Month: June 2021

The European Union is working on new rules where banks will have to state the “greenness” of their activities, or what share of their business is financing climate-friendly activities — a move that would impact profitability in an increasingly environmentally conscious world.

The so-called green asset ratio (GAR) measure is meant to help inform stakeholders — including investors, employees and depositors — of a bank’s commitment to disinvesting from fossil fuels by revealing what proportion of its assets are environmentally sound.

How would it work

Depending on its relative shade of green, a lender’s funding costs could be at stake, as well as its ability to retain talent and its attractiveness to customers. Unlike banks’ other complex financial metrics, a green label may resonate with a much broader public that’s increasingly conscious of companies’ role in society.

However, there is a lot of uncertainty around what will be included in the GAR. If too many banking activities are included it may unnecessarily hit some lenders, and if only a few are included there is danger of “greenwashing.” Also, the banks may shift dirty business to where it isn’t captured in the GAR.

While the European Union proposed measuring green assets against banks’ entire activities, including derivatives, the European Banking Authority has a different view. It favours excluding derivatives entirely from the calculation and reporting so-called “capital markets indicators” separately.

The EBA’s proposal could let banks off the hook on climate change by possibly flattering their green asset ratios. Derivatives are a significant and somewhat risky part of investment banking so their inclusion in the GAR would make a difference. Worse, some lenders might take on greater risk by structuring non-green deals as derivatives to keep them out of the GAR calculations.

Where do European banks stand?

French banks are known for dominating their home market, but they’re considered also-rans on the global stage when compared with US lenders. That’s not the case in the world of green banking. Credit Agricole is the leading underwriter of green bonds, three places ahead of the much larger JPMorgan since the end of 2015, according to an analysis on activity from almost 140 banks around the world by Bloomberg. Two other Paris-based banks, BNP Paribas and Societe Generale, rank in the top 10 in the league table.

French banks were early in identifying green lending as a way to differentiate themselves from their rivals, said Maia Godemer, a London-based researcher at BloombergNEF, a clean-energy think tank. Green debt offerings have been steadily increasing for the past five years, and 2021 is shaping up to be the biggest yet. Issuers have sold more than $187 billion of green bonds so far in 2021, almost triple the pace from the year-earlier period.

A renewable energy market

The underwriting market for renewable-energy companies is minuscule when compared with the funds that fossil-fuel companies are raking in. Since the start of 2016, renewable-energy producers have raised less than $160 billion in the debt markets, compared with the $3.6 trillion for non-renewable energy producers, according to Bloomberg data. This year, when one would expect the spread to be narrowing, green energy providers have received less than $10 billion from bond sales and loans, while fossil-fuel companies got almost $190 billion. The leading lenders to renewable-energy companies since 2016 include Japan’s Mitsubishi UFJ Financial Group, BNP Paribas and Australia & New Zealand Banking Group. Bank of America was the top U.S. bank, placing 11th in the league table.