Luxembourg raises €1.5 bln in Europe’s first ‘sustainability’ government bond

AMSTERDAM, Sept 7 (Reuters) – Luxembourg became the first European government to sell a “sustainability” bond on Monday, raising €1.5 billion ($1.77 billion).

Its choice of a ‘sustainability’ bond, a blend of ‘green’ bonds that finance environmentally friendly projects and ‘social’ bonds that target spending with socially beneficial outcomes, contrasts with that of other European governments.

Like Germany last week, they have sold ‘green’ bonds in their efforts to fund climate-friendly spending and support the development of sustainable finance.

Luxembourg will divide the proceeds equally between green and social projects, a finance ministry spokesperson told Reuters.

With the outbreak of the pandemic, global ‘green’ bond issuance took a backseat as ‘social’ bond issuance, especially from development banks, rose sharply.

“We are seeing more interest to go down the social and sustainable route from sovereigns,” said Trisha Taneja, head of ESG advisory at Deutsche Bank, which managed the sale together with BCEE, BNP Paribas, BIL and Societe Generale.

Last year, Luxembourg launched a 10-step framework to implement the United Nations’ 17 sustainable development goals and drafted a climate law to cut greenhouse emissions by 55% until 2030.

“There is no sustainable development if you don’t have the social aspects in (the issuance framework) as well,” the Luxembourg finance ministry spokesperson said.

Still, Luxembourg ranks the lowest among EU countries in making progress to achieve the U.N. goals, according to the 2020 Sustainable Development Report. Significant challenges remain in areas like clean energy and climate action.

At €12.5 billion, investors demanded over eight times the amount Luxembourg raised, and the bond was priced for a yield of -0.123%, lead managers said.

Deutsche’s Taneja said Luxembourg’s commitment to disclosing alignment with the EU taxonomy on sustainable finance – rules ensuring investments do not prop up pollution – was appreciated by investors.

Luxembourg will also be able to issue standalone green or social bonds via the bond’s framework in the future. (Reporting by Yoruk Bahceli, Editing by Lawrence White and Steve Orlofsky)