Is The possibility of issuing green bonds a major change in corporate financing policies?

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For more than twenty years, civil society, government and business have agreed on an undeniable fact that goes beyond the individual sphere and puts the survival of human beings at the centre of concerns: the planet is threatened by human activities that have contributed to the wealth of nations.

Initiated by the Kyoto Protocol in 1997 and relaunched by COP 21 in 2015, the financing of the energy transition and a sustainable development model that respects the environment and future generations is at the heart of concerns at a new stage in the history of world industry. If previous industrial revolutions have exploited the planet’s natural and human resources, the era that seems to be emerging will be that of responsible economies and “green” finance.

green bonds

The priority for both companies and governments is mainly to change energy sources, which are essential for maintaining economic activity. As oil reserves, the main source of energy in our current economies, are tending to shrink and their exploitation will come to an end around 2030, it seems crucial to encourage the transition to the exploitation of renewable energies as a pillar of the energy transition.

However, the stakes are high. The annual financing needs to limit global warming to less than two degrees, as agreed by the Paris Agreements, are considerable.

It is on this premise that the financial sphere should be given its full importance in the move towards a green economy that investors seem increasingly concerned about and that represents a highly profitable sector for decades to come.

Thus, the creation of green bonds as a means of financing these operations appears to be timely in a society increasingly concerned about the environmental impact of companies’ activities.

It is therefore legitimate to question whether the possibility of issuing such bonds can constitute a major change in corporate financing policies.

However, before analysing the impact of green bonds on corporate financing policies, it is still important to consider the extent to which these green bonds can be issued, to which companies they are addressed, who can hold them and how to avoid abuses in a buoyant and coveted market.

I. Green bonds, a financing tool for a green economy.

While there is no shortage of ways for companies to finance themselves on the markets, it is of particular interest to look at how green bonds work. Indeed, unlike a “traditional” bond, the green bond forces its issuer to use the funds drawn from the issue for a specific purpose and must be part of a sustainable project financing approach.

However, there is a large legal vacuum and no law or body strictly regulates or controls the proper use of funds. Although the Green Bonds Principles set out the reference standards for the issuance of these obligations, regulators and governments, while taking a proactive stance, have yet to decide on sanctions for companies that do not comply with them and not respecting commitments.

Moreover, like all bond issues, this tool is not suitable for all companies and discards many of them, which is an obstacle to the desire to initiate a global transition of the economy.

In this section, the particularities of green bonds compared to traditional bonds will be explained, highlighting the importance of the final destination of the funds. A great deal will be given to the legal aspect surrounding these obligations: who can act as a supervisory authority, what text governs them, can we take advantage of this grey legal zone for non-moral purposes, will be developed.

Under green bonds, amounts raised from investors are specifically intended to finance projects or innovation aimed at the broad energy transition, i.e. energy efficiency or renewable energy. The specificity is clearly the channelling of money directly to projects, whereas traditional bonds finance the entire activity of the company or issuer.

On the investor side, the green agenda is taking up a lot of space and is rising in the hierarchy of large institutional investors. There is a growing appetite for specific green bond or green impact funds that are developing among local players.

Above all, we are seeing the arrival of new actors who were not historical actors.

The main subject on the green bond market is standardisation. This involves establishing a common definition of the green bond, setting eligibility criteria for projects to mark the amounts raised and finally measuring the environmental or social impact of the financed projects. Standardised impact reporting would thus enable investors to make trade-offs based on the impact of projects.

The second lever would be to convince more manufacturers to issue green bonds to finance efficiency or carbon footprint improvement projects.

There is no regulatory definition or precise standards, but there are major voluntary principles, the “Green Bond Principles”, drafted in 2013 by four major international banks, Bank of America Merrill Lynch, Citigroup, JP Morgan Chase and the French Crédit Agricole CIB. In particular, they recommend the opinions of external experts, such as a second opinion certificate.

Thus, the lack of agreement on a text clearly defining a common position on the directives that must be applied to the issuance of a green bond raises many questions as to the framework, monitoring and sanctions applicable in the event of non-compliance with the proper use of funds.

This framework is based on the sole morality of the company and the reputation factor, which tends to diminish in the event of a scandal due to “green-washing“, the practice of declaring itself abusively respectful of the environment or the climate, in the marketing of a product or a communication action, and by extension in the context of a financial transaction such as a “green bond”.

II. What future for corporate financing?

As part of a process of overhauling corporate financing systems while promoting projects that serve a new model for creating sustainable wealth, the green bond introduces a new question about the future of corporate financing. Indeed, this part will be an opportunity to stress that the change that is tending to be made concerns not only the form but also the content.

While considering the measures taken by the signatory countries of the Paris Agreements, but also global concerns about global warming combined with the willingness of consumers and investors to “clean up” their lifestyles or portfolios, it is relevant to ask whether the purpose of these operations does not lie in the fact that economic actors ultimately wish to finance only eco-responsible projects.

The attractiveness of global economic actors to companies that comply with the criteria and provisions of the multiple international agreements regulating the climate impact of economic activity is increasing. To this end, investors are increasingly sensitive to this growing market, as evidenced by the sharp increase in green bond issues. However, this represents only a small proportion of total bond issuance.

The dynamics of green bonds are part of an awareness of the challenges of combating climate change and financing the energy and ecological transition. The strong interest of investors and public and private issuers, particularly in France, in so-called “green” bonds is well known.

France strengthened its position as a leader in green finance at the last environmental conference when the President of the Republic announced that France would develop the green bond market and that the State could itself carry such a financial instrument dedicated to the transition.

However, while the green bond market has grown by +50% since its creation in 2007, with strong growth in 2014, its development slowed slightly in 2015 to reach an outstanding level of $91 billion at the end of 2017, or less than one percent of the debt securities traded on international markets.

Through the question of green bond financing, we can see that the whole economy is concerned. Public authorities and investors, civil society and consumers, although the stakes are different for everyone, a common framework is emerging: the growth model must be transformed.

However, without effective legislation, the risk of drift is still present and “greenwashing” is worrying. In short, it is not so much the financing policies that tend to be modified by the introduction of this new means of financing, but rather the use of companies’ funds and by extension their activities in general.

Thus, a new idea of duty for economic actors is mixed with climate concerns: the transition to a green economy is a matter for everyone, companies, States, consumers, a consortium must be created around common issues whose purpose is beneficial to all.

If Nietzsche wrote in 1888 in the Antichrist that “a people is lost when they confuse their duty with the idea of duty in general”, would it not be topical for all actors to become aware of what is expected of them?

Laurent BATTISTELLI


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