April 2021
abstract
Responsabilité & Environnement
Quelle finance pour une économie durable ?
Issue editor:
Ivar EKELAND
Issue 102
Firms
Finance at a time of reckoning with planetary limits
By Ivar EKELAND
Mathématicien, spécialiste d’économie et de finance
Economics and other disciplines use the key concepts of finance ( e.g. , yields, discount rates) but with different meanings. Much effort has been made to clear up this source of misunderstanding by, for instance, defining an ‟environmental interest rate” or introducing ‟carbon bookkeeping”. Indicators have thus been designed for overseeing the activities of firms and translating climate-related objectives into business activities. Once a climate policy will have been clearly established, the instruments for financing it will not be lacking. Although nation-states set climate objectives, many shortcomings can be observed, in particular the durable subsidies allotted to fossil fuels.
The dawning awareness of climate risks and their systemic dimension
By Laurent CLERC
Directeur d’étude et d’analyse des risques à l’Autorité de contrôle prudentiel et de résolution
Collective awareness on the systemic nature of climate change is recent. It has notably emerged in the context of international meetings under the auspices of the United Nations (UN) and reports of the Intergovernmental Panel on Climate Change (IPCC), which have recognized human responsibility. It took a longer time in the economic and financial sector where, despite an acceleration in the mobilization of authorities and stakeholders since 2015, financial institutions are struggling to take into account this systemic nature of climate change and to integrate it into their framework for managing financial and extra-financial risks. A change in financial regulation is also necessary to accelerate this consideration.
Les risques financiers
Economic and financial models put to the test of the environmental polycrisis
By Gaël GIRAUD
Directeur de recherche au CNRS, fondateur du Programme de justice environnementale à l’Université de Georgetown
Why are most of the conventional models that take account of both the economy and climate incapable of apprehending the real relations between these two? After answering this question, the ways are suggested for eluding the theoretical and practical blockages of neoclassical models. A minimum of realism forces us to take account altogether of global warming, the destruction of biodiversity and the scarcity of nonrenewable resources.
Financial tools for more resilience
By Stéphane HALLEGATTE
Banque mondiale
Given the ever rising costs of natural catastrophes, risk reduction is a welcome priority. It is, however, impossible to fully prevent the damage wrought by catastrophes: there will always be roads that have been flooded out or homes damaged by earthquakes. To lower as much as possible a catastrophe’s impact, the capacity of people, communities, firms, regions and countries to withstand shocks has to be augmented. In other words, resilience is indispensable for risk-reduction. A well-filled financial toolkit for improving resilience is reviewed while paying special attention to the situation of the poorest countries and populations. Emphasis is placed on: the need to have a set of complementary solutions for covering different needs; the key role of welfare systems in helping the poorest and backing up other forms of insurance; and the importance of incorporating risks in budgetary tools and governmental processes.
Risks related to the energy transition and failed assets
By Michel LEPETIT
Chercheur associé au LIED, vice-président de The Shift Project
Applying ‟failed asset”, a core concept in ‟green finance”, to the production of energy is worthless. The transition toward a low-carbon economy is supposed to reveal the risks of investing in assets too exposed to fossil fuels. In the thermal coal industry however, the theory of failed assets seems to have overlooked the international treaty that guarantees energy investments. With regard to petroleum assets, it does not take account of the major impact of interventions by central banks over the past decade. These two examples illustrate the underestimation of the crucial, systemic part played by energy in macroeconomics.
Legal uncertainty and risks to reputations
By Béatrice PARANCE
Professeure agrégée de droit à l’Université UPL Paris 8 Vincennes-Saint-Denis
The pressure exerted by NGOs and ‟civil society” on investors is mounting with the goal of making the latter assume their societal responsibility. It is exerted upstream in the process for making investment decisions by playing on the investor’s reputation through ever more actions that target stockholders and invoke the obligation of accountability. In this sense, the EU’s fair disclosure regulation of November 2019 requires investors to account for the risks that, related to environmental, social and corporate governance, are likely to have negative effect on investments. Downstream in this decisions-making process, lawsuits based on liability are increasing with the aim of holding investors accountable for the impact of their investments on climate change. The legal grounds for such litigation in France can be the ‟obligation of vigilance” foreseen by an act of law in 2017. This obligation might be adopted Europewide in the very near future.
How the funding model war has formatted the environmental transition
By Arnaud BERGER
Associé au sein de la société Mob-Ion, en charge des partenariats
The collapse of the profit-earning capacity of fossil fuels is driving the development of renewables and energy storage (hydrogen batteries and fuel cells). After thirty years of efforts, Europe is finally tending toward ‟energy sovereignty” as it backs funding for climate-related programs. The choice of a banking model is more than a funding tool. The current business model has already been formatted by the choice between the Anglo-American approach and the still prevalent model in Europe of intermediation via banks. Depending on the model chosen, the effects on purchasing power and on jobs, as well as the expected benefits for society, will be quite different. In Europe, these two funding models have been contending with each other for more than forty years, even as the Anglo-American capital markets model has been gaining ground. This situation recurrently raises the question of how to exercise control over equity in European firms and manage the risks of a switch from a dependency on petroleum to a dependency on foreign capital.
Le rôle de l’État
How to reduce environmentally harmful subsidies?
By Guillaume SAINTENY
AgroParisTech et Académie d’agriculture de France
The question of subsidies and tax credits that damage the environment has received less attention than the creation of new environmental taxes. Such public ‟subsidies” amount to several hundreds of billions of dollars before taxes but several thousands of billions after taxes. They have many disadvantages. Not only do their costs weigh heavily on government budgets, such subsidies also underprice resources and inhibit the saving of energy, thus impeding the energy and environmental transitions or even hindering the progress of technology. Furthermore, they are inefficient and socially regressive, and have negative effects on health and the balance of trade. The OECD’s ‟Green Budgeting” has renewed interest in this topic.
Adapting budgetary governance to environmental requirements
By Alain GRANDJEAN
Co-fondateur et associé de Carbone 4 et président de la Fondation Nicolas Hulot
The COVID-19 pandemic has sidelined budgetary rules in Europe and served to justify major simulus plans with part of the funds earmarked for the fight against climate change. This imposes heavy, recurrent public expenditures over a decade or more that are incompatible with a fast return to the status quo ante (which would be dangerous macroeconomically). Nonetheless, budgetary and monetary cooperation is necessary within the European Union to avoid economic, political and social distortions. The rules defined more than thirty years ago have to be adjusted to this situation, while limiting the inevitable short-term social crisis and averting a public debt crisis. Responses are proposed to these issues related to the future of Europe and the EU’s capacity for handling the many problems facing it.
The stakes in the European taxonomy for green finance
By Anna CRETI
Université Paris Dauphine-PSL
The main items of a ‟green taxonomy” are described: the set of criteria about the activities consistent with attaining carbon neutrality. This taxonomy represents the first attempt in Europe to make a granular classification (using NACE codes) of the sectors that emit CO2. Emphasis is laid on the need, as part of this evolving process, to make the principles applicable and concrete and, too, to coordinate them with European policies for ‟decarbonizing” the economy.
A mini-toll on cashless payments for financing the transition toward a sustainable economy
By Jean-Charles ROCHET
Professeur d’Économie bancaire, GSEM, Université de Genève et École d’économie de Toulouse (TSE)
The new tax, proposed herein, would bring in enough revenue to alleviate taxes on labor while financing the energy transition. It would set up a mini-toll for all cashless flows between the bank accounts of French taxpayers, both private persons and firms. Since these flows represent more than 100 times the GDP, a toll at a very low rate would yield substantial revenue, even after taking into account the contraction of the volume of cashless payments that would result. Levying this tax, which would be hard to dodge, would come at a low cost. Its uniform rate and the absence of exemptions would make it transparent and easier to accept. The levy would be progressive, since the wealthiest households make many more cashless payments.
Nouveaux instruments financiers
Green bonds: The king is naked
By Julien LEFOURNIER
Consultant en finances
As internalizing a negative externality amounts to paying an additional cost, the usefulness of the bond is based on the assumption that this additional cost would be, at least partially, transferred to bondholders ‒ The buyers of green bonds ‒ thus making finance contribute to the common good. This assumption is unrealistic. We show this in a simple way by explaining how the mechanics of the primary bond market forbid it when professional investors participate in the placement of green bonds. For those (non green) investors, the fact that the green bond is not contractually different from a traditional bond prevents them from giving it any singular value. This in turn necessarily means that the rate of return on a green bond cannot be lower than that on a traditional bond (all other things being equal). Finally, the green bond cannot constitute an incentive to carry out a green project. among firms and project leaders, carbon offsets have to undergo a change. Their uses must be better regulated, and the perception of them has to be updated so that they are seen to be what they really are: a means toward carbon neutrality worldwide.
From carbon offsets to the funding of carbon neutrality
By Renaud BETTIN
Lead Climate Expert chez Sweep
Following the avalanche of commitments made by big firms to eventually become ‟carbon neutral”, the market of carbon offsets, till then known only to insiders, started taking off. A growing number of private parties are voluntarily using these offsets, which were set up under the Kyoto Protocol and are now being enshrined in carbon strategies. Far from offering incentives for reducing CO2 at its origin, this procedure is, nonetheless, being used to finance the transition toward low-carbon development on the planet. To build confidence among firms and project leaders, carbon offsets have to undergo a change. Their uses must be better regulated, and the perception of them has to be updated so that they are seen to be what they really are: a means toward carbon neutrality worldwide.
Biodiversity mitigation, an economic instrument at the service of the public interest
By Jean-Christophe BENOÎT, Antoine CADI, Sophie MÉNARD
CDC Biodiversité
For the first time in French legislation, an act of law in 1976 reflected a progressive approach to programs of rural planning. Projects of development have to try to avoid having a negative impact on the environment and then projects must be technically adjusted to reduce the unavoidable negative effects. Any remaining negative effects are to be offset by actions guided by the objective of not lessening biodiversity. Though bolstered by a 2016 law on biodiversity, this approach has been poorly adopted. Its successful application depends not only on the interpretation that local authorities make of national regulatory texts but also on the existence of controls and sanctions. To move ahead, the principle of avoiding-reducing-offsetting adopted for economic and financial leverage seems to allow for a fairer application of biodiversity mitigation for the sake of the public interest.
Measuring biodiversity as a tool for reaching global objectives
By Joshua BERGER, Antoine CADI, Sophie MÉNARD, Antoine VALLIER
CDC Biodiversité
The current multidimensional crisis emphasizes even more, were it necessary, the urgency of fighting against the collapse of biodiversity. The major causes must be tackled in order to advance toward a more sustainable society. For this, firms need targets, scenarios and tools. They also need credible partners for following up on the implementation of their strategies in favor of biodiversity. The tools needed to measure the ‟biodiversity footprint” are being designed along with actions for actually reducing the pressure on biodiversity. Among these tools is the ‟global biodiversity score” (GBS) for measuring the biodiversity footprint and reaching the global objective of reversing the downward trend. The financial community can play a key role in this by choosing the projects and investments that have the most positive effects on nature.
Corporate environmental and social policies: How to dialog with investors?
By Édith GINGLINGER
Professeure à l’Université Paris-Dauphine ‒ PSL
Institutional investors’ investment policies increasingly take environmental and social issues into account. This review of research on the leverage that investors have for making the firms in their portfolios turn toward decisions aligned with environmental and social objectives points to three possibilities: investors can place their confidence in corporate boards of administration for improving the performance in relation to these objectives; they can have direct exchange with corporate leaders; or they can submit resolutions for a vote at shareholder meetings.
Bookkeeping and the environment: Accounting differently
By Frédérique DÉJEAN
Professeure en management à l’Université Paris Dauphine ‒ PSL
What is at stake in the relation between bookkeeping and the environment? Bookkeeping at the service of sustainable development or for measuring what really counts? Can and should we set a value on ‟natural capital”? Why and how to account differently? What are the advantages of an ‟integrated” accountancy? What is the place for extra-financial information and performance? What are the effects of assessing a firm’s performance?
BNP Paribas and green finance
By Sébastien SOLEILLE
Responsable Transition énergétique et environnement, BNP Paribas
In the past few years, green finance has become a major issue for several players in finance. It should help BNP Paribas bring its business activities in line with the climate objectives set by the Paris Agreement and enable the firm to work toward the UN’s sustainable development goals. To be a leader in sustainable finance, BNP Parisbas is using levers for: aligning its loan portfolio with the Agreement; proposing ‟green” financial products and services to all its customers (individuals, investors and firms); orienting financial flows toward activities related to the energy and environmental transitions; and deepening the dialog, with its clients and the firms in which it invests, about their strategies and actions in pursuit of these transitions.
Economic leverage for biodiversity
By Laurent PIERMONT
Ingénieur agronome et docteur en écologie
Reaching the objectives set for the conservation of biodiversity means integrating this issue in the economy and finding leverage for creating value and, as a supplement to public actions, obtain funding from the private sector, which has the technical and financial means to provide it. The pertinent methods for actions with (and not against) nature are discussed that could come up with nature-based solutions. Besides the already available levers and tools, attention is paid to the conditions for creating value that would allow for financing actions in favor of biodiversity. Contrary to what is observed in climate-related matters, the results of these actions would bare raise the funding needed.
Paris, I love you! When finance embraces climate goals
By Stéphane VOISIN, Julie RAYNAUD, Peter TANKOV
Institut Louis Bachelier
A key factor for the success of the Paris Agreement and its application is ‟alignment”, a concept referring to the methods that a growing number of financial institutions use to evaluate the compatibility of their portfolios with the Agreement’s objectives. Intended for informing investors and individuals about the ‟climate performance” of their investments and savings, these methods should be handled prudently given the many variants of the underlying hypotheses and a cumulation of uncertainty (which can affect calculations and results, as shown in the ILB Alignment Cookbook). These not very comparable methods can be used for the purpose of communications (about the coherence of a managerial strategy that makes a climate commitment or about a portfolio’s ‟implicit temperature”), but they are not fit as indicators for managing climate risks. The accompanying claims about a positive impact are subject to discussion, even if the dynamics of ‟alignment” on a large scale may lead to decarbonizing the real economy. This is precisely the objective assigned to it in the Paris Agreement.
COVID-19 and CO2: Can finance contribute to a ‟convergence in combat”?
By Christian de PERTHUIS
Université Paris Dauphine ‒ PSL
In 2020, the fight against the circulation of the virus cleared the sky and lowered CO2 emissions for the first time ever. The quest for more resilience in handling the pandemic has reinforced climate-related actions. Is this convergence a happenstance that will disappear as the viral load dwindles? Under the shock of COVID-19, societies might prime the pump for a more lasting shift toward resilience thanks to a convergence between the combat against the circulation of viruses and the fight against the proliferation of CO2. This discussion of how this convergence can be organized in the medium and long terms indicates how finance could make a genuine contribution.