The first green Confederation bond is to be issued already this autumn. What exactly are green bonds and how has the market for them developed? Here's a brief introduction to the topic.
What is a Confederation bond?
The Confederation's gross debt amounted to just under CHF 110 billion at the end of 2021. Most of this debt, i.e. CHF 70 billion, consisted of so-called Confederation bonds. The Confederation raises funds on the capital market with these debt instruments, which have maturities of up to 50 years.
And what are green bonds?
An issuer can raise money on the capital market with green bonds in the same way as with conventional bonds. In the future, green bonds will be a specific component of Confederation bonds and will diversify the Confederation's financing instruments. The money raised with green bonds cannot be used freely; it may be allocated exclusively to projects that have a positive impact on the environment, primarily in the areas of public transport, biodiversity, international cooperation and research.
Do green bonds lead to higher environmental expenditure?
Green bonds do not automatically lead to more environmental expenditure, as they are only a financing instrument. Parliament has to decide on additional green expenditure to achieve higher environmental expenditure. Green bonds as an instrument are intended to promote the competitiveness of the Swiss financial centre, strengthen the application of international standards in Switzerland and encourage the issuance of green bonds by private players.
What volume will be issued?
The targeted issuance volume is several hundred million francs per year. The new financing instrument will enable the proceeds to be allocated to green expenditure that has already been approved by Parliament. An analysis of the federal budget based on the 2021 state financial statements identified green expenditure of around CHF 4.5 billion, primarily in the areas of public transport, biodiversity, international cooperation and research. Since the available green expenditure exceeds the Confederation's longer-term issuance volume and conventional bonds will continue to be issued, only some green expenditure will be allocated to green Confederation bonds.
How has the green bond market developed?
The market for green bonds is still relatively small, both in Switzerland and internationally, but it has grown robustly in the past few years. Green bonds were first issued in 2007, but have only become established in recent years. By the end of 2021, green bonds totalling around USD 1,400 billion had been issued worldwide, aggregated over all years. That sounds like a lot, but compared to the total volume of bonds outstanding on the capital market, it is a niche product. Around 14% of all green bonds are issued by governments or public bodies. So governments play an important role in the issuance of green bonds.
What other countries issue green bonds?
Many European countries have already issued green bonds, with France, Germany and the UK being particularly active. The European Commission has also announced that around a third of the EUR 750 billion Next Generation EU programme is to be financed with green bonds and has already issued green bonds. The United States, the global benchmark issuer, has not yet announced any plans to issue a sovereign green bond. Overall, however, only a very small proportion of sovereign issues have been green bonds up to now.
What is the situation in Switzerland?
Issuers have a total of just under CHF 11 billion in green bonds outstanding on the Swiss capital market. This corresponds to 1.9% of the total Swiss capital market. To date, green bonds have been issued mainly by banks and insurers, and the cantons of Basel Stadt and Geneva have also been active in the market.
When will the first green Confederation bond be issued? How much will it cost?
The Federal Finance Administration is planning to issue the first green bond in autumn 2022. The precise specifications for the first issue (volume, maturity, coupon and yield) will depend on the Confederation's funding requirements and the prevailing market conditions at the time of issuance.
Who can buy such a green bond?
Most current Confederation bond holders are domestic institutional investors, i.e. insurers, pension funds and banks. Anyone wishing to subscribe to a Confederation bond can do so via their main bank. The minimum denomination is CHF 1,000.
How were these green bonds developed? What is the basis?
The framework adopted by the Federal Council during its meeting on 17 August 2022 forms the basis for issuing green Confederation bonds in the future. It shows how the bonds will be integrated into the federal government's sustainability strategy, which green expenditure from the federal budget can be allocated to green Confederation bonds and how this expenditure will be reported. When preparing the framework, the federal government was guided by the Green Bond Principles (GBP) of the International Capital Market Association, which are considered the market standard internationally. The framework was subjected to an external evaluation and certified.
Press release 17.11.2021: Federal Council wishes to show its commitment to sustainability with green Confederation bonds
Last modification 24.08.2022