The Green Deal - 09/24 (EN) #responsiblebanking

• EUR ESG primary market with record summer - September so far slightly below expectations
• Green and Sustainability bonds trade closer to SLB asset class following risk-off in August
• Still more investment in fossil fuels than in sustainable energy
• Corporates increasingly implement climate transition plans, but transparency still to be improved CDP data shows
• CEZ is increasingly positioning itself as a CEE SLB pioneer
• Slovenia issued first sovereign Social Samurai Bond
• Greenwashing once again in the focus: Germany blocks CO₂ credits amid fraud concerns

The summer break on the EUR ESG primary market was unusually short this year, resulting in a record primary market summer (August and July), thanks in particular to the issue volumes at the end of August. EUR 34.5 bn was placed on the EUR ESG market over the summer months. This means that EUR 15 bn more was placed in the summer months of 2024 than in the summer of the previous year and still EUR 10 bn more than in the previous record summer of 2022. Green bonds again accounted for almost 2/3 of the new issue volume over the summer months.

After the record summer, the start of September on the EUR ESG primary market was very promising compared to the previous year. So far, EUR 27.8 bn in ESG bonds have been placed, of which just under EUR 20 bn was attributable to green bonds. This means that more green bonds have already been issued in September to date 2024 than in the entire month of the previous year. But this is put into perspective when looking at 2022 and 2021. Here we saw monthly EUR ESG new issue volumes of over EUR 60 bn each in September and monthly green bond volumes of around EUR 50 bn, making this month historically the strongest EUR ESG issuance month on average. We do not expect to reach this level again this year. It could also be difficult to reach the level of the strongest issuance month to date in 2024 (January EUR 54 bn). September issuance is therefore likely to fall slightly short of expectations.

Credit spreads trended wider over the summer months in particular following weak US economic data which sparked recession fears in early August. However, markets moderated since then and the safe haven flow depressed yields which resulted in substantially higher ytd total return across all ESG asset classes. SLBs remain the highest performing asset class within ESG. The greenium is still not existent on the IG EUR market as the overall index continues to trade at a small premium. Also, real estate hardly plays any factor anymore in terms of greenium. Whats more, the risk-off in early August actually resulted in sustainability & green bonds trading much closer to the SLB asset class. In general, we would expect green bonds - given their dominant primary market share - to reflect current market dynamics the best via the primary market repricing mechanism. On the other hand, in the financials segment the greenium remains persistent across maturity buckets at a few basis points. Meanwhile, the average greenium for German twin bonds remains in the single digit basis point area.

In a study, Urgewald looks at how many shares and bonds are still held by international investors in coal, oil and gas companies. The figures themselves are based on an analysis of 7,500 institutional investors and 2,928 fossil energy companies. Of the 7,500 institutional investors, 7,245 investors are still invested in oil and gas. Of these, 5,260 investors are also still invested in coal. In total, the investments amount to USD 4.3 trn. Of this USD 4.3 trn, USD 3.9 trn is attributable to companies involved in the exploration, development or infrastructure for new fossil energy sources.

According to the study, investors from 10 countries are responsible for 91% of institutional investments in the fossil fuel industry. The elephant in the room are clearly US investors, who currently represent 65% of global investments in fossil fuels. In second place is the USA's northern neighbor, Canada, with a considerable share of 6%. According to the data, Europe accounts for an investment volume of USD 554 bn and thus 13% of the total amount. The largest share of this is attributable to the UK (USD 152 bn), followed by Norway (USD 86 bn) and Switzerland (USD 80 bn).

While it is the large financial institutions in the UK and Switzerland in particular that are driving up the balance, in Norway it is the state pension fund, which is the largest investor in fossil energy in Europe with USD 70 bn.

The fact that the “green” transition is progressing rather slowly on the investment side is also underlined by the figures in the World Energy Investment Report 2024. Although it shows that investment in renewable energy has increased significantly in the last decade (2014: USD 300 bn vs USD 771 bn in 2023), this also applies to “brown” energy. If you compare this to investments in fossil fuels, the discrepancy between the desire (green) and reality is obvious. In 2014, USD 600 bn was invested in fossil fuels and this amount rose to USD 1,100 bn by 2023. So much for the green turnaround.

With CO₂ being arguably one of the most important ESG KPIs, setting climate transition plans - targets to reduce the CO₂ footprint - is becoming increasingly important for corporations in order to continue to attract capital flows and prevent investors questioning the going concern business model and competitive position in an inreasingly CO₂ aware world. CDP - a non profit organization with the aim to increasding disclosure and improve reduction of environmental impacts - said that out of the total of companies providing data to CDP, roughly 25% (5.9 ths companies) have a climate transition plan in place to cap global warming at 1.5 degrees above the pre-industrial average - the most ambitious of the Paris targets. In 2023, the number of companies having implemented such climate transition plans was up 44% yoy. In addition to the roughly 5.9 ths companies, another 8 ths aim to publish transition plans in 2025.

However, apart from a reasonable climate transition target, the quality and scope of data is an important factor to consider. CDP has 21 indicators in place which a company should aim to fill-out in order to assure data quality to investors. Only 2% of the companies reporting targets were able to provide data on all metrics. 40% discolsed data on at least 2/3 of the metrics. Disclosure is best in industries such as power generation and financial services, while in particular the manufacturing sector has the highest share of companies reporting only "few" (0-33% of the 21 key indicators) indicators at roughly 75%. Materials and Food & Beverage are also among the laggards. This is worrying as manufacturing and materials are large contributors to global CO₂ emissions.

Looking at global data from LSEG for company reported emission reduction targets we find that the majority (40%) has 2030 targets in place, followed by 2025 (23%) and only 6% out of our sample currently target 2050. This shows that the majority of global companies has a rather short term view on the GHG emission issue, however, also reflects a trade-off in terms of feasiblity and predicitbility given the currently available technologies and resources etc. The further out the target goes, the greater the potential discrepancy we reckon. Focusing on the short to medium term and then take it from there seems plausible, we reckon. We also find that among the 2030 targets only 18% have a 100% reduction ambition, while for 2050 its at 97%. This fits the step-by-step approach, we believe.

• Ups CEZ did it again: While SLBs have lost a lot of “market love” in the last 1.5 years, the Czech utility CEZ seems to be following in the footsteps of Enel (despite the missed KPIs and thus the coupon step-up coming into effect), the European pioneer and market leader in the SLB sector. CEZ currently appears to be assuming this role despite the difficult environment for SLBs in the CEE region. The issuer is focusing on significantly reducing its CO₂ footprint. The fact that this is partly achieved by replacing coal energy with nuclear power does not meet with a warm reception in all parts of Europe, but on the other hand this is exactly what is meant by transition technology - and leads to significant CO₂ savings in the medium term. At the end of August, CEZ placed the second EUR SLB in the course of the year. It was interesting to note that the second issue was less well received on the primary market than the first issue in June. Overall, the bonds were very comparable (June issue 2032, volume EUR 750 mn; August issue 2031, volume EUR 700 mn). In the June issue, the issuer was able to narrow the spread in the pricing process by 35bp and point to an order book that was three times oversubscribed. In the latest issue, the narrowing was only 15bp and the order book was “only” 2 times oversubscribed. From our point of view, the August issue had a harder time on the primary market, as investor interest was exhausted with two almost idenctical bonds being placed within such a short period of time. Additionaly from an issuer that is not investable for all investors due to its coal activity. Nevertheless, the issue was solidly placed. As already mentioned several times, we see SLBs as the most important capital market instrument for the “green transformation” - provided that the KPIs are ambitious. In the case of CEZ, we consider the targeted carbon dioxide reduction of 57% by 2030 (starting year 2019) to be ambitious. The criticism of the coupon step-up, which was often considered too low in the past if the targets were not met (previously mostly 25bp), is also better resolved in the case of CEZ at 75bp.

• Slovenia tapped the global ESG bond markets with a first of its kind rarity. The sovereign priced an inaugural Social Samurai Bond Deal. Thte total volume of JPY 50 bn was spread across 3-year and a 5-year fixed rate senior unsecured bonds. The dual tranche deal was priced at the tight end of the guidance due to strong demand from Japanese and offshore accounts alike. The social bond is aligned with its Sustainability Bond Framework (ICMA, dated January 2023) and proceeds will be directed soley towards expenditures falling within eligible social projects such as access to essential education services, healthcare infrastructure or projects which support employment generation. While it was the first social samurai bond issued by an sovereign, JPY-denominated Eurobonds are not a novelty among CE/SEE issuers: The Czech Republic, Hungary and Poland already have some outstanding and Romania is another hot candidate to debut in the Asian, possibly Japanese, market later this year, according to its own statements.

Germany's Environment Agency decided to reject carbon credits worth 215 ths tons of CO₂ from oil companies which are suspected of fraudulent climate projects in China. Under EU/German law, companies selling liquid fuels are obligated to reduce GHG emissions of said fuels. Since 2020 it is possible to offset some of the reduction requirements via surrendering upstream emission reduction certificates (UER), which in turn are received via projects that focus on reducing upstream emissions such as via using renewables energies in crude oil production. Upstream emissions are defined as GHG emissions taking place before the fuel enters a refinery or processing plant and projects to reduce those can be in or outside the EU. For UERs to be received, projects are subject to a validation. Now the Environment Agency found serious legal and technical inconsistencies for seven projects investigated in China and operated by large international companies. One project was disqualified for not following rules with regards to starting up the project. The agency is also investigating another 13 projects. Out of the 21 projects, only five granted full access to the sites, which in itself raises questions already. This issue once again brings "greenwashing" in the focus.