Green Covered Bonds

What benefit can green covered bonds provide and what is the status of the market today?

Green covered bonds provide an opportunity to finance sustainable building projects and public-sector green projects. With buildings being the largest energy-consuming sector in Europe, the covered bond market, which funds about 30% of the mortgages in Europe, can play a significant role in reducing greenhouse gas emissions.

The green covered bond market has developed steadily since the first green covered bonds were issued in April 2015, with 54 issuers of sustainable covered bonds from 13 countries as of June 2022. As with most green bond markets, green covered bonds have a price differential, which is explained by a wider pool of investors willing to buy green bonds. As new rules require investors to report their green assets, we can expect this differential to increase over time.

What assets are eligible for green covered bonds and what structure can they take?

Green covered bonds have specific eligibility criteria for the assets they can finance. Most green covered bonds now conform to the EU sustainable finance taxonomy. The taxonomy requires that economic activity contributes to one of six environmental objectives, including climate change mitigation and adaptation, while also avoiding significant harm to other objectives. The three categories of assets that are eligible for green covered bonds are the renovation of existing buildings to improve energy efficiency, the construction of new energy-efficient buildings, and the acquisition and ownership of efficient buildings. 

Most green covered bonds are secured on green assets that already meet the eligibility criteria, but a use of proceeds approach, where money raised must be used to finance new eligible assets, is being considered in the EU's Green Bond Standard. Green covered bonds also conform to the Green Bond Principles, which include reporting requirements and third-party verification of green credentials.

What does the future hold?

The green covered bond market is likely to grow as the market adapts to new regulations, including the EU Green Bond Standards, upcoming changes to mortgage credit and energy performance directives, and new disclosure standards. With the decline of central bank funding, the market has already seen an increase in green covered bond issuance, and changes in investor disclosure rules may increase the premium paid for green bonds. However, eligible collateral is finite, so banks may turn to alternative funding sources. Overall, the growth of green covered bonds is expected to continue to contribute to greenhouse gas reduction goals.