With its economic stimulus package and its Climate Action Programme 2030, the German government is already strongly committed to climate action. As part of the Climate Action Programme 2030, the German government has started to issue green bonds. The aim here is to promote the idea of sustainability in financial markets too. Germany’s green bonds are also referred to as “green twins”, because they have the same characteristics as conventional federal securities. The difference is that they have eco- and climate-friendly budget expenditures assigned to them.
The German government issued Green German Federal Securities for the first time in 2020. Germany’s Finance Agency launched the sale of 10-year Green Federal Bonds in September 2020, which were followed by the introduction of 5-year Green Federal Notes in November 2020. The issue volume was €6.5bn for the Green Federal Bonds, and €5bn for the Green Federal Notes.
Green Bond Framework
The use of proceeds from Green German Federal Securities always corresponds to federal expenditure from the previous year. Spending from the previous year’s budget that qualifies as “green” is assigned to the securities. The Green Bond Framework lists five main green expenditure categories that can be assigned to Green German Federal Securities. These are:
- International cooperation
- Research, innovation and awareness raising
- Energy and industry
- Agriculture, forestry natural landscapes and biodiversity
By specifying these categories, the framework creates transparency regarding green expenditures and their impact. The Green Bond Framework is available for download at https://www.deutsche-finanzagentur.de/fileadmin/user_upload/institutionelle-investoren/pdf/GreenBondFramework.pdf.
First green bond allocation report
The German government published its first green bond allocation report on 20 April 2021. The Green bond allocation report 2020 lists the expenditures from the 2019 federal budget that qualify as green and shows how they were assigned to the German Green Federal Securities. In 2020, €11.5bn in proceeds from the securities were offset against €12.3bn in qualifying expenditures from budget year 2019.
€12.3bn in expenditures from the 2019 budget qualified as green. In line with the Green Bond Framework, a core team consisting of representatives from the Federal Ministry of Finance (which chairs the team), the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety and the Finance Agency selected the eligible expenditures, taking established international market standards into account. These expenditures were then assigned to the proceeds from 2020.
Auditors from Deloitte conducted an external audit of the allocation and provided third party verification that the proceeds had been assigned to the green expenditures.
In line with the Green Bond Framework, the German government will publish a report detailing the impact of green spending on the climate and environment. The first impact report, which will refer to 2019 green spending and green bonds issued in 2020, is scheduled to be published in mid-2022.
The German government intends to play an active role in building and shaping the market for sustainable government bonds. For example, the Federal Ministry of Finance and the Finance Agency have already announced plans to issue the first 30-year Green Federal Bonds in May 2021. This will produce a green yield curve that will give a further boost to the sustainable finance market while helping to establish Germany as a benchmark issuer of green securities. This will also strengthen Germany’s position as a hub for sustainable finance.