If an oil company borrows money to cut emissions, is that green finance? That isn’t a rhetorical question. The answer is yes. Even if they are not in traditionally 'green' sectors like wind farm engineering or energy-efficient building construction, companies are increasingly able to raise green finance very cheaply, compared to regular debt.
Earlier this month, US Steel (US:X) raised over $60m (£45m) in a green bond issuance. In November, fellow steelmaker Mitsubishi Heavy Industries sold $240m in green bonds to finance its renewables projects. Outside the commodities space, Tritax Big Box REIT (BBOX) raised £250m, with a coupon of 1.5 per cent. The REIT’s other bonds have coupons ranging from 2.6 to 3.1 per cent.
These aren’t huge amounts but many companies are dipping a toe into the space, even as questions grow over how green bonds are monitored and whether heavy polluters should have access.
A company like US Steel produces huge amounts of CO2 because of the energy needed to turn iron ore into steel. It is done for the most part using high-grade coal (coking, or metallurgical coal) in a blast furnace.
A greener option is using renewable energy to power an electric arc furnace. This is what US Steel is putting the $60m towards. This will only be a tiny proportion of the total cost of the plant, but chief executive David Burritt said it was an “important step forward”.
This is not much in the grand scheme of things, but the steel industry will eventually have to move fully over to this technology. BHP (BHP) has highlighted its scope-3 emissions from Chinese steelmakers, which far outweigh its own mining-related CO2 production (see chart), while Swedish iron ore miner LKAB last year issued its own $238m green bond to clean up its act.
Sean Kidney, chief executive at the non-profit Climate Bonds Initiative (CBI), told us he was keen to support any company trying to cut its impact on the planet, because industrial growth is not going away.
“We're a big fan, we say yes, yes yes,” Mr Kidney said. He gave an oil company raising money via green bonds to fund a solar project as an example. “They're essentially using a dirty balance sheet to finance clean, green [projects].”
The CBI certifies green bonds. It is also involved in EU climate policy and supports governments and central banks around the world in assessing climate risk.
Mr Kidney said green bonds were cheaper than non-green financings because they signified lower-risk investments.
“If a company is issuing green bonds, it's a sign they are doing something to shift their portfolio and shift their assets,” he said. “In Sweden now, if they're not issuing green bonds, you get a question asked 'is there something we need to know about this company?' in terms of their portfolio.”
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The Africa Finance Corporation’s (AFC) mandate is to encourage development on the continent.
It issued its own green bond in September. AFC executive director for financial services Sanjeev Gupta told Investors' Chronicle that securing cheaper debt was not the reason the institution had raised the 150m swiss francs (£127m) in green bonds.
“It's not a free-ride at all,” he said. “When you do raise money under the green bond definition and criteria, you also sign up advertently and inadvertently into some serious criteria, around how you will operate in future, how you will invest in future, and how you will report in future.”
AFC largely funds major infrastructure projects, like bridges and toll roads. The £127m will likely go towards a wind farm in Djibouti or the Singrobo Hydro Dam in Côte d’Ivoire.
Those two projects easily fit the definition of green. Mr Gupta said investors should be wary of forgetting development needs amid the excitement over these lower-risk bonds, however.
“We have to be a little careful of not trying to accelerate this carbon issue so fast, so hard, that you start stifling Africa's development,” he said. “Projects that meet all the criteria around which green financing can happen, there are still not that many, it's not that easy, and not that cheap [to develop them].”
Mr Kidney also brought up this issue of countries that have made little contribution to climate change seeing development slowing as investors look at cleaner options to buy into.
“We're going to need to [invest hugely in infrastructure] in emerging markets: Lagos, Sao Paulo, Jakarta,” he said. “In fact in those sort of countries – Jakarta has three subways, it needs 60 subways. There is a massive building boom...those places are becoming richer, they're building infrastructure.”
It’s those green-adjacent projects which Mr Kidney thinks should also be a focus. He said the CBI was going as far as identifying minerals that would be needed for the transition, like lithium, rare earths and copper.
“Our goal is to be able to identify mining investments that are essential for the transition, and bring them to the market,” he said.
These are bold statements from two people in distinct areas of the green bond discussion. The CBI has even written up criteria for a special ‘transition’ bond designed for polluters to raise money to cut emissions. They do have to have a strategy conforming with the Paris Agreement, so a climate laggard like Exxon-Mobil (US:XOM) won’t be raising a 1.205 per cent coupon bond just yet.
Companies that have said their strategy would fit with the Paris goals, like Glencore (GLEN), BP (BP) and Royal Dutch Shell (RDSB) are likely to be listening, however.
