Once upon a time, the Little Prince by Antoine de Saint Exupéry

Once upon a time the Small Prince

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Conditions for the emergence of a clear horizon for responsible finance?

The regulatory framework is not up to the challenge. It is being reformed in several European countries. But the road is still long and the horizon of European harmonization even longer, but there is still hope. Here are some developments that could warm it up.

National financial sector supervisors could encourage the purchase of responsible assets or the refinancing of bank credits granted for responsible investments. According to this logic, the Basel regulations could, for example, reduce the impact of their recognition as equity in balance sheets. In the Basel regulation, goodwill must be removed from regulatory capital, which makes the recognition of virtuous goodwill unattractive to banks or large investors. Supervisors would be well advised to promote virtuous goodwill through an exemption measure.

The recognition of responsible certifications associated with financial instruments could provide them with advantages allowing for a better valuation. Our civil servants will not lack the creativity to imagine the incentive tools they could use.

Supervisors could agree to harmonize green/responsible/sustainable certifications at least at the European level, for example by moving closer to the ICMA or GRI standards.

In our societies, the power to govern is political in nature. It sets the framework and orientations. Today, the piling up of administrative layers, from Europe to the territories, goes far beyond these prerogatives. The conditions for the emergence of an efficient and responsible financial market will only be met when it is driven more by liberal forces than by public infusions. The regulatory system must be the arm of the policy of liberalizing this market, whose dynamics will contribute to both budgetary savings and the achievement of sustainable development objectives.

However, by accompanying these adaptations of the European regulatory environment, the way out of the impasse of responsible financing remains the creation of a true responsible finance market.
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Confidence, the first foundation of the market, is weakened by the multiplication of certifications

To illustrate this concern, in France alone, we have the 17 green and sustainable development objectives inherited from the United Nations, to which are added a dozen national labels (GreenFin, CEE, etc.). The market itself is confusing for the bona fide financier because of the lack of coherence between the various green certifications. Each country, depending on its objectives and strategic choices, defines its own labels:

In France, nuclear power is the asset to reduce our carbon tax emissions;
In the United States, oil and shale gas are becoming green industries;
In China, coal is miraculously ecological.

Issuers of securities that have the ambition to attract international counterparties must choose a side and a label. Investors, who are mainly transnational funds, then include in their green portfolios assets that meet various, even incompatible requirements and, with a lot of hypocrisy, will populate funds that meet the only green denomination. It is once again the confidence, the main engine of the market, that is at risk by this amalgam.

We remember the origin of the 2008 crisis, which was the securitization and grouping in funds of assets with incompatible risk profiles: subprimes in this case.

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Dilemna of the ESR investor

Motivations of an ESR investor

To meet the demands of its market, the investor must integrate the strengths of its environment and ensure the compatibility of its image and its communications as perceived by its customers, employees, partners, and society in general.

Managing their image has become a strategic issue for international companies exposed to the media (often linked to brand management).

Today, the vehicle for this investment is essentially green bonds or green equities or partnerships/grants.

For the investor, it represents a financial asset combining the value of the debt or the asset and an intangible “green label”, with no value apart from the use that will be made of it in a communication.

He is “greening” his balance sheet and records this asset, but is this providing enough confidence to achieve the emergence of a dynamic market?

Outstanding green bonds have increased tenfold in less than 10 years and now exceed $400 billion. France is the world’s third largest issuer of green bonds. Compared to a traditional bond, there are few real differences in the legal terms and conditions, apart from the financial conditions of the issues (pricing) and the commitments made by the issuer regarding the use of the funds. The market for responsible assets undoubtedly exists, but it is far from meeting the needs generated by the pursuit of the SDGs.

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