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Green bonds are essential to the reorientation of finance
Secretary General of the French Agency for Ecological Transition (ADEME), author of La finance verte (La Découverte)
The COP21 gave green bonds a boost: they are seen as a tool to a greener finance, one of the major goals of the 2015 Paris Agreement. In France, reaching carbon neutrality by 2050 implies doubling, or even tripling, climate financing to reach 50 to 70 billion euros per year by 2030, according to l4CE. On a global scale, the OECD estimates the investment requirements for a low-carbon transition at 6900 billions dollars per year until 2030. By comparison, climate financing only reached 600 billions dollars, representing 2% of total flows.
What is a green bond?
Just as an ordinary bond, a green bond is a loan raised from investors on the capital market. The « green » label implies a commitment to use the raised funds exclusively to finance « green » projects, assets or activities. such as, for instance, renewable energy, clean transportation or biodiversity preservation.
The market quickly organized itself around Green Bonds Principles (GBP), a standard created by banks and investors in 2014. Up until now, these principles were not legally binding. However, in 2016 the Autorité des marchés financiers (AMF) in France recommended green bond issuers to follow these recommendations. In Europe, the European Commission plans to make them mandatory.
The impulse of public issuers
The first green bond was issued by the City of San Francisco in 2001 to finance solar electricity. The Green Bond market really took shape in 2007 with bonds issuance from the European Investment Bank (EIB) and the World Bank. After the Paris Agreement, several States have entered a race to be the first sovereign green bond issuers.
I have thus witnessed the launch of the most important issuance of green bonds ever made: the French State borrowed 7 billion euros in early 2017 to finance its green expenditures. This unprecedented event, initiated by the Minister of Ecology Ségolène Royal, made it possible to provide transparency on the share of the budget allocated to the environment.
The benefits of green bonds
Through increasing the transparency of the information available to investors, the green bonds market offers many benefits. Investors can then implement climate strategies while compagnies establish a dialogue between their financial department, their sustainable development department, and their business departments, which manage the projects that will be financed. In addition, green bonds can support the implementation of national climate policies through increased awareness and a more efficient capital allocation.
For the borrower, this transparency is rewarded with a lower financing cost for green projects. There are two explanations for this « green premium » : green bonds appeal to new investors and the demand for green investments is now greater than the supply.
Another less measurable reason is the « announcement effect » : the issuer’s green strategy sends a positive signal regarding its resiliency and long-term profitability.
This is not a Green Obligation
Independent consultant, co-author of L’illusion de la finance verte, expert at the Veblen Institute
First, let’s use a comparison between a loan and a bond so we can all understand what is at stake. If an individual purchases an electric vehicle, he or she receives a bonus from the State and must make a personal effort to pay for the rest of the expenses, because the electric vehicle is more expensive than its internal combustion engine counterpart. The State does its part, the buyer does his or her part, but not the financer. Because when the buyer turns to a banker to finance the purchase, the bank offers a loan and a loan rate regardless of the kind of chosen vehicle. In short, it does not matter if the vehicle is electric. However, if the buyer chooses an electric vehicle, the bank will be able to call the loan “green” without it making the slightest difference in the buyer’s decision process.
All the things that can be financed with a green bond could also be financed with a regular bond
Unfortunately, this is exactly how a green bond works: the fiduciary responsibility does not make it possible for investors to give it a different price than the one dictated by the solvability of the borrower. Whether the borrower issues a green bond to finance a green project, or a regular bond to finance a any project (or even a “brown” one), his/her repayment capacity is the same one and the bondholders, all joined together, will ask for the same yield (which is the cost of capital paid by the issuer).
Finance for Tomorrow stakeholders have agreed to define “Impact Finance” as a financing strategy that aims to accelerate the just and sustainable transformation, by providing evidence of its beneficial effects. It is based on the pillars of intentionality, additionality and impact measurement. In that regard, it is obvious that green bonds do not have any impact. Especially since all the things that can be financed with a green bond could also be financed with a regular bond, with the same cost for the borrower.
A green bond does not incorporate any incentive or particular contribution to accelerate a sustainable transformation. This systemic uselessness is the very negation of the concept of green finance, which aims to modify the cost of capital (depending on the climate trajectories) of economic players in order to induce a reallocation of the resources necessary to the sustainable transformation.
Green bonds illustrate the incapacity to take action against climate change
Beyond this ultimate flaw that perpetuates the paradigm of financial “business as usual”, we could add a few other reasons why green bonds are uneffective :
- This designation is not regulated (the audits are purely formal) and allows abuses when the project being financed is not green (airport expansion for instance).
- Communication around green bonds is often disproportionate and misleading, and prevents from talking about important subjects, such as carbon budget, the Net Zero goal, Integrated value chains, and so on. If you read “over XX tons of CO2 have been avoided thanks to a green bond”, you might as well read the same sentence removing the word “green”.
- The issuance of green bonds by commercial banks is absurd. They create money directly through lending and do not transfer the money from savers’ pockets to their customers.
- This label induces confusion for small investors and issuers. It is not the green bond that makes the project green, but the opposite.
To conclude, green bonds perfectly illustrate the incapacity to clearly and systemically take action against climate change. They are rather part of the global strategy (i.e. ESG investing) to develop nonsolutions advocated by political decision-makers and financial interests who do not take the subject seriously or with enough benevolence.