Live from the Green Bond Principles Conference in London, Sean Kidney looks at one of the big questions.
‘Fossil fuel companies should not be issuing green bonds because they are not green businesses.’
Varying versions of this statement crops up often at green bond conferences and in articles. We disagree, and here is why:
It’s use of proceeds that matter
Green bonds are about use of proceeds. What matters is the green characteristics and features of the projects that are being invested in, the ‘use of proceeds’, not the balance sheet backing the bond. This is an accepted concept in the green bond market globally (and the first pillar of the Green Bond Principles).
The use of proceeds concept means a fossil fuel company could issue a green bond with proceeds allocated to qualifying green projects – offshore wind farms, for example – and that bond will be just as green as a green bond issued by a pure-play offshore wind company allocating proceeds to the very same type of projects.
It’s already happening
Engie, a largely gas energy company, has already done this with their green bond.
The oil-filled balance sheet backing the bond does not impact the green credentials of the bond - provided sufficiently strong management practices are in place to ensure proceeds are properly earmarked for green projects alone. We need trust in the process.
Now, to clarify, Climate Bonds does not support fossil fuel companies (or any other issuer) issuing green bonds for fossil fuel projects, such as "clean" coal (what a brilliant piece of disinformation that term has been).
To meet internationally accepted emission reduction targets, we need to shift away from fossil fuels, and ramp up the speed of that transition to clean energy sources dramatically.
Urgency of the climate challenge means we need the big players to change
The urgency of climate mitigation means we encourage fossil fuel companies that wish to issue green bonds for ambitious green projects and should welcome them with open arms to the green bond market. Those fossil fuel companies that embrace a transition from their high carbon business model, should garner institutional investor support.
We need the big companies with massive investment and capex budgets to put less into exploration and development and more and more into money into green projects. The urgency of the climate challenge requires a faster re-allocation of capital.
We simply don’t have the luxury of leaving all green investments to smaller, pure green companies, and wait for them to slowly displace fossil fuel companies in the energy supply mix.
We were reminded of the great urgency of climate action this week when reviewing reports of masses of methane – a greenhouse gas 20 times more potent than CO2 - being released from the arctic seabed. The quantities will only increase with a warming ocean.
Fossil fuel companies offer scale and existing internal capabilities to green projects
The green business units or divisions may still account for a relatively small share of any fossil fuel company’s balance sheet, but because of the vast scale of many fossil fuel giants, the green divisions are surprisingly large when pitted against other players in the renewable energy industry.
If the solar division of French oil company Total SA solar division were separated from its parent company, it would be one of the world’s largest solar businesses. Similarly, if Norwegian oil giant Statoil were to spin out its offshore wind business into a separate company, it would be one of the 15 largest companies listed on Oslo Stock Exchange – across all sectors.
Turning an oil tanker may be a slow process, but when it comes to shifting a fossil fuel company into renewable energy, it can be a surprisingly simple shift, since many of the technical and management skills needed are the same. Everyone in Statoil's wind energy department was recruited internally, as "not much is required to retrain an oil engineer to be an offshore wind engineer".
Dirty balance sheets backing clean energy – exactly what we need
The beauty of green bonds issued by the fossil fuel companies to finance these divisions is that they would be backed by the full balance sheets of these giants. Hence investors don’t need to take any renewable energy risk, but proceeds would be earmarked for the green business units alone. I.e. using brown balance sheets to build green.
No different from banks and energy giants issuing green bonds
Still not convinced fossil fuel companies have anything to do in the green bond market?
What about green bonds issued by banks and large energy companies? Both banks and large energy companies also have fossil fuel filled balance sheets, due to their lending and investments in the area. As BankWatch pointed out this week, the banks that created the Green Bond Principles still have quite large fossil fuel loan portfolios. So welcoming oil companies to issue green bonds is really no different from accepting banks with fossil fuel exposure issuing green bonds.
Simultaneously we can and should continue the push to have banks and institutional investors get out of fossil fuels.
Like encouraging good behaviour among children while chastising bad behaviour.
The Last Word
“What exactly is wrong if Total issues a corporate green bond to finance their solar division-one of the world's largest solar companies. That's using oil industry balance sheets and creditworthiness to finance (and reduce the cost of capital for) solar - exactly what we need, is it not?” – Sean Kidney, CEO Climate Bonds Initiative