For European governments battling to brace economies pummelled by the coronavirus, there might be no better time to go green.
Normally thrifty countries, such as Germany, accept they will have to spend heavily to weather the economic shock of the coronavirus. Many also face the challenge of ploughing billions of euros into climate schemes to keep carbon reduction pledges.
Could "green stimulus" be the answer?
For budget hawks preparing to throw out the traditional fiscal rule book to fight the pandemic, green bonds - raising debt for funding projects such as renewable energy and public transport - might be a palatable option.
Coronavirus has taken some focus away from environmental issues but pressure is now mounting to design spending around climate change. On Tuesday, UK government adviser Chris Stark urged governments to "look to green stimulus".
Germany is pulling out the stops, eyeing around 350 billion euros of new debt to finance stimulus. Europe s biggest economy separately aims to cut greenhouse gas emissions to 55% of 1990 levels by 2030.
Britain, meanwhile, has promised to pay 80% of wages for employees facing layoffs as a result of lockdown measures, to be funded by selling more debt. It has also previously pledged to bring carbon emissions to almost zero by 2050.
Simon Bond, director of responsible investment portfolio management at London-based Columbia Threadneedle, wrote last year to the UK Treasury urging it to issue "green gilts".
He said now was the time to roll them out given the pressing need for stimulus due to the virus outbreak.
"The rationale for green gilts is to target projects which actively contribute to the aspiration to bring greenhouse gas emissions to net zero by 2050," Bond told Reuters. "Those projects should be part of green infrastructure spending and associated with fiscal stimulus."
GREEN YIELD CURVE
So far governments have been relatively slow to embrace green debt; there are just 12 sovereign green bond issuers worldwide, amounting to less than a tenth of the green bond market, which also includes debt from companies and other entities and saw $250 billion in new issuances last year.
But debt agencies say change is on its way.
Germany plans to issue a green bond in the second half of 2020 as does Italy; other candidates are Spain, Sweden, Denmark and Britain.
Germany s debt agency told Reuters its green bond plans would go ahead despite the coronavirus outbreak. It has just published an update, announcing Germany would "substantially strengthen and decisively develop" the green and sustainable investment market.
It also hopes to establish a green yield curve for the euro area, as its chart below shows.
GREEN AGENDA GROWING
Green bonds currently comprise less than 0.1% of total sovereign debt, according to S&P Global. Given governments have some $9 trillion of outstanding debt worldwide, going green on even a small portion of that would give the market a huge boost.
What s held them back so far is fear that green bonds will damage mainstream issuance programmes by stealing trading volumes from those markets, eventually raising overall borrowing costs, officials from five European debt agencies told Reuters.
It could also further fragment a market already thinned out by the European Central Bank s asset purchase programme.
Even in Britain, home to a $2 trillion gilt market, debt agency chief, Robert Stheeman, has expressed doubts that issuing green gilts would be cost effective.
But debt agencies have come up with strategies that could allow green borrowing without the associated risks.
Denmark is considering an issue whose proceeds may not be earmarked directly for environmental projects but would come with a pledge for equivalent green spending, said Thorsten Meyer Larsen, head of monetary policy operations and government debt at Denmark s central bank.
Under this idea, it would attach a green certificate to a standard government bond.
"Everyone can see that the green agenda is growing and we want to be part of that, but not in a way that s detrimental to our existing bonds and bondholders," Meyer Larsen said.
"So if you buy that (equivalent spending) idea then that s a bit more straightforward."
Germany is, meanwhile, exploring an option to sell twin bonds: so a green issue with the same maturity and coupon as its conventional peer and replacing part of the conventional bond s auction volume, according to a market participant with knowledge of the country s plans.
The person said that during a crisis, perhaps like the ongoing volatility, investors could switch from the green bond to the conventional issue, which would have better trading volumes.
Liquidity tends to be less concerning for companies as they rely less on bond markets for their funding, said Geraint Thomas, EMEA head of green loans and bonds at MUFG.
But concerns of green bond programmes boosting borrowing costs may be unfounded, according to some analysts and investors.
The investment industry is clamouring for green securities, as pension funds, sovereign investors or family offices request more environmentally friendly securities. Demand for top-rated sovereign names is likely to be high.
Bram Bos, lead portfolio manager of green bond strategy at NN Investment Partners, also expects the stimulus programmes to bring more governments to the market, raising its size.
"More green expenditure could lead to more green bond issuance and less concerns around liquidity of green bonds."