The State of Hesse has been a frontrunner among sub-sovereign GSS bond issuers, and its planned third green bond promises to be its biggest and broadest yet. Anna Beil, Tanja Czymek and Alexander Labermeier of the Ministry of Finance of the State of Hesse, and Patrick Seifert at joint lead LBBW, spoke to Sustainabonds about the German state’s sustainability achievements and ambitions, and how green bonds complement its wider activities.
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Neil Day, Sustainabonds: There has been pushback against ESG and a watering down of some commitments in various regions and institutions. What do you make of this?
Alexander Labermeier, head of treasury, Hessian Ministry of Finance: ESG topics are undoubtedly under discussion at the moment, but really this is nothing new. When you have the luxury of looking at things at a high level, everyone wants to reduce emissions; but then when you are booking a flight for your holiday, not everyone wants to worry about it. And while some political parties want to tackle environmental issues, others want to downplay or even deny them. So you have the two sides of the coin. Ultimately, we have a democracy, and voters decide.
The aim of the state administration should then be to deliver best market practice and efficient management on a sustainable basis. If you have too bureaucratic a process and impose higher costs when it comes to sustainability-related matters, at a certain point people won’t be able to afford it, or won’t want to pay for it, and maybe tend to vote accordingly. The approach of the new coalition government in Hesse is to reduce bureaucracy and achieve cost-savings. At the EU level, the related environmental regulations are very harsh and President von der Leyen now says regulation has to be cut by 25% in general — we’ll see how that plays out.
Politicians and the administration have to lead by example: if we phase out fossil fuel heating, and only then regulate our citizens, for example, that’s an easier way to make progress than if politicians make requirements of the population without acting accordingly first.
Day, Sustainabonds: Is Hesse’s commitment as strong as previously? How is the state developing its ESG efforts?
Labermeier, Hesse: The state is still focused on ESG. The State of Hesse considers climate protection as an essential part of its policy: the principle of sustainability is written in our state constitution as an objective, so it remains valid. But at the same time — as I mentioned — with less bureaucracy and greater efficiency in mind, as reflected in the new coalition treaty alongside the goal of tackling environmental and social issues. We map our whole budget structure to the UN SDGs. Most of our expenditures are social — university, schools, etc — as the state’s aim is to take care of the needs of society, but alongside these are environmental related expenditures.
Regarding our green bonds, our approach is to refinance the environmental expenditures of past fiscal years through our issuance. So while we also look to the future, that is driven by parliament — and ultimately the voters — in their new decisions and next budgets. We then follow their lead. So for the forthcoming green bond, we have the environmental expenditures of the last two fiscal years, and the subsequent green bond will reflect the forthcoming budgets. With this refinancing approach, we are always somewhat behind the curve, but it’s a transparent approach for investors. We can clearly demonstrate what we have done — it’s not simply a promise that someone could take off the table afterwards.
Patrick Seifert, head of primary markets and global syndicate, LBBW: The EU simplification measures Alexander mentioned are derived from the so-called “Omnibus” package to restore economic competitiveness. They could reduce the burden for SMEs up to 35%, which sounds like a good start. But it will need to be done right. In that respect, let us keep in mind that down-to-earth regulation benefits from a high level of transparency and this is exactly the approach the State of Hesse applies.
Day, Sustainabonds: It’s interesting to hear that you do the UN SDG mapping, for example. How does your activity compare to what your peers are doing?
Labermeier, Hesse: NRW has been a frontrunner in the Länder segment with sustainable bond issuance — albeit including mostly social expenditures — while in green bonds the two frontrunners have been Baden-Württemberg and Hesse, which issued inaugural green bonds at the same time in 2021 and remain the only green issuers. Few states have followed NRW’s approach in issuing sustainable bonds, mainly because a lack of environmental-related expenditures prevent them achieving sufficient size for a green bond.
Those Länder that issue green, social or sustainability bonds are in a minority, because most do not. A sustainable bond in whatever format takes a year of preparatory work, while a normal bond takes just three or four days — that’s maybe a key reason. You really need to have the political push to go ahead, but also the willingness of the team to do all the work — which is ultimately really rewarding. We really want to continue in the direction of green bonds and not social bonds. We are already the largest issuer of green bonds among the Länder.
Day, Sustainabonds: Has your green bond strategy evolved since your previous issues?
Anna Beil, funding manager, Hessian Ministry of Finance: Our strategy is to deliver a high market standard every time. That’s also why we don’t use the same framework for all our green bonds, but develop a separate framework for each one. So, every time, we receive a distinct second party opinion for the respective framework and projects. Furthermore, we have increased the number of projects: in the first green bond, we only had 20 projects; now, we have 31 projects — five more than in the second one. But while it is evolving in this way, we continue to follow best market practice, including the Green Bond Principles, and the overall project themes remain the same.
Day, Sustainabonds: What are the most important use of proceeds categories in your green bond issuance? And what new projects are included?
Tanja Czymek, funding manager, Hessian Ministry of Finance: Looking at our project list, the biggest share is environmentally-friendly public transport, where we support the transport association in maintaining better public transport. It is the biggest share in our forthcoming green bond and also was in our previous issuances.
Another very important category included in our green bond is measures concerning forests. Hesse is the most densely forested state in Germany, with 894,000 hectares of forest. The forest is very important for our society: it provides a habitat for plants and animals, ensures clean air and water, and makes an important contribution to climate protection because of its CO2 absorption. That is why it is important not only for us and for our green bond, but for everybody. We support the sustainable management of these forests through a 12 point forest plan that is included in our green bond.
We include other nature conservation measures, such as the extensification of grassland, where we promote permanent grassland without the use of fertilizer and plant protection. Another project that is smaller but nevertheless featured in the green bond is the promotion of biotopes and floodplains, which are also important for ecological flood protection.
A new project in our green bond is the expansion of broadband coverage. This has a social aspect, but also an environmental one taking into account the advantages of an efficient structure in terms of the energy consumption.
Seifert, LBBW: It is not hard to see that from a structural point of view, the State of Hesse has a strong exposure to nature and, therefore, provides a particularly suitable rationale to be issuing green bonds. In fact, this is pretty much regardless of what the current regulation looks like.
Labermeier, Hesse: The biodiversity measures were already included in our first green bond, but are still pretty unique. There are the forest and grassland projects Tanja mentioned, but also nature conservation projects like “100 wild streams of Hesse”. This is categorized as SDG 14: life below water, which could come as a surprise if you look at Hesse’s landlocked position within Germany! So biodiversity has been quite a special feature of our green bonds since we began.
And then if you look from an efficiency perspective, you want to spend money where it will achieve the highest possible carbon dioxide reductions — it is hard to beat forests in this respect: once planted, the trees use the carbon dioxide to grow intensively over many years. Other projects have much higher costs for fewer carbon dioxide emissions avoided.
Day, Sustainabonds: Turning to the backdrop for the issuance of the forthcoming green bond, but also returning to the first question about the level of enthusiasm for ESG, what is your sense of how investor interest in green, social and sustainability bonds is evolving?
Labermeier, Hesse: Our experience is that the green focus persists. In the investor presentations for our normal Hesse issuance, we always include the last green bond and that’s something we always get onto. We even get feedback from investors that the only reason they want to attend the meeting is because we are a sustainable issuer and focusing on green — they can already imagine how a state is organized and so don’t need to spend much time on that. The green bond is therefore a pretty unique selling point in meetings for our normal bonds, too, and it’s something that helps broaden our investor base. We can demonstrate our status as a sustainable issuer, show our carbon dioxide balance sheet system, and its UN SDG metrics, for example.
For sure, some investors argue that it’s not worth paying a greenium for a green bond. But others take the opposite stance: they only want green bonds, with maybe even EU Taxonomy alignment. So it´s all about supply and demand.
Day, Sustainabonds: What are your ambitions for your forthcoming green bond?
Czymek, Hesse: As Alexander said, we pursue a bond-by-bond approach, refinancing the last two years’ expenditure, and we want to issue a benchmark size every two years to build a green curve. We want investors to see Hesse as a good issuer of green bonds — which, again, also works as an advert for our other bonds. We aim to maintain our pioneering role in issuing green bonds at the state level, setting an example in this sector, supported by being a strong state in terms of our economic figures and performance.
Labermeier, Hesse: When it comes to size, our last green bond captured €1.1bn of environmental-related expenditures, with an issue size of €1bn — the biggest from a European sub-sovereign. The forthcoming framework has €1.8bn of eligible expenditures, so it could set the next milestone in terms of volume.
Day, Sustainabonds: How will the new issue fit in with your overall funding plan for the year? Has that been affected by the market volatility?
Labermeier, Hesse: I don’t think we ever expected 2025 to be such an interesting one in the capital markets. But, looking back, you could say that about almost every year.
We communicated that we had €8bn to raise this year and we have already been active in the market. In January we issued a large liquid €2.5bn benchmark with a seven year maturity. At the end of last year, in light of discussions around amendments to the debt brake, the spreads for Bunds and Länder had risen, and in January many investors found the new yield and spread levels attractive. We could therefore achieve the most widely distributed bond Hesse has ever sold, with 140 investors and €8.7bn of demand — quite a success.
With the new US administration and discussion on tariffs, the terrain got somehow rougher, but we still see increasing interest in Germany among investors, and also in our bonds. However, you have to spot issuance windows more carefully. No one wants to go out with a mandate on a Friday right now because of the weekend, and sticking to intra-day execution instead of having overnight risk has even been discussed.
We have now issued two bonds, which were both very well received, and two more will come this year. One will be the green bond, and another will be in the second half of the year, another up to €1.5bn mid-maturity bond, depending on market conditions.
Day, Sustainabonds: You mentioned the execution risk evident in this year’s market. To what extent, if any, does the green element reduce such risks?
Labermeier, Hesse: You have two advantages. The first is that the bond size is limited — because everyone knows how much environmental-related expenditure you have — so investors can even be sure that the bond cannot be tapped. The second advantage is that you attract more investors and have more time to market the deal. If markets get volatile, the timetable could be something of a disadvantage, but if the market window really closes, nobody is going to complain if ultimately you don’t issue. And we have seen in previous years that sustainable issuances worked very well in volatile markets, with normal bonds facing some difficulties. So the advantage is still there and it should work well, but, for sure, you can’t force something onto a market where it won’t work.
Day, Sustainabonds: The issue of EU Taxonomy alignment came up earlier and we have now seen the first EU Green Bond Standard issuance. Is the EU GBS a format appropriate for Hesse? Or an area where regulation has gone too far?
Beil, Hesse: At the moment, we think that the EU Green Bond Standard, as the gold standard, is too highly regulated. It is very impractical. It involves so much work and bureaucracy that it is too much for us. There are still very few issuers who have gone down that route — the EU itself doesn’t use it. It would be helpful if the EU changes it so it is not so difficult to achieve.
More issuers seek EU Taxonomy-alignment, or at least for some projects to achieve, say, 40% alignment. We considered having EU Taxonomy-alignment as a feature of our third green bond and simulated that with projects from the second green bond — because they are likely to be also in the new one — but it turned out that it really meant a great deal of work for us and also for the ministries, as the administrators of the projects. Some of the necessary data was also simply not available, it was not possible for the ministries to deliver it to us. For example, the amount of wastewater from toilet flushing would have had to be measured in all properties used by the state, and we don’t believe that is a good use of taxpayers’ money. So at the moment we have no EU Taxonomy-alignment in the green bond because of the bureaucratic efforts involved.
And we don’t need either the Standard or Taxonomy for our green bonds. They are increasingly discussed and maybe some investors will require them in a few years. But at the moment, nobody really benefits.
Labermeier, Hesse: Indeed, one year of work for a green bond is already enough of a workload and somehow we need to be able to finish such a project.
The Green Bond Standard was completed by the EU rather late in the day. The ICMA standard had been successfully developed by practical market participants: investors, issuers — everyone was around the table — whereas we get the impression that the GBS involved everyone putting down details without considering how it could be practically delivered. If a 25% reduction in the regulatory burden is the aim of the EU, let’s see how it works.
Additionally, the idea of this standard was to prevent greenwashing by corporation, not by states. We follow the law, we administer the law, we are even law-making when it comes to the parliament of the state — I don’t think the idea of the GBS was to prevent greenwashing by an issuer like us.
Seifert, LBBW: This is a view I absolutely share. The success of the EU GBS transaction from the EIB certainly set a reference for the market and this is important for the European capital market. When it comes to dedicated green bond issuers, and we have heard about the rationale for the State of Hesse, it is more relevant to provide the right balance of market standards, transparency and market liquidity.
Day, Sustainabonds: What other standards and metrics are relevant to your issuance and reporting?
Czymek, Hesse: We use a variety of impact indicators. Sometimes this is CO2 savings, but we don’t have surveys on that for every project. For the remaining projects we have other metrics for the measures financed, like train kilometres for local rail passenger transport. Another example is that every Hesse employee receives a ticket allowing them to use public transport for free — which is included in one of our green bond projects — and they were surveyed about how they use these state tickets, which allowed for traffic evaluation.
And as we are refinancing expenditures from previous years, we have the advantage that not only can we show all our impact indicators in advance in our framework and investor presentations, but we can prepare everything upfront with our colleagues in the ministries. We can really involve them from the beginning, to get all the details we need.
Labermeier, Hesse: This was one of the most valuable recommendations of our structuring advisor for the first green bond: think from the end, i.e. think from the impact report. Prepare the structure of the impact report already, to see what you need to deliver. Don’t issue a green bond and afterwards start thinking about impact reporting. So we really have the impact report in mind when discussing projects.
Our budget director is also looking at that, because, after all, if projects deliver no impact, you could ask why they are being done, irrespective of whether or not they are being refinanced in a green bond. Public money always needs to have impact, and that, as Tanja described, is one of the advantages of our refinancing approach, to be able to demonstrate impact in advance, to investors in respect of the green bond.
Day, Sustainabonds: You mentioned that due to your approach, you have a different second party opinion for each bond. What are your key takeaways regarding the latest SPO from ISS?
Czymek, Hesse: They really see Hesse as a state fit for green bond issuance and appreciate the ambitions of our projects.
Labermeier, Hesse: We have now prepared three green bonds, with the same SPO provider, so you might expect it to have gotten easier for us, but that’s certainly not the case — new projects raise new questions and with new details at the project level.
For example, regarding the train kilometres Tanja mentioned, the figures for kilometres per person on electric-powered trains — that’s difficult to provide, because the state tickets can be used on diesel buses, electric buses, diesel trains, normal trains, and the specific use is not recorded.
For our new project, optic fibre for broadband and the related energy efficiency, we presented research on that. We were delighted when they gave the green light for 100% of our projects. It’s a bit like being in school and waiting for your grades. But in the end it’s definitely worthwhile.
Beil, Hesse: This stricter and stricter questioning may also be the result of the regulation of SPO providers that arrived in conjunction with the EU Taxonomy.
Day, Sustainabonds: Beyond what we have already discussed, are there other pertinent developments or initiatives you would highlight, positive or negative?
Labermeier, Hesse: In 2023 Hesse set out its goal of reducing carbon dioxide emissions to zero by 2045 in its act on the promotion of climate protection and adaptation, in line with federal law. However, you can’t just pass a law saying what needs to be achieved in 20 years’ time, you need to set up the concrete measures whereby you will achieve this, and that is underway. The measures in the Hessian Climate Plan are divided into 10 areas of action. These range from the large-scale expansion of renewable energies and the decarbonisation of the economy to measures for the transport transition, the establishment of future-proof forests, and the improvement of disaster prevention among the population. Examples of these measures include climate education, recruiting and training skilled workers for the energy transition, promoting climate-friendly transport, encouraging walking and cycling, and reducing agricultural emissions. And as I mentioned, the state is not regulating others and letting them do the work, it is leading the way and setting an example. For instance, photovoltaic cells have been installed on public buildings first, with regulations for the population following. As well as being a frontrunner in the state’s sustainability strategy and our green bond issuance, we are involved in the Frankfurt-based Sustainable Finance Cluster, providing input into high level discussions there on an ongoing basis. We have also been able to attract to Frankfurt the International Sustainability Standards Board (ISSB), which oversees the key standards for companies’ balance sheet development worldwide.
So we are part of sustainability developments on the regulatory side, the practical side, and the issuance side, which is a good combination.
Day, Sustainabonds: What can investors expect from Hesse in green bond issuance going forward, in terms of volume, regularity and ambition?
Labermeier, Hesse: We have ambitious goals, for sure. We plan to issue every two years a large benchmark green bond, with the aim of building up a liquid curve — in green format only.
We are ready to proceed now and to follow up with the impact reporting, and then next year we will look at fiscal year 2025 to kick off the process for the next one with the ministries and the inter-ministry working group. Our decisions will of course follow the budget decisions of the parliament relating to environmental-related expenditures. We will then take the time to look at and discuss new projects — if they are the same projects again, then it will be easier to source the data — before moving ahead to the next bond. From our perspective, it really makes sense to issue every two years, because it’s efficient, but we will still embark upon the next one directly after the issuance of this bond.
Seifert, LBBW: With this rare combination of green-only issuance in size, the State of Hesse displays high market standards and addresses an otherwise undersupplied segment of the German Länder. We expect this to be a win-win situation for the issuer and investors alike.
Hesse photography: Alexander Hoffmann-Glassneck
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