Vanguard sovereign
Austria made up for its late entrance to the sovereign green bond market by emerging as an ESG financing pioneer in 2022. Deploying a notably broader and more innovative green product menu than its peers, with further breakthroughs set for 2023 and beyond, it is IFR’s Sustainable Issuer of the Year.
The most visible dimension of Aa1/AA+ rated Austria’s long-awaited arrival in the green market was May's €4bn inaugural bond. The 2049 deal attracted huge investor demand, more than six times subscribed on over €25bn of orders and achieving a greenium of 2.5bp compared to conventional debt.
But other sovereigns have delivered wildly popular inaugural green bonds in recent years. Where Austria stands out is that this formed only part of a deeper reworking of its funding.
By the end of the year, it had differentiated itself by also pioneering green Treasury bills, an unprecedented instrument for the sovereign sector, as well as taking in private green loans.
“In one year we issued under three different programmes in green format and I think the assessment is really positive,” said Markus Stix, managing director at the Austrian Treasury.
“The feedback that they are receiving has made the finance ministry extremely happy,” added one market participant.
More than 20% of orders for the inaugural deal came from new investors, meeting Austria’s goal of finding additional buyers.
“They are already in all relevant regions of the world, but the green aspects are just improving and increasing their investor base,” said Antonio Keglevich, global head of sustainable finance advisory at UniCredit – one of the sovereign’s advisers (with JP Morgan) on establishing its green financing framework, which was one of the first to align the bulk of its use of proceeds with the EU Taxonomy of sustainable activities.
Austria now plans to intensify its green push. It is likely to pioneer sovereign green commercial paper in 2023 and could potentially extend its leadership by issuing other novel products like green private placements or Rule 144A notes too as its green programme – already unmatched as a proportion of GDP – expands.
“In the medium term we will progress further, especially with regards to a potential framework update in the future which could include Austrian regional governments and therefore higher eligible amounts as well,” Stix said.
ESG credentials
Even before its green entry, Austria offered many attractions to ESG-oriented investors. Its energy mix includes the European Union’s highest proportion of renewable power, for example.
Nonetheless, as a smaller issuer it is always seeking new sources of investor demand – particularly as the European Central Bank starts to wind down its bond buying support. The development of a thriving sovereign green bond market presented a clear opportunity.
When Austria decided to finally establish a presence, it went further than others. At 1.3% of GDP, the eligible green expenditures identified in the framework it launched in April represent the biggest share of any national economy.
In addition, the sovereign also made an unmatched commitment to greening its funding. Initially, it declared it would source 20% in short-term markets and then signalled openness to issuing green versions of all its instruments.
Besides government bonds and T-bills, these include loans, Schuldscheine, medium-term notes, commercial paper and debt sold under SEC Rule 144A.
“We now have the possibility because we included use-of-proceeds language, green language, in all our programmes except one that we do not use at the moment,” said Stix.
With the sovereign’s green funding set to grow, “it's worthwhile having all the programmes open for investors with use-of-proceeds language,” he said. “If there is demand from investors, we are open.”
The exception to the rule is the sovereign’s Australian dollar Kangaroo programme. The Treasury intends to update this to incorporate a green option too but with the facility not having been used since 2004, this large piece of work was not among its 2022 priorities.
Greening the range
The most notable achievement of Austria’s first green year was in short-term debt. In October it sidestepped the long-standing objection that only long-dated funding is appropriate for green projects, attracting more than €2.2bn of demand for its €1bn debut offering of green T-bills – a bid-to-cover ratio of 2.69 on the competitively-bid portion, compared to an average of 2.12 on conventional bills – and pricing at a greenium of 2bp.
This success “is showcasing that there is demand for short-term ESG-relevant paper”, said Keglevich.
From February, the Treasury will move to quarterly auctions. Outstandings will be rolled over as long as it has term green debt outstanding.
This commitment makes short-term debt a core part of Austria’s green funding and provides what Stix calls “the missing link”.
“It doesn't matter from the investor's perspective if they invest in the bond or the bills – they have the opportunity to invest in Austrian green securities with a final maturity of 2049,” he said.
The final component was €100m of self-arranged private green loans. A domestic insurance company provided the eight and 18-year tranches.
CP pioneer
2023 will see the sovereign go further still in greening its product range. With at least another €1bn of eligible expenditures committed to its short-term funding, it is poised for another first – the inaugural issue of green sovereign commercial paper.
While it could simply schedule additional green T-bill auctions, it has a “clear” strategic goal of making a green product available to CP investors who come to it for tailored notes out to 12 months in currencies such as US dollars and sterling as well as euros, according to Stix
With increasing focus from all types of buyers on ESG, feedback from money-market funds, central banks and other major short-term accounts has been highly supportive. “There is a clear positive signal that we should use this programme in addition to our green Treasury bill programme,” said Stix. “It looks like the demand is really good for such a product.”
The Treasury will determine its target currencies, maturities and volumes during the first quarter.
It must also decide on its green bond approach for 2023. With at least €4bn of eligible expenditure available, it could take several routes: using the entire amount on opening a new green line; boosting the existing line through one or more auctioned or syndicated taps; or some combination of the two. A €1bn tap would take the 2049 bond up to €5bn – a threshold size for trading platforms – while leaving at least €3bn for a new green benchmark.
Two pillars
Despite its taste for innovation, which has also seen it issue a landmark century bond, Austria has no plans to issue in other ESG formats such as social, sustainable or sustainability-linked. Echoing its stance on inflation-linked debt, which it views as potentially fragmenting issuance and affecting liquidity, the Treasury has ruled out adding further funding “pillars”.
“Otherwise it will be too much and the liquidity could suffer. Therefore we took the decision to go with a two pillars strategy. In all our discussions investors are happy that we decided only for two different pillars and not more,” said Stix.
Even so, Austria’s green programme is set for significant growth in the medium term. While current activity only funds the federal government, the Treasury is set to borrow on behalf of sub-sovereign entities too.
This expansion would facilitate back-to-back loans to regional governments and their affiliates for green projects. In total, it should eventually boost Austria’s green borrowing by up to €4bn a year, the Treasury estimates.
