Measuring the impact of green finance: where do we stand?

Green finance: a key lever to finance the transition

One of the main challenges of the 21st century is to achieve economic development that is compatible from both social and environmental perspectives. This requires a very rapid transformation of our production processes to limit global warming to +2°C while maintaining or even improving the state of natural capital. In this context, the European Union has made strong commitments to achieve ambitious environmental goals. For example, regarding climate change, the European Union aims to reduce its emissions by 40% at the level of 2030 compared to the level of 1990.

Achieving these environmental goals requires the implementation of several projects called "green projects" that will contribute to rapidly changing our production processes. The expected amount of investment for these green projects is estimated at 180 billion € across the European Union. This raises the question of financing these projects through the creation of a specific market to attract funds for these green projects. This is the entire objective of green finance. The issue of financing green projects is not specific to Europe but common to all countries globally.

Financial instruments have already been implemented to finance these green projects. The creation of green bonds is a perfect example. However, the development of green finance raises the question of delineating the boundary between what is "green" and what is not "green". The absence of a clear boundary poses the risk of certain projects being financed in the green financial market to take advantage of better conditions than in the conventional market, even though their environmental impacts are highly questionable (a risk known as "green washing"). This opportunistic behavior can undermine any effort to create a specific financial market for green projects (Berger, 2017).

The sustainability of green finance depends on conducting an environmental assessment, published in environmental reports, to evaluate the "green" nature of the projects. The methodology for environmental assessment must be rigorous to avoid questioning the green aspect of the projects (Rivière-Giordano, 2012). In this context, global initiatives have emerged to better integrate the environmental impacts related to investment in assets or portfolios of assets. This is particularly the case for impact investments (or "impact investing").

Based on a review of initiatives, this article provides a brief overview of the environmental assessment methods for green projects and raises the question of the conditions for developing green finance.

The green bond market

Definition and limits of environmental reporting

The Ministry of Ecology and Ecological Transition defines green bonds as follows:

A green bond is a loan issued on the market by a company or a public entity to investors to enable it to finance its projects contributing to ecological transition (renewable energies, energy efficiency, sustainable waste and water management, sustainable land use, clean transport, and adaptation to climate change...), particularly infrastructure investments.

" A green bond is a loan issued on the market by a company or a public entity to investors to enable it to finance its projects contributing to ecological transition (renewable energies, energy efficiency, sustainable waste and water management, sustainable land use, clean transport, and adaptation to climate change…), particularly investments in infrastructure. It differs from a traditional bond by providing detailed reporting on the investments it finances and the green nature of the projects funded. <"

While the sustainable nature is well defined in the principles of green bonds, no standard exists to characterize the environmental dimension of financed projects. Current issues particularly focus on the green qualification of projects and the strengthening of reporting. The CGDD (CGDD, 2016) points out the risks related to the credibility of the green bond market due to a lack of definition of what is green, the absence of a framework, and the trust problem in the information provided on the monitoring and evaluation of green bonds.

ICMA (International Capital Market Association) published in [[NUM]] (ICMA, [[NUM]]) the main principles of green bonds.

The ICMA (International Capital Market Association) published in 2017 (ICMA, 2017) the main principles of green bonds. These main principles are not binding for issuers<. The GBS are more like codes of good conduct<. The three fundamental concepts are transparency, disclosure, and reporting<.

associated with impact assessment. An attempt is underway to harmonize the assessment of certain impacts (energy efficiency, renewable energy, water, and wastewater).

The main principles of green bonds (GBP) propose, in the interest of transparency, to evaluate qualitative and, if possible, quantitative performance indicators while clearly specifying the methodology and the assumptions associated with the impact assessment. An attempt is underway to harmonize the evaluation of certain impacts (energy efficiency, renewable energy, water, and wastewater). ICMA encourages other initiatives aimed at establishing additional references for impact reporting.

It is recommended that emitters can call upon an external person (e.g., consultants) to confirm the alignment of green obligations with the GBP.

for green bonds. Data was collected from [[NUM]] issuers and [[NUM]] bonds issued until April 1, [[NUM]].

The organization "Climate Bonds Initiatives" has conducted a study on the current state of ex post environmental reporting for green bonds. Data was collected from 146 issuers and 191 bonds issued up to April 1, 2016. Considering that the issuance of green bonds requires, according to the main principles of green bonds, the drafting of an annual report, the study allocated time to complete the reporting over a duration of one year and 2 months to account for the time for the report to be made public.

The results showed that 74% of green bonds had environmental reporting, representing 88% of the value of these bonds. Unsurprisingly, the preparation of the reporting depends on the amount of bond issuances: the higher the value of green bond issuances, the higher the share of issuers producing environmental reporting.

. No guidelines apply in the case of private placements. However, if the issuer has used publicity to issue bonds (e.g., publication in a newspaper), they must provide a report in return.

• The funds used by issuers serve to refinance existing projects rather than to finance new projects (the most common case).
• The obligations are issued in private placements. No guidelines apply in the case of private placements. However, if the issuer has used advertising to issue bonds (e.g., publication in a newspaper), they must provide reporting in return. 1 in 5 bonds that have not been reported concerns private placements.
• Nearly a quarter of the available reports have been detailed reports indicating the name and description of the project, allocation in procedures, the share of refinancing vs new projects, as well as a detailed impact assessment.
• Bonds are used to finance several activities of a green company. The issuer considers that the company's annual sustainability reporting also applies to green bonds.
• The reporting is not public. Emitters can send the reporting directly to investors in the form of a letter without it being made public.

Nearly a quarter of the available reports have been detailed in a report indicating the name and description of the project, the allocation in the procedures, the share of refinancing vs new projects, as well as a detailed evaluation of impacts. The majority of reports (49%) are at an average level with some detailed information about the project and some impact evaluation measures. Regarding climate change, the most commonly used indicator concerns avoided emissions, followed very distantly by emission intensity and CO₂ emissions.

The development of green finance to achieve European environmental goals

To finance green projects that will contribute to achieving its ambitious environmental goals, the European Commission has created a High-Level Expert Group on Sustainable Finance (HLEG).

Here are the key points to remember about their recommendations:

. It is therefore possible to establish a green label for portfolios that achieve a certain share of financing for green projects and exclude activities that are not compatible with the EU's environmental objectives (e.g., activities that are heavily fossil fuel-intensive).

• The development of a taxonomy to distinguish what is green from what is not green. This requires comparing the impacts of funding through, for example, the establishment of standards or labels. The document specifies that the results of projects funded by green finance must contribute to achieving the EU's environmental objectives, which raises the question of how to measure this contribution (see the initiatives on "science-based targets"[1] that determine the emission reductions of each company to achieve a world where the temperature increase is limited to +2°C). This measurement should allow for an assessment of the green share of the asset portfolio.
• The adoption of a sectoral approach< for funds allocated to green finance, in order to reflect the diversity of emission reduction potentials across sectors.
• The development of standards and eco-labels< to identify green assets. Currently, environmental reporting is based on self-assessments, which involves heterogeneous levels of methodologies, transparency, and ambitions. One prerequisite for developing green finance is the guarantee of the quality of this self-assessment through the emergence of a standardized methodology<. The HLEG recommends increasing transparency on the sustainable impact of funds. The goal is for investors to understand the impact of their savings through the development of a small number of simple and understandable indicators<. It is therefore possible to establish a green label for portfolios that achieve a certain share of financing for green projects and exclude activities that are incompatible with the EU's environmental objectives (e.g., activities that are heavily fossil fuel-intensive). It is essential to make visible the assets that have a high priority for the EU to achieve a low-carbon economy resilient to climate change.
• The development of an environmental reporting, recommended only in the GBP published by ICMA, should be mandatory in the EU. The involvement of a third party (e.g., consultants) would also be required to assess whether the funded program aligns with the environmental objectives of the European Union.

The term "impact investing," which could be translated into French as "investissement à impacts," was created by the Rockefeller Foundation in 2007.

Impact investment or " impact investing "

The term "impact investing," which could be translated into French as investissement à impacts, was created by the Rockefeller Foundation in 2007. According to the website of the Global Impact Investing Network (GIIN), impact investments are defined as "investments made by companies, organizations, or funds with the intention of generating social and environmental impacts alongside a financial return." In this sense, it differs from philanthropic investments (which do not seek a financial return) and socially responsible investments (which aim to avoid negative impacts without necessarily seeking positive impacts).

According to the 2017 annual GIIN survey, the 208 respondents to the survey invested 114 billion US dollars in impact investment assets (this figure corresponds to the market floor given the non-exhaustive nature of the survey).

classified by section (financial performance, operational impact, organizational description, product description, and product impact) and by sector of activity.

In the case of developing impact investment, the GIIN has created an organization called IRIS (Impact Reporting and Investment Standards) whose goal is to develop methods and indicators to assess the social and environmental impacts of assets or asset portfolios for investors.

IRIS has published a set of impact indicators classified by section (financial performance, operational impact, organizational description, product description, and product impact) and by sector of activity. Among the environmental impacts, there are currently indicators aimed at integrating indirect impacts (or impacts along the entire value chain). Thus, the IRIS classification includes the indirect GHG emissions. This only concerns purchases of products that are high emitters of GHG such as electricity, heat and steam, transportation, materials, fossil fuels, and waste.

Thus, the development of green finance must go through better transparency of the environmental impacts generated by investment in assets or portfolios of assets.

The IRIS website also features methodological guides presenting various operational tools (e.g., SROI, input-output analysis, cost-benefit analysis, poverty footprint) to evaluate economic, social, and environmental impacts.

A central issue: standardize, simplify, compare

Thus, the development of green finance must go through better transparency of the environmental impacts generated by investing in assets or portfolios of assets. To date, no standardized method exists to clarify the boundary between green assets and conventional assets, as well as to assess the environmental impacts related to the investment of assets. Environmental reports, when produced, rely on methods that are based on specific assumptions for each.

This complicates comparisons between projects and activities.

Current initiatives such as impact investing seek to develop a set of indicators that could allow for standardized environmental assessments. Thus, the current challenge is to determine simple and understandable indicators that allow for the evaluation of the environmental impacts of investments and to distinguish green assets from conventional assets.

References

• [1] Financial instruments have already been implemented to finance these green projects. The creation of green bonds is a perfect example. However, the development of green finance raises the question of delineating the boundary between what is "green" and what is not "green." The absence of a clear boundary poses the risk of seeing certain projects financed in the green financial market to take advantage of more favorable conditions than in the traditional market, even though their environmental benefits are highly questionable (a risk known as "greenwashing"). This opportunistic behavior can undermine any effort to create a specific financial market for green projects (Berger, 2017). The sustainability of green finance depends on conducting a environmental assessment, published in environmental reports, to assess the "green" nature of projects. The environmental assessment methodology must be rigorous to avoid questioning the green aspect of projects (Riviere-Giordano, 2012). In this context, global initiatives have emerged to better integrate environmental impacts related to investment in assets or portfolios of assets. This is particularly the case for impact investments (or "impact investing").

Bibliography

• Climate Bonds Initiative, 2017, Post-Issuance reporting in the green bond market
• CGDD, 2016, Green bonds in service of the energy and ecological transition
• GIIN, 2017, Annual Impact Investor Survey
• ICMA, 2015, Green Bonds working towards a harmonized framework for impact reporting
• ICMA, [[NUM]], The Green Bond Principles [[NUM]]: Voluntary Process Guidelines for Issuing Green Bonds
• IRIS, IRIS 4.0 taxonomy
• Riviere-Giordano, G., [[NUM]], Verifying environmental information to legitimize green reporting and combat greenwashing, [[NUM]]
• Riviere-Giordano, G., 2012, Verifying environmental information to legitimize green reporting and curb greenwashing, 8^th day of the French Marketing Association, 25 p.