Boutique ESG Funds Are Latest Target for Pioneer Austria

Austria is targeting specialist ethical investment funds with plans for green money market notes, its latest innovation in sovereign debt.

(Bloomberg) — Austria is targeting specialist ethical investment funds with plans for green money market notes, its latest innovation in sovereign debt.

The nation, which brought benchmark-size century bonds to the euro area and issued the world’s first sovereign green Treasury bills last year, will start selling commercial paper linked to environmental projects from March. These are effectively short-term IOUs that organizations typically use to fund day-to-day operations.

The aim is to diversify Austria’s funding base and tap a new market as the European Central Bank winds down its bond holdings. Central banks looking to adopt environmental, social and governance investment standards into their liquidity management may end up being among the most important buyers.

The Treasury in Vienna is also tailoring the instruments to smaller dedicated funds by reducing deal sizes to as low as €10 million ($10.7 million) and allowing maturities of between two weeks and a year. It plans to sell at least €5.1 billion of green debt this year, including 20% in short-term instruments.

“It’s a new product from the sovereign area for smaller boutique dark-green money-market funds,” managing director Markus Stix said in an interview.

The commercial paper market, normally a hidden part of financial system plumbing, came under the spotlight in the pandemic, when companies across the globe rushed to build up cash buffers to weather the economic fallout. Such securities in the ESG world are hard to find.

Unlike government bills that are offered at regular auctions, commercial paper is bilateral debt sold on an ad-hoc basis that can be denominated in multiple currencies. The Treasury announces pricing daily across maturities and then decides on issuance based on interest from investors via its group of primary dealers.

“I think that the green commercial paper market will grow a lot in the future,” said David Gorgone, a portfolio manager for money markets and short-duration bonds at Geneva-based Pictet Asset Management. “The demand is there but the market is very small or non-existent.”

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While Austria started green debt sales later than most European peers, the euro area member state has relied on innovation and the country’s high share of eligible environmental projects to bolster investor demand. The green funds it raises will be allocated for spending on a pro-rata basis and may slightly fluctuate due to the nature of commercial paper transactions. 

The Climate Bonds Initiative, an influential standard-setter for ethical debt, last year released guidance on how to apply ESG to products with maturities of less than a year, such as commercial paper. It concluded that double-counting — where a single green investment is counted more than once among various parties — is unavoidable.

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On days when green commercial paper volume declines, some projects may be temporarily funded by conventional debt, according to Stix, who said all transactions will be included in Austria’s allocation report.

“There will be some gaps” with the commercial paper sales “but that’s not a problem for investors,” Stix said. The green T-bills will be rolled at regular auctions and there the link will be perfect, he said.

–With assistance from Greg Ritchie.

(Adds comment from fund manager in eighth paragraph.)

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