How “green” is green finance?
Dr. Edina Schweizer, Partner, Head of CEE Banking & Finance, Head of Hungary Banking & Finance, Noerr and Partners Law Firm
The new buzzwords that have sparked excitement in the finance landscape over the past two years are “green finance”, “green bonds” and “ES” (environment, social and governance).
Green finance aims to increase financial flows (banks, insurance and investments) towards investment and sustainable development priorities.
The financial landscape game changer
Growing international concern about the impact of climate change has led to increasing attention to the environmental and social responsibilities of businesses and governments. As a result, green finance has become a potential game changer in the financial landscape. Banks and financial institutions (on the supply side) and borrowers and asset managers (on the demand side) were hungry and excited to discover this new arena.
Thus, ESG has become a key subject. The green bond market has grown exponentially over the past five years, growing at over 60% per year globally. ESG assets are on track to exceed $ 50 trillion by 2025.
Market players quickly understood that you could create value by applying an ESG strategy. However, there was no real consensus in many organizations on how best to manage the expectations of different stakeholders.
On the investment side, the green and social bond market is growing. Likewise, on the lending side, there is an undisputed and growing interest in sustainable finance. In Hungary, banks are now considering offering green loans as an alternative to traditional loans. However, the green loan market still lags behind the green bond market, where we have recently seen a wave of corporate green bond issuances, mostly by real estate companies.
A gas distribution company can issue green bonds, how is that possible?
The lack of clarity on what “green” means often leads to confusion as to which products are classified as sustainable. Czech Gas Network Investments, a natural gas distribution company, recently issued green bonds worth € 500 million. An average investor may have a hard time understanding how a natural gas company could use the word “green” regarding its business in the first place.
Likewise, several real estate development companies have issued green bonds in Hungary, the Czech Republic and other Central and Eastern European countries; half of all the non-renewable resources that humanity consumes are used in construction, making it one of the least sustainable industries in the world.
The “green” labeling of real estate assets in operation may also raise questions. For example, almost 40% of existing modern office buildings in Budapest hold a “very good” (BREEAM) or “gold” (LEED) qualification, which makes owners eligible for green bond issuance. If 40% already correspond to the green bill, one might think that the threshold should be revised.
Regulators should take the lead
Until now, green bond issuers have followed their own standards and guidelines when classifying their bonds and operations as “green” or “sustainable”. To get more clarity, regulators realized they needed to lead the discussion and lay the cornerstones. To this end, the EU has introduced the Public Financial Disclosure Regulation (SFDR) and taxonomy. In addition, a separate regulation, the European Standard for Green Bonds (EUGBS), is under development. These regulations aim to create a “gold standard” for the market as to what “green” means.
The market has already started to adapt. Funds and asset managers have reduced their use of the term “ESG” in anticipation of the time when more rigorous labeling will be applied. For example, DWS Group, the investment unit of Deutsche Bank, declared 459 billion euros in “embedded ESG assets” at the end of 2020. After the introduction of SFDR, they declared 70 billion euros. euros in “dedicated ESG assets” at the end of the year. S2 2021.
In Hungary, the central bank has taken an active role and introduced laudable methods to boost green finance, including subsidized ‘green home loans’, purchases of green mortgage bonds and easing capital requirements for banks seeking. green finance. A phased approach that is well ahead of other regional regulators in Central and Eastern Europe.
With all of the above, green finance is on the right track to have more standardized fundamentals to avoid “greenwashing” and could evolve to a much greener place.
This article first appeared in the print issue of the Budapest Business Journal on October 22, 2021.