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by the Climate Bonds Team
‘Fossil fuel companies should not
be issuing green bonds because they are not green businesses.’
Varying versions of this statement
crops up often at green bond conferences and in articles. We
disagree, and here is why:
It’s use of proceeds that matter
Green bonds are about use of
proceeds. What matters is the green characteristics and
features of the projects that are being invested in, the ‘use
of proceeds’, not the balance sheet backing the bond. This is
an accepted concept in the green bond market globally (and the
first pillar of the Green Bond Principles).
The use of proceeds concept means
a fossil fuel company could issue a green bond with proceeds
allocated to qualifying green projects – offshore wind farms,
for example – and that bond will be just as green as a green
bond issued by a pure-play offshore wind company allocating
proceeds to the very same type of projects.
It’s already happening
Engie, a largely gas energy
company, has already done this with their green bond.
The oil-filled balance sheet
backing the bond does not impact the green credentials of the
bond – provided sufficiently strong management practices are
in place to ensure proceeds are properly earmarked for green
projects alone. We need trust in the process.
Now, to clarify, Climate Bonds
does not support fossil fuel companies (or any other issuer)
issuing green bonds for fossil fuel projects, such as “clean”
coal (what a brilliant piece of disinformation that term has
To meet internationally accepted
emission reduction targets, we need to shift away from fossil
fuels, and ramp up the speed of that transition to clean
energy sources dramatically.
Urgency of the climate challenge means we need the big players
The urgency of climate mitigation
means we encourage fossil fuel companies that wish to issue
green bonds for ambitious green projects and should welcome
them with open arms to the green bond market. Those fossil
fuel companies that embrace a transition from their high
carbon business model, should garner institutional investor
We need the big companies with
massive investment and capex budgets to put less into
exploration and development and more and more into money into
green projects. The urgency of the climate challenge requires
a faster re-allocation of capital.
We simply don’t have the luxury of
leaving all green investments to smaller, pure green
companies, and wait for them to slowly displace fossil fuel
companies in the energy supply mix.
We were reminded of the great
urgency of climate action this week when reviewing reports of
masses of methane – a greenhouse gas 20 times more potent than
CO2 – being released from the arctic seabed. The quantities
will only increase with a warming ocean.
Fossil fuel companies offer scale and existing internal
capabilities to green projects
The green business units or
divisions may still account for a relatively small share of
any fossil fuel company’s balance sheet, but because of the
vast scale of many fossil fuel giants, the green divisions are
surprisingly large when pitted against other players in the
renewable energy industry.
If the solar division of French
oil company Total SA solar division were separated from its
parent company, it would be one of the world’s largest solar
businesses. Similarly, if Norwegian oil giant Statoil were to
spin out its offshore wind business into a separate company,
it would be one of the 15 largest companies listed on Oslo
Stock Exchange – across all sectors.
Turning an oil tanker may be a
slow process, but when it comes to shifting a fossil fuel
company into renewable energy, it can be a surprisingly simple
shift, since many of the technical and management skills
needed are the same. Everyone in Statoil’s wind energy
department was recruited internally, as “not much is required
to retrain an oil engineer to be an offshore wind engineer”.
Dirty balance sheets backing clean energy – exactly what we need
The beauty of green bonds issued
by the fossil fuel companies to finance these divisions is
that they would be backed by the full balance sheets of these
giants. Hence investors don’t need to take any renewable
energy risk, but proceeds would be earmarked for the green
business units alone. I.e. using brown balance sheets to build
No different from banks and energy giants issuing green bonds
Still not convinced fossil fuel
companies have anything to do in the green bond market?
What about green bonds issued by
banks and large energy companies? Both banks and large energy
companies also have fossil fuel filled balance sheets, due to
their lending and investments in the area. As BankWatch
pointed out this week, the banks that created the Green Bond
Principles still have quite large fossil fuel loan portfolios.
So welcoming oil companies to issue green bonds is really no
different from accepting banks with fossil fuel exposure
issuing green bonds.
Simultaneously we can and should
continue the push to have banks and institutional investors
get out of fossil fuels.
Like encouraging good behaviour
among children while chastising bad behaviour.
The Last Word
“What exactly is wrong if Total
issues a corporate green bond to finance their solar
division-one of the world’s largest solar companies. That’s
using oil industry balance sheets and creditworthiness to
finance (and reduce the cost of capital for) solar – exactly
what we need, is it not?” – Sean Kidney, CEO Climate Bonds
——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong,
Beate Sonerud, and Justine Leigh-Bell.
The Climate Bonds Initiative
is an “investor-focused” not-for-profit promoting long-term debt
models to fund a rapid, global transition to a low-carbon
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