Green bonds: France shows the way with a milestone issue

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The financing of the energy transition by issuing green bonds has reached a fresh milestone now that France, a prominent proponent of climate change mitigation and environmental protection efforts, has issued the largest and longest green bond to date.

Already a leader in the development of green finance, France launched, on 25/01/17, a EUR 7 billion, 22-year Green OAT government bond, marking the first sovereign benchmark issue in the market for green bonds and underscoring the country’s role as a driving force in the implementation of the December 2015 Paris Climate Agreement.

Institutional investors including asset managers, banks, pension funds and insurers figured among the roughly 200 buyers of the bond, illustrating the keen interest among such investors to support the transition to a low-carbon economy – not least from a fiduciary perspective. Reflecting the interest, bids for the French bond exceeded EUR 23 billion.

Exhibit 1: Growth in the green bond market between 2012 and 2016 

green bonds france

Source: Climate Bonds Initiative Markets Team, as of January 2017

Billions needed for climate change fight

The investment needs to fight and adapt to climate change, protect biodiversity and fight pollution are huge, running into the billions of US dollars (euros), with the energy transition for example seen costing USD 1.3 trillion per year between now and 2050, according to recent International Energy Agency (IEA) estimâtes.

With assets in the European asset management industry standing at some USD 20 trillion (latest figures from Efama), it would seem that asset managers are one obvious participant in the green financing market and the green bond market. Indeed, socially responsible investing fits well with the primary duty of many asset managers to act in the best interests of clients and honour their wishes.

For investors, investing in green bonds can be a way to boost their green credentials, thus for example aligning retiree demands or regulatory requirements with the investments in a pension fund. Among its other advantages to investors, green bonds can help boost portfolio diversification and factor climate risk into a portfolio.

Exhibit 2: Use of proceeds from the issuance of green bonds in 2016

green bonds france

Source: Climate Bonds Initiative Markets Team, as of January 2017

Towards a greener asset allocation with green bonds

Indeed, green bonds can be a key tool to drive green changes in the allocation of capital and integrate climate risk into investment decisions. They can help manage climate risk, which involves measuring portfolios’ carbon intensity, and steer investments away from those sectors of the economy and those assets which are roiled by major climatic events and tougher environmental regulation.

Indeed, the proceeds of France’s bumper green bond will be used to subside or invest in projects involving for instance green buildings, green transport and green energy, pollution control and eco-efficiency. The country has said it has identified more than EUR 10 billion of eligible green expenditure for 2017, while indicating it would reopen the issue and raise the volume to maintain its liquidity.

Narrowing down the definition of a green bond, which is still evolving, France said it was following best market practice for instance in the shape of the voluntary guidelines of the Green Bond Principles which form the de facto benchmark for the green bond market, with four fundamental tenets for issuers on the use of the proceeds, the process for project evaluation and selection, the management of the proceeds and reporting on the allocation of the funds raised.

The latter is important since for investors to be able to comfortably invest in a green bond – and if needed justify that investment vis a vis stakeholders – the need for transparency is paramount. Only through adequate disclosure can integrity in the green bond market be safeguarded. From an investor, it is essential that standards are clarified and harmonised, thereby ensuring that green bonds are effective in combating climate change and avoiding any reputational or ‘greenwashing’ risk.

So, as the supply of green bonds increases, we believe responsible investors should clearly disclose the criteria that drive their appetite for green bonds. BNP Paribas Investment Partners would support green sovereign issuance aligned with these criteria:

  • green sovereign issuance must be aligned with the Green Bond Principles (see above)
  • governments must allocate the funds raised to environmental projects which are essential to meeting their climate pledges (aka Paris Agreement – Nationally Determined Contributions) and should ring-fence the use of proceeds from changes in government policy
  • as part of their sustainability credentials, countries must commit to protecting citizens’ best interests and providing goods and services embedding environmental, social or institutional strength

Exhibit 3:Demand for France’s 1.75% 25 June 2039 Green OAT

green bonds france

Source: L’Agence France Trésor, as of 24/01/17

Why green bonds are so important in financing the energy transition and similar projects

The first reason is that the bulk of infrastructure project financing is debt-based and thus bonds, including green bonds, are the vehicle of choice here. Secondly, bond markets are sources of cheap, long-term capital. Furthermore, green bonds involve raising funds directly in the capital markets, circumventing banks whose financing can be more expensive. Finally, debt products can be tailored easily to the needs of institutional investors. Indeed, bonds are the preferred asset class of many pension funds and insurance companies.

So what is delaying the mass development of green bonds? On the supply side, the insufficient number of low-carbon projects meeting climate change objectives is an often-cited factor as well as the relatively small size of projects and the lack of aggregation mechanisms which can be used to pool projects or provide an overview of available projects.

Demand-side constraints include the perception of, for example, low-carbon projects as high-risk, particularly those undertaken in emerging countries, and the limited capacity among certain investors for analysing the long-term characteristics of green issues.

Fiduciary duty and support for green bonds

BNP Paribas Investment Partners is committed to improving practices in this sector. We support the Paris Green Bonds Statement of asset owners, investment managers and funds representing more than USD 11.2 trillion of managed assets aimed at encouraging issuers to work towards better harmonisation of standards.

We are implementing a Green Bond strategy based on a sector policy, using an in-house methodology to assess the environmental and social impact of the funded projects and providing investors with a multisector review of the investments. The idea is also to create a framework to encourage the purchase of green bonds for our bond portfolios totalling more than EUR 215 billion.

We also participate via the European Commission and the Energy Efficiency Financial Institutions Group (EFFIG) in working groups seeking to overcome obstacles to the large-scale development of green bonds resulting from the lack of an aggregation mechanism for energy efficiency projects in the European property and manufacturing sectors. In France, we have recently supported the launch of a report making the case for access to long-term financing via green bonds for energy-efficient refurbishments of French citizens’ homes.

We believe it is our fiduciary duty to ensure the sustainability of investments and manage the associated risks, also by increasing our support for the green bond sector and promoting exposure to investment products with a positive environmental impact.


Contributing editor: Nieck Ammerlaan

See also:

Launch of the green OAT 1.75% 25 June 2039

Green OAT

Financing the transition: Bringing together the Best of Both Worlds

EFAMA report on responsible investment

Report on energy-efficiency refurbishments of French homes

Sovereign green bonds: the missing link between NDCs and the $100trn debt capital markets, by Felipe Gordilo

Felipe Gordillo

SRI Senior Analyst

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