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Green securitisation offers welcome step towards a cleaner future … but EU climate targets demand wider action

17 September 2019

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Building a “climate-neutral, green, fair and social Europe” is one of the four priorities set out by the European Council in its new strategic agenda for 2019-2024. The success of the green transition, notes the Council, “will depend on significant mobilisation of private and public investments, on having an effective circular economy, and an integrated, interconnected and properly functioning European energy market”.

Significant and ongoing investment in an array of environmental projects will be crucial to achieving the EU’s ambitious climate and energy targets. Green securitisation, it is hoped, will have an important role to play in meeting those investment requirements. But what impact can it realistically have?

Boosting green securitisation

While institutional investor interest in green assets is growing, demand for green securitisation bonds remains relatively low.

A particular problem to date has been the lack of agreed definitions on what constitutes a green project, and how green the financing structures are in practice.

Introducing clear criteria and guidelines that stipulate a securitisation should relate specifically to transactions collateralised by green underlying assets (such as financing for electric cars) would help address the potential for ‘green-washing’.

More clarity would enhance the market’s credibility, allow investors to better match transactions with their investment goals and policies, and potentially foster the instruments’ appeal to the wider investment community beyond the niche green funds that currently occupy this space. In addition, it would help ensure the proceeds from green securitisations are specifically ploughed into market activities aimed at tackling the threats and effects of climate change.

Only a first step towards greener financing

Yet while green securitisation can play a part in efforts to combat climate change, the market’s size means that by itself it will only have a limited impact on meeting international climate targets. Development of the green securitisation market therefore needs to be part of wider efforts that extend through the whole financing system.

Introducing preferential regulatory capital treatment for green bonds has been mooted as one way to incentivise activity. But the point of regulatory capital is to strengthen financial institutions. Lowering the threshold simply because it is a green bond could be seen as counterintuitive.

An alternative idea could be to attach an implicit government guarantee to green finance structures. That would give them a covered bond-type flavour, potentially making the instruments more attractive to investors by lowering the possibility of default. Government backing could stimulate the retail green bond market in particular, where considerable public interest in environmentally-related projects already exists.

Other initiatives could include lowering the tax threshold for institutions that use green financing, or offering tax relief on the income from green bonds.

Promoting green bonds in such a way could help stimulate the industry’s growth, which in turn would spur further developments in the green economy.

We believe a sustainable global economy should combine long-term profitability with social justice and environmental care. As a professional services firm, our environmental impact is small compared to many other industries. We’re proud to have worked on a variety of green transactions including solar projects, wind farms and green mortgages and continue to look for further opportunities where we can contribute to this growing market.