Danish bond experiment aims to bring some clarity to ethical investing

Copenhagen

THE world's least corrupt country plans to bring some clarity to the opaque universe of ethical investing.

Denmark, which topped Transparency International's latest ranking, wants to win over investors with something it says other sovereign ESG issuers don't always offer: a real price.

"Some issuers say they're borrowing more cheaply with green bonds than regular ones, while investors say they're not paying more," Thorsten Meyer Larsen, head of monetary policy operations and government debt at Denmark's central bank, said. "Both can't be true."

Denmark's debt office plans to sell green certificates tied to existing bond series. To avoid any obfuscation in the secondary market, Mr Larsen says the office will be "very clear in stating in the prospectus and elsewhere that we see it as green only if you have both parts, the certificate and the bond".

Mr Larsen says the approach lets investors compare the price of bonds - those with green certificates and those without - so they can calculate the exact cost of the ESG designation (meaning a security lives up to certain environmental, social, governance goals). The model "will be transparent about the price difference between a green bond and a regular bond". Mr Larsen notes that Germany is introducing a similar model.

As ESG financing has grown in popularity, investors have had to wade through an increasingly murky world of products masquerading as sustainable, without necessarily being so. To address the lack of transparency, the European Union is introducing an ESG taxonomy.

But not all investors welcome Denmark's approach.

"The challenge is that when I invest in a government bond, it's sold at a price of 100 and it has a coupon," said Poul Kobberup, chief investment officer at Danske Bank's pension unit, Danica. "When I buy a certificate, I can't calculate a value."

Mr Larsen says the certificate model lets Denmark do green financing without splitting an already small bond market into more sub-categories. "We simply can't decide to issue just anything, and certainly not in the volumes that the large investors like pension funds need," he said.

The debt office is now waiting for the final go-ahead from the government, which will follow a report by BNP Paribas, Danske Bank and Nordea Bank looking into the proposed ESG financing model.

Right now, "various expenses are being reviewed for what can be considered green", Mr Larsen said. "Ultimately, it's a political decision." BLOOMBERG