Should an oil company be able to issue a green bond? Possibly, says Manuel Lewin.
A little while ago, I spoke at Environmental Finance's Green Bonds Americas conference.
The topic of the panel was: 'What is green?' – a favourite for any event on green bonds. We had a very good discussion.
"We're not just looking for the green poster children and the greenest of the green," I said at one point.
After the panel, a reporter followed up with me: "Would you at all consider a bond from an oil company green?"
I said: "Yes, we would consider it. If the company had a sound strategy to diversify out of fossil fuels, followed the Green Bond Principles, and could demonstrate the positive impact of the projects financed through the green bond, why not consider it?"
A green bond, if part of a sound strategic approach to align the business for a low-carbon future, can be a signal for potentially lower credit risk
Sure enough, the headline the next day read: 'True colours: Zurich would consider green bonds from oil firms'.
I received some – shall we say – mixed reactions after that. A person I much respect for his views and experience wrote me an email. "Is this for real???!!!" the subject line read.
To be fair, I also got feedback from people who very much agreed with the position. Obviously, the issue is a rather controversial one.
For me, the much more important underlying question though is: what can green bonds really do for the environment?
Most institutional investors in the market – including Zurich – are not prepared to pay a premium for a bond just because it is green. This would not be aligned with their fiduciary responsibilities. As a result, green bonds by and large price in alignment with other bonds by the same issuer.
So, I would not expect green bonds to lower the cost of financing for green projects. At least not in an immediate way.
So, what's the case for green bonds? Here's my view:
- Green bonds are a brilliant tool to create awareness and learning. At Zurich, for instance, investing in green bonds has resulted in at least a good dozen very senior investment professionals, including our Chief Investment Officer, engaging in ongoing conversations about green finance. (And many more in occasional ones.) How could one ever expect an investor to start investing in more risky green investments without going through such a process first? At issuing and intermediating companies, Chief Financial Officers, people from Treasury, bankers, sales people and many more go through a similar process. At the same conference I was speaking at, a finance manager from a car company and the CFO of an information technology company also spoke. Neither policy action nor NGO activity have so far had the same effect.
- Green bonds create transparency around the flow of green finance. Everyone agrees that very large sums of money need to be invested to tackle climate change. But no one really knows how much, and how much is actually being done. Not only can green bonds help to make more transparent the flows of green finance, but through impact reporting they will – over time – also make more transparent where investments are most effective in achieving a positive outcome.
- Last but not least, green bonds are a signalling device. With more and more investors starting to incorporate environmental, social and governance (ESG) factors into their credit risk analysis, a green bond, if part of a sound strategic approach to align the business for a low-carbon future, can be a signal for potentially lower credit risk. If credible, that might actually lower funding costs after all, but not just for the green bond, but for all the bonds of a green bond issuer.
Of course it is great to see green bonds issued by institutions with the highest green credentials and an absolute focus on green activities. But all the benefits listed above will be amplified significantly by allowing companies that are not necessarily perceived to be at the centre of green activity to become part of the green bond market.
All the benefits ... will be amplified significantly by allowing companies that are not necessarily perceived to be at the centre of green activity to become part of the green bond market
I would love to see industrial companies, retailers, folks who spend large amounts on research and development, the transport sector, manufacturing, etc. think about issuing a green bond.
They are all essential in creating a low-carbon and climate-resilient economy, and will have to make and finance investments if they are to be prepared.
And, yes, oil companies too.
Maybe the market is not quite ready for them, but thinking about green bonds in black and white terms – good and bad – will not get us where we need to be.
After all, mixing yellow, blue and little bit of brown will get you a dark green.
Manuel Lewin is head of responsible investment at Zurich
