$ 180 billion green debt boom grows faster than its impact

(Bloomberg) – The green debt market is growing at a faster rate than the real world projects it was created for, thanks to some financial engineering.

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While there is no official estimate of the difference between green finance and actual green businesses, a growing number of listeners, researchers and climate activists are warning that the numbers provided by bankers provide an inflated picture of their role in the fight against climate change.

“Financial institutions can paint a picture that makes their contribution to the climate transition more meaningful than it actually is,” said Stanisław Stefaniak, sustainable finance researcher at the Warsaw-based think tank Instrat.

The concern centers on the resale of green loans, with the financial sector’s contribution to an underlying project being accounted for as often as the original debt is refinanced. After issuing green loans, bankers can bundle them into a green bond which can then be sold to another financial institution. Both can claim to finance the climate transition.

The accounting conundrum means that the amount of green financial assets on the balance sheets of banks and asset managers exceeds real-world green capital spending. This year, financial institutions printed a record $ 180 billion in green bonds, more than any other private sector.

“It is difficult to quantify the level of double counting that will occur due to the private nature of the lending market,” said Maia Godemer, sustainability analyst at BloombergNEF. The “caveat”, however, is that we risk ending up with “a clearer picture of the actual decarbonization allowed by credit institutions,” she said.

Debt repackaging and restructuring is a well-established and fully legal form of financial engineering. While there are examples to show that such models can backfire if applied without restriction – the subprime mortgage crisis is one example – debt consolidation can also add liquidity and bring more players to a market to help it develop.

As banks are under pressure from regulators, especially in Europe, to make their loans greener, this type of refinancing serves them well. But disconnecting real green businesses can complicate efforts to track their contribution to the urgent decarbonization needed to avert a climate catastrophe.

“If the bank has a legitimate exposure that it is able to report but then sells or repackages the loan, there is a risk that the buyer obtaining the credit could be viewed as financially engineered instead. to represent the sustainable money that goes into the real economy, ”said Tim Conduit, partner at Allen & Overy. “It’s about how the different green exposures are reported.”

Policymakers are beginning to counter this potential for green laundering in the debt market. Proposed amendments to the European Union’s green bond standard include a clause that would prevent “the creation of green bonds from scratch” through continuous refinancing, according to Paul Tang, a lawmaker responsible for guiding legislation in the European Parliament .

Wes Bricker, who co-leads PwC LLP’s Trust Solutions Practice, says that while the EU’s goal is to use the green asset ratio reported by banks “to identify the volume of investment in green projects so that policymakers and society can understand if we are transitioning at a fast enough pace, we may get an inaccurate signal by inflating.

“It depends on what we expect from this number, who is using it and for what purpose,” Bricker said.

Even established asset classes such as green bonds have questionable climate impact. They often provide money to refinance completed green projects and the label does not require the issuer to use the released capital on another green project. And this year has seen the emergence of green derivatives and pensions, which regulators have warned could be greenwashing prone as they rush to design a rulebook for these products.

EU regulatory packages have global reach and affect non-European businesses if they target customers in the bloc. The idea is to divert capital from activities that harm the planet and towards projects that protect the environment and social justice.

Frédéric Hache, who heads the Brussels-based Green Finance Observatory, said European policymakers should be guided by the vision articulated at the climate summit in Scotland last month. He proposes that any bank refinancing its green loan portfolio through green securities not count the loans in its green asset ratio.

“COP26 recently underlined the critical importance of avoiding double counting of carbon credits for the purposes of environmental integrity and credibility,” he said. “The same goes for green claims. “

(Add a quote from Allen and Overy in the 9th paragraph.)

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