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Aegon AM on the new green bond by the Netherlands: well-received continuous improvement

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ARTICLE TYPE

Insights

TOPIC

Opinion

PUBLISHED

October 19,2023

READ TIME

8 mins

AUTHOR

Irina Kurochkina

Julius Huttunen, CFA

Back

ARTICLE TYPE Insights

TOPIC Opinion

PUBLISHED October 19,2023

READ TIME 8 mins read

AUTHOR Irina Kurochkina

AUTHOR Julius Huttunen, CFA

The green bond framework

We are encouraged to see the Netherlands issue labeled debt aligned with the EU taxonomy after four remaining environmental objectives were presented by the European Commission earlier in 2023. We view the EU taxonomy as one of the most rigorous frameworks along with the CBI taxonomy that issuers can utilize globally. The EU taxonomy is a science-based classification that allows for a common definition of what can be considered environmentally sustainable hence increasing transparency and reducing greenwashing risks. We have witnessed mixed practices in the past few years from issuers, in other words, not all labeled debt is equal when it comes to issuer disclosure post-issuance adherence to the voluntary guidelines.

As an investor closely monitoring labeled debt issuances globally, we believe the updates to the DSTA Green Bond Framework provide a great example for corporate issuers to learn from as the EU Green Bond Standard is expected to become more commonplace. The commitment to provide the bond-level reporting is an important element as the portfolio-level reporting often makes it confusing for investors. Interestingly, the DSTA will provide financing and refinancing % of the allocation, which is often omitted by issuers but requested by investors. However, as is always the case with labeled debt issuance, the validity of the green credentials of the new DSL bond will be confirmed next year when post-issuance allocation and impact reporting will be made available by the DSTA.

“Blue” projects in eligible expenditures

We are excited to see the EU taxonomy update for the State of Netherland’s Green Bond Framework by incorporating the EU Environmental objectives of not just Climate Change Mitigation, Climate Change Adaptation but also Sustainable use and protection of water and marine resources for the first time. Water management is a huge topic in the Netherlands given that a quarter of its territory lies below sea level and more than 50% of the country is at risk of flood by both sea and rivers. The Dutch government has obligations under the national law to manage these water-related risks, with the Water Act being the main regulation for the extensive network of dikes, canals and water infrastructure and the Delta Act for the execution of flood risk prevention and fresh water supply. Since 2019, there is also a Climate Law that mandates the government to achieve at least 55% GHG reduction (from 1990 levels) by 2030. For us, it is important that the green bond issuance of the Netherlands is aligned with the overall government agenda on climate change and is not done as a one-off exercise.

Details of the new issuance

The new bond with maturity on 15 January 2044 and a coupon of 3.25% was issued at a price of 98.63 with 3.345% yield. It was priced at a spread of 29 basis points (bps) vs German 2.5% 04/07/2044 bond after the initial spread guidance of 28-32bps. In a typical manner of the DSTA, the new issue was done in the form of the Dutch Direct auction where investors put their orders within the original price guidance through the primary dealers. The bid-to-cover ratio was 3.67 with the order book of around € 18 billion for the issue of € 5 billion.

The DSTA reported[i] that of the total size, 76% of the issuance went to “real money” accounts like pension funds and insurance companies, and 24% to “other” accounts that include banks and hedge funds. There was a strong demand from the local investors with 28% of total issuance being allocated to the Netherlands-based parties. The second largest geography of allocation was the UK (23%), followed by Germany (10%) and Italy (8%). It is expected that the new bond will be reopened several times in the future to increase the outstanding amount to around € 10 billion. This affirms the Netherlands as an important player in the green capital markets.

Note: Aegon Asset Management in the Netherlands invested in the new green DSL 3.25% 15 January 2044 for a number of portfolios.

_{[i] https://english.dsta.nl/news/news/2023/10/17/new-20-year-green-dsl-2044-raises-%E2%82%AC-4.98-billion}

Important Disclosures

For Professional Clients only and not to be distributed to or relied upon by retail clients.

Thiscontent has been compiled for educational purposes only and reliance upon the information is at the sole discretion of the recipient. The information is confidential, has been prepared and is intended for use on a confidential basis for [state audience and place of presentation and date]. It may not be reproduced, redistributed or passed on to any other persons or published in whole or part for any purpose.

All investments contain risk and may lose value.

Responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgement exercised, by any company of Aegon Asset Management will reflect the beliefs or values of any one particular investor. Responsible investing norms differ by region. There is no assurance that the responsible investing strategy and techniques employed will be successful. Investors should consult their investment professional prior to making an investment decision.

Opinions and/or example trades/securities represent our understanding of markets both current and historical and are used to promote Aegon Asset Management's investment management capabilities: they are not investment recommendations, research or advice. Sources used are deemed reliable by Aegon Asset Management at the time of writing. Please note that this marketing is not prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing by Aegon Asset Management or its employees ahead of its publication.

All data is sourced to Aegon Asset Management (a trade name of Aegon Investment Management B.V.) unless otherwise stated. The document is accurate at the time of writing but is subject to change without notice. Data attributed to a third party (“3rd Party Data”) is proprietary to that third party and/or other suppliers (the “Data Owner”) and is used by Aegon Investment Management B.V. under license. 3rd Party Data: (i) may not be copied or distributed; and (ii) is not warranted to be accurate, complete or timely. None of the Data Owner, Aegon Investment Management B.V. or any other person connected to, or from whom Aegon Investment Management B.V. sources, 3rd Party Data is liable for any losses or liabilities arising from use of 3rd Party Data.

Aegon Asset Management UK plc is authorized and regulated by the Financial Conduct Authority. Aegon Investment Management B.V. (Chamber of Commerce number: 27075825) is registered with the Netherlands Authority for the Financial Markets as a licensed fund management company. On the basis of its fund management license Aegon Investment Management B.V. is also authorized to provide individual portfolio management and advisory services.Aegon AM NL also operates through branches in Germany and Spain. These branches are regulated by the BaFin (Germany) and CNMV (Spain) based on the home-host state supervision rules.

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More about the authors

Irina Kurochkina Portfolio Manager

Irina Kurochkina is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.

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Julius Huttunen, CFA Head of ESG – Fixed Income Public Markets

Julius Huttunen, CFA, is head of ESG – fixed income public markets in the responsible investment team.

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_{[i] https://english.dsta.nl/news/news/2023/10/17/new-20-year-green-dsl-2044-raises-%E2%82%AC-4.98-billion}