By Jörg Bayer and Gunter Deuber, RBI Vienna |
The green transformation in the financial world can no longer be stopped, and this is especially true in Europe, where the EU Commission and the ECB are now joining forces at the highest level to accelerate the green transformation, especially in fixed income markets; the latter being possibly a late comer to the ESG topic compared to the equity space. While in many countries of Western Europe this sustainability movement has already found expression on the capital market, the CEE region including Russia seems to be still asleep, even though the first tender shoots of a “green capital market revolt” are visible in Poland and Hungary in particular, and Poland certainly plays a pioneering role within the region.
In Central and Eastern Europe (CEE), the “green transformation” or ESG investing could be a long-term development and investor theme, as was the nominal and real convergence of the 2000s. And it is precisely this process that has benefited many Western European investors. We see great potential in the ESG context in CEE based on seven cornerstones.
1. Progress in core ESG dimensions will in CEE certainly be much more effective and tangible in macroeconomic terms than in Western Europe, which is already more advanced in some cases. In concrete terms, the marginal benefit of every ESG-invested euro in the economy as a whole or in the green finance sector should be significantly higher than if it were invested in Western Europe. We are thinking here above all of instruments such as transition bonds, transition loans, etc. that are based on improving credit stories on a sovereign or corporate level. Here, the direction and extent of change would play a much greater role than the starting point. Moreover, there are possibly some “hidden champions” in the ESG sector in the region (see also the last point).
2. The CEE region, like parts of Western Europe, is characterised by a very high dependence on debt and credit financing. In this area, the market focus on ESG products is just beginning to gain momentum. The countries in Central and Southeast Europe in particular could benefit from this development, as Western European foreign banks play a central role in the banking sectors, or it is precisely these banks that can bring ESG expertise and investors to the region in a “second transformation”.
3. The EUR is a natural issuing currency for many CEE countries and corporates and the euro seems to be establishing itself as the green finance currency, which opens up opportunities in CEE. Moreover, the highest volume of ESG assets is currently managed in Europe.
4. The ultra-low interest rate environment in the euro area, which is set to last for years, should also allow more attractively priced ESG assets from CEE to be well placed in the market. After all, ESG investing will also be measured in the longer term by its potential for long-term asset growth and relevant interest rate opportunities. ESG assets with positive returns and not too long maturities from CEE should be particularly attractive from an investor’s perspective.
5. Energy generation in the CEE region is based much more on fossil fuels and the use of brown coal (which is currently the exclusion criterion for many ESG investors) still accounts for a significant share in many countries. Sustainable forms of energy generation do not play a significant role at present. In the near future, a high investment effort will be required, especially in this area, for which the EUR-denominated bond market is certainly one of the most elegant and most favorable financing options, especially due to the clear positioning of the EU including the ECB in sustainable financing. The first step could be the transformation from coal to gas and only in a second step towards sustainable energy. We expect a significant push for ESG bonds from the CEE region. Especially from Poland, very timely “green” issues should follow. The country is the most dependent on coal within the EU, but with EUR 4.2 bn of “sustainable” bonds outstanding it is currently leading the way in the CEE region. Especially PKO Orlen (biggest Polish company) could become an important game changer towards sustainability in the region to finance a USD 6.4 bn decarbonization plan.
6. COVID-19 pushed the issue of ESG into the background for the time being, but on the other hand it leads to a significant increase in public debt and public investment, which could have a huge leverage effect towards sustainability. The EU has already announced that it will finance 30 per cent of its planned recovery fund of EUR 750 bn via Green Bonds. Also, the topic of social bonds offers itself for COVID-19 conditional financing, which can already be seen from the current issues. By October, almost three times more social bonds had been issued compared to 2019, while green bonds are currently at the same level as last year. Furthermore, it can be assumed that some of the government support measures will go directly into sustainable projects.
7. The need for advice and evaluation in the ESG field or constant monitoring of ESG performance criteria (from the starting point) should be particularly high in CEE and emerging markets. Here, too, we see great market opportunities for long-established and deep-rooted players in the region, such as the leading major Western European CEE banks. Especially as many of the national champions in CEE come from the metals and mining, oil and gas and utilities sectors. And there is also generally less data and research available on many CEE and emerging market issuers. This holds true for standard credit research as well as ESG-related monitoring.
Given the framework conditions outlined above, we currently see attractive market development opportunities in the CEE region for dedicated Western regional players. Within RBI, such processes are being driven forward within the “Yellow goes Green” stream. Also for investors the topic sustainability will be inevitable and as you can see from the above mentioned points the CEE region offers interesting investment opportunities but on the other hand there is no way around the region if you want to reduce greenhouse gas emissions in continental Europe on a large scale and in an economically efficient way. Therefore, the “green revolution” is an opportunity for both investors and issuers in CEE.
ESG bonds outstanding (EUR bn)