BBVA issued the first ever Green Additional Tier 1 (AT1) bond on July 7, and immediately sparked a spirited debate among the TwentyFour team over how green bank capital can be.
The premise of the €1bn deal, which BBVA priced at 6% after attracting demand of €1.8bn, is to assist the Spanish bank in providing €100bn in sustainable financing by 2025.
However, the documentation made clear that this new issue might be used to refinance another AT1 BBVA has outstanding, which for us caused some confusion. Would this bond be used as capital against lending for sustainable projects, or would it be used to buy back an existing AT1?
BBVA does already have €2.9bn of eligible green assets in its portfolios, so technically it could do both. However, the key question from an ESG point of view is whether this will improve the bank's sustainability, and on this the answer is far from clear; the proceeds could lead BBVA to increase its ESG-friendly lending, but equally it could have no impact whatsoever.
Green bond issuance has gathered pace as more investors have focused on ESG and sustainability, with around $271bn of such bonds issued in 2019. The key concern in these early days has been tracking and reporting the use of proceeds. While we expect to see standardised rules at some point, currently there is no regulation ensuring the proceeds of ‘green' deals go to ‘green' projects.
BBVA did try to address this, saying it would "maintain a buffer of projects above the proceeds" from all its green bonds and publish an annual bond report, which we hope will detail each green investment the bond issuance has facilitated.
The green bond market is relatively young and still in transition, and this inaugural issuance of a green capital instrument adds another new dimension.
The deal did gather healthy interest from investors, which will likely lead other banks to follow suit. We will have wait to and see how the market develops, but for now the jury is out on whether Green AT1 can indeed boost sustainable bank lending.
Charlene Malik is a member of the portfolio management team at TwentyFour Asset Management
• Green AT1 is potentially an exciting new product for ESG-focused investors
• We believe the AT1 sector generally offers attractive relative value
• The strength of the link between green bank capital and green projects is unclear
• Green bonds still lack standardised rules governing use of proceeds