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Italy joins Green Government Bond market

Italy has launched its €8.5bn inaugural green bond – 2021’s first major green sovereign issue.

After inaugural green bonds in 2020 from the Netherlands, Sweden, Germany and Hungary; Italy is the latest to join the list.

The Italian government, led by new prime minister Mario Draghi who has pledged to increase the focus on climate change, has issued its first green bond with a maturity of 24 years.

Italy’s debut offering was almost 10 times oversubscribed.

The timing of the launch is pertinent as investor sentiment towards the country has improved following the appointment of former European Central Bank president Draghi as prime minister earlier this year, and its debt remains among the region’s highest-yielding assets.

Publishing its framework for green bond issuance, the Italian government said that it would align as much as possible with the EU’s green bond standard, due in the coming months.

The majority (around 90%) of the proceeds will be allocated to transport, energy efficiency, protection of the environment and biological diversity. The remainder will be used for things like renewable electricity and pollution prevention with a proportion used for refinancing projects agreed between 2018 and 2020.

Bram Bos, NN IP’s lead portfolio manager for green bonds, is encouraged by the Italian green bond launch. 

He believes this is an important milestone for the green bond market as treasury portfolios make large allocations to Italian government bonds.

“The growth of the green bond market keeps on accelerating and the strong increase in government issuance is giving a broader range of investors the chance to greenify their fixed income portfolios.”

He adds: “We are reaching the stage when replacing part of a regular government bond portfolio with green government bonds is a logical and feasible step. The government bond market has become more diversified and is likely to keep on growing, with countries like Spain, UK and Singapore all expected to issue inaugural green bonds this year.”

Arnaud-Guilhem Lamy, manager of the BNP Paribas Green Bond Fund, takes a similar line.

“Green government bonds are also regular government bonds with the same credit fundamentals, that additionally finance dedicated green projects.  Most of our portfolios already hold sovereign green bonds where appropriate, be they green funds, SRI funds or standard funds. It’s quite possible that some investors may hold sovereign green bonds without even being aware.”

He adds: “We expect Spain to come to market with a green bond and we welcome similar issues from other countries as well.  Eurozone issuers already include France, Netherlands, Belgium, Ireland, Germany and Italy.  We would also be very happy if those countries with just one or two green bonds were to issue more with different maturities in order to have green bond curves.”

Bos points out that although Italy is expected to be a regular green bond issuer and has committed to tap the green bond market on a regular basis, it is not (so far) planning to follow Germany’s example and build a full green yield curve. 

Italian commitment

In 2019, Italy promised to meet the EU bloc’s target of carbon neutrality by 2050 in keeping with Paris Agreement’s 1.5°C scenario. And last month Draghi insisted his government would boost renewable energy and green hydrogen production. 

However, the current green bond framework, which describes the use of proceeds for the bond, does not mirror that renewable and hydrogen commitment, making it the smallest category of the allocation.

Isobel Edwards, green bond analyst at NN IP has reservations about the current green bond framework. 

“Italy has made efforts to align all its green bond categories to the EU Taxonomy in terms of the mitigation objective criteria’’ she says. ‘’While we welcome this, we hope that the ‘do no significant harm’ criteria will also be considered for each activity”.

These considerations are laid out in the EU Taxonomy technical criteria for each industry but have not been included in the green bond framework at the pre-issuance stage. Edwards hopes they will be laid out in the impact report. “The ‘do no significant harm’ assessment is one of the key pillars underpinning the EU Taxonomy and EU Green Bond Standard”, she explained.

Italy consumes 1.5 times more natural gas than its total reserves and is a large importer of this fuel. Unlike some other Italian issuers, the green government bond’s framework does not include natural gas as an eligible activity with regard to ‘no significant harm’.

“We hope this signals a more strategic shift to reduce the share of natural gas in the country’s energy mix in the coming years,” Edwards said.

Green bond evolution

In terms of common trends across Europe, more and more issuers are excluding the mining sector from their green bond frameworks, and Italy is no exception. Issuers feel that they cannot establish sufficient safeguards in these industries to ensure robust environmental standards.

However, this poses something of a dilemma as more metals and minerals will be needed in the future, in particular rare earth metals, which are required for renewable technologies such as electric vehicle batteries. 

 “It is crucial to invest and find a way to source and recycle these sustainably, if we are going to develop into a green economy,” said Bos. “Issuers should not feel afraid to be ambitious in this area and look for solutions for green mining.”