Politics and green bonds… and social finance

Publication le 23 mars 2018 sur Les Echos Le Cercle

et le 5 mars 2018  Green is the New Gold dans Revue Banque

 When we think of the green economy, renewable energies are most often in mind, but rarely do other sectors of activity renew themselves and even less rarely do we finance the whole thing.

However, in response to the challenges of a carbon-neutral environment, at least two green financing schemes have been set up. Specialised investment funds, such as Demeter, and secondly sustainable financing, of which ING is the most prominent global pilot and Engie is the world’s leading issuer of green bonds at the time of writing. With these three companies, we were recently the participants in the conference on green finance, “Green is the new gold”, organized at Dauphine University by the Magistère Banque-Finances-Assurance led by Mrs Carré-Talon.

The first question we asked ourselves was: is green finance a fashion trend or a sure thing?

Let us look at green bonds. The total issued in 2007 was $0.8 billion compared to $81 billion in 2016, between $121 and $155 billion in 2017 and probably over $250 billion in 2018. The progress made in 10 years illustrates an intense challenge for this market segment, but much remains to be done. Indeed, once everything is accounted for, the financing needs of countries, companies and communities towards a carbon-free world are estimated at nearly $100 trillion over the next 15 years (i.e. initially). Put this figure in perspective with the global debt reported by the IMF on October 5, 2016, $152 trillion.

Green bonds will only be a part of that 100 trillion. In the immediate future, they represent about 4% of annual emissions. Multiplied by seven times at cruising speed, they will approach 15% of new financial needs if they double. In conclusion, we are far from a fashion trend.

The second topic discussed at Dauphine concerned the regulation and control of green obligations. Until recently, it seems that China allowed the issuer, particularly state-owned companies, to use up to 50% of the proceeds of a green bond to repay bank loans or invest in the company’s operations. The other 50% should be spent on green: pollution reduction, clean coal, solar or wind energy infrastructure, etc.

European regulations seem much less precise. There are no regulations governing the green colour of the obligations but recommendations. Once captured, there is no sanction if the money is not used in the green. That is to say, an issuer could legally use 100% of the funds in a project far from the original purpose. However, this case of moral misuse would expose the borrower to a deep crisis of confidence on the part of rating agencies and underwriters. His future emissions would be tainted, he would pay the price.

To avoid such adventures, the three companies present in Dauphine follow and recommend that they scrupulously follow four principles:

– Initiation of the project: intention and environmental benefit.

– Project selection: feasibility and eligibility.

– Funds management: precise identification of expenses at the issuer’s premises.

– Transversal reporting: Detailed monitoring of the commitment of funds on a project-by-project basis.

And all these safeguards are effective since 33% of green bonds are used in renewable energies, 30% in the renovation of buildings, 15% in transport, 23% in sustainable water development, the circular economy, forests…

Third theme, what are the real advantages of green finance for companies since its success is a prelude to social obligations and, more broadly, to sustainable finance?

A first answer probably lies in the evolution of the product. Green bonds are identical to other traditional bonds when approached via structure, risk or income; issuer by issuer they are not more or less expensive than the others.

But recently the range has been changing. From green bonds we move on to virtuous green bilateral loans or otherwise identified as sustainable development loans. The latter are special because, unlike bonds, they see the bank credit margin evolve according to the company’s green or “sustainable” rating. This barometer is regularly established by specialized rating agencies, such as Sustanalytics or Vigéo Eiris; the better the environmental rating, the better the rate, which is no longer a quantitative maltôte impermeable to the company’s environmental or social efforts.

A second answer is qualitative. At a time when political ecology is dying of its own excesses, the ecology of finance is disappearing. Without opening the endless debate between politics and finance, let us be satisfied with the fact that ideology has allowed a branch of finance to change the company when, under the influence of green, the lending bank and the financial management of the borrowing company transform their relationship. This one is enriched and improved because the dialogue between financial commissaries from both sides is deepened by the contributions of technicians and field managers who provide and explain cross-functional reporting project by project. This qualitative change provides an additional guarantee to the subscriber that funds are spent on initial projects; it benefits companies that retain a source of financing while enriching internal communication; it also benefits banks that bet that their green-sensitive customers will perform better than others. The same will undoubtedly apply to social obligations.

Let us conclude on the impact of this sustainable finance on debt. The carbon-free world is a qualitative leap from the carbon-free world, and this step comes at a price. The 100 trillion over the next 15 years will increase global net debt and this will be reflected in future IMF reports. But you don’t necessarily have to fear it. Like any debt, green or social debt can be a beautiful thing. It accompanies optimism, carries the risk and then generates discoveries.

Didier JULIENNE

Linkedin: Didier Julienne

Twitter:  @didierjulienne

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