has to do with the strengthened euro area (crisis) management architecture. Investors trust the setup shaped by the ECB and ESM as backstop. Moreover, from an investor's point of view, it is assumed that once established instruments, institutions and facilities will be pragmatically increased and used in the event of a crisis. This is a key learning out of the history of European unification. Furthermore, the ultra-low interest rates have certainly favoured the use of the euro as an international issuing currency (incl. swapping then into other currencies such as USD) in recent years. Moreover, issuance by the ESM, IFIs of the EU (such as the EIB) or the new EU bonds are meeting with high demand internationally (i.e. outside the euro area). Some emerging markets have been also actively trying to cap or reduce their holdings of US Treasuries in foreign exchange reserve management in recent years. Nevertheless, the euro still has some catching up to do here, since a few years ago it was almost on a par with the USD in terms of globally outstanding bonds across all sectors; in terms of market share, the USD is still traditionally well above the euro in international issues anyway.

Moreover, in terms of market standing, the euro has benefited from the decisive and coordinated crisis management of the ECB and EU in the context of the COVID-19 crisis — even though the acceptance of the euro as an issuance currency had already recovered in the years. In the COVID-19 crisis and with regard to the PEPP, the ECB clearly confirmed its commitment to the euro area and did not act as a “passive” investor according to fixed country keys. In our opinion, the euro can receive a further boost from the ESG and green finance turn globally and in Europe; the latter also got a boost from the COVID-19 crisis. Or in other words: The euro is just establishing itself as THE international (issuing) currency in the field of green finance and ESG. We will take a closer look at this aspect in particular in the following.

ESG vs. other dimensions: International role of the EUR

BIS, ECB, RBI/Raiffeisen Research

International role of the EUR in the field of ESG

Calculated over several indicators or market segments, the ECB sees an overall international usage or market share of the euro at around 19% globally. In terms of outstanding volumes in ESG fixed income instruments, the euro currently stands at over 50%; the USD “only” at 23%. But this is no reason for gloating. After all, the USD has also made dynamic gains in 2020. Nevertheless, the euro has had a clear advantage over other currencies in the ESG area for years. Should the euro be able to consolidate this role, it could also make gains in other areas of international usage, such as foreign exchange reserve management (here the euro has still lost som,e importance since 2008 until today). In this respect, we see a high rationality that relevant institutions are actively pursuing the strengthening of the euro as an ESG currency. This would fit well with the EU's ambition of strategic autonomy and at the same time certainly promotes the ambitious Green Transition agenda at the EU level. Moreover, given the outlined internationally prominent role of the euro in the field of ESG, Europe has the opportunity to open up an important capital market segment for the European banking and financial sector. This is all the more relevant as the low interest rates will certainly remain with us in Europe until well into the 2020s — but this of course means that the attractiveness of the euro as an international issuing currency will remain high.

In addition to France, Germany and the Netherlands, which have been playing a pioneering role here for years and ensure record new issue volumes on the EUR ESG bond market every year, the EU itself (including the ECB) is taking on a key role here already. The EU should also ensure that in 2021, for the first time, supranational issuers will issue more EUR ESG bonds than individual countries. At the start of the year, the EU was already setting the pace on the market with its EUR 10 bn SURE (Social Bond) and is thus responsible for ~25 % of the EUR-denominated issuance volume.

In addition to its issuing role, the EU is likely to be even more important for the EUR ESG market as an investor in a variety of roles. Firstly, through the ECB as a direct investor via its various bond purchase programmes. Here, the conditions have already been adapted in order to be able to purchase Sustainable Linked Bonds (KPI), for example. The EU itself is likely to promote the development and financing of green bonds through several sources. For example, the European Green Deal includes EUR 1,000 bn in sustainable investments over the next 10 years. At least 37% of the EU's EUR 750 bn Recovery Fund is also to flow into “green” projects. Furthermore, there is a EUR 160 billion package to cushion the labour market consequences of the COVID-19 crisis and this would be suitable for social bonds, for example. Thus, there is a lot of financial firepower of the EU directly to underpin its ESG ambitions. The internationally prominent role of the euro is certainly also an important factor for many issuers in Central and Eastern Europe. This is because the euro is in more frequent use here in many dimensions than it is at the global level. The CEE region, for example, is likely to benefit comparatively disproportionately from the EU Recovery Package.

It is important to emphasize that many of the trends outlined here are also inherently self-reinforcing. The more solid euro area (crisis) management architecture has strengthened the role fo the EUR as an issuing currency and thus partly laid the foundation for its rise as ESG currency. In sum, this has also increased the depth and liquidity of the euro capital markets. Political developments have certainly also given the euro a tailwind here, and we think that relevant institutions and especially the ECB could give the euro further tailwind as a green finance and ESG currency. In the course of redefining and sharpening its monetary policy strategy and instruments in 2021, the ECB could send forward-looking signals (keywords here are “Green QE” or “Green LTROs”). In the light of continental European financing structures with a macroeconomic dominance of debt and bank financing, the establishment of numerous varieties of ESG financing forms is certainly of particularly high relevance.

ESG bond market is and was a EUR market (in EUR bn equivalent)

Refinitiv, RBI/Raiffeisen Research

The attractiveness of the EUR as a currency for ESG bonds is also shown by non-euro area issuers that have already used the EUR credit market this year. Chile, for example, took advantage of the positive ESG EUR credit market for a dual-tranche issue in which they placed both a "green bond" and a "social bond". Examples such as the issues of the Japan Finance Organisation for Municipalities, the Asian Development Bank, the Australia & New Zealand Banking Group or the Banque Ouest Africaine de Development also show that Europe and the euro enjoy a special position here and issuers from all continents are placing ESG bonds in EUR.

The developments outlined here are related to the fact that ESG is certainly no longer a niche in the fixed income markets. There is an increasingly wide range of instruments, sectors and maturities. A comprehensive analysis on the outlined issuing currency trends in the ESG area and on markets, sectors etc. can be found on our portal (with registration) in our new publication series "Yellow goes Green".

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Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.

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Joerg leads the Fixed Income & ESG Research department. Before joining Raiffeisen Research, he gained expertise in international consulting projects, auditing and risk management, which gives him a broad perspective as he analyzed companies from different angles. In recent years Joerg has been working intensively on the topic of sustainability in the financial markets and developed the RBI ESG Scoring Tool for this purpose. If you have questions about all kinds of sustainable financial products, Joerg is the right person for you. Joerg is CFA Charterholder graduate in business administration and economics.