The ecological transition subjects the financial systems to a triple challenge: climate change and its effects first take place in the very long term with regard to the decision-making horizon of most financial actors – it is “the tragedy of horizon” highlighted by economist and banker Mark Carney in 2015.
Then, the systemic dimension of climate risk is likely to affect the overall functioning of the financial system as during the 2008 financial crisis.
Finally, the climate transition requires considerable investment, estimated at around 2% to 3% of GDP each year according to the United Nations. This raises the question of their financing and of the actors behind them.
Missions entrusted by the State
Public financial intermediaries (PFIs) – better known as public or development banks – have a strategic role to play in addressing these challenges. As economists have shown, they play an essential role in many countries for their ability to finance large-scale, long-term projects that generate positive externalities.
Their missions are entrusted to them by the State and consist in particular in carrying out a counter-cyclical financing policy in a Keynesian logic of stabilization, and in contributing to the financing of risky operations and innovative companies following a Schumpeterian logic of support for ‘innovation.
Finally, insofar as the climate transition requires massive financing that banks and private investors cannot achieve alone, they also have a strategic role as “catalysts” of financing.
According to the economist Mazzucato, these public financial actors are part of the levers available to the State to fulfill its functions of insurer and risk taker, among other tools such as financial and prudential regulation, and ecological planning.
Historical analysis shows that these entities have accompanied our economic development. In the 19thand century, the State created public financial institutions such as the Caisse des Dépôts to finance large-scale projects.
In the post-war period, public banks were deployed at different geographical scales, like the World Bank for Reconstruction and Development, founded under the Bretton Woods Agreements of 1944, and the European Investment Bank (EIB) which was established in 1958.
From the 1970s, neoliberal policies, leading to the privatization of the banking system, led to the decline of public banks. Until the 2008 financial crisis and ecological imperatives gave them a strategic role, for example through the “European Green Deal” launched in September 2019.
Today, however, the situation appears paradoxical. Despite their official recognition, these actors are not the subject of a clear and consensual definition and their diversity is poorly listed.
In the absence of a common understanding, we carried out an analysis based on several criteria, including public ownership and control, the existence of missions of general interest, the nature of the resources and financing instruments and the types borrowers and targeted sectors.
By combining the first two criteria, public financial intermediaries can be defined as any financial institution that at least one State or public authority owns or controls with an explicit legal mandate to achieve more or less broad socio-economic objectives in a region. or a sector.
Taking into account a third criterion related to the nature of the financing instruments makes it possible to distinguish two main categories of IFP:
public banks, which grant loans, are made up of multilateral development banks (MDBs) like the EIB and national development banks (NDBs) like the German bank KfW, green investment banks such as the New York Green Bank, commercial banks under public control.
public investment funds, which buy securities, include public pension funds, sovereign wealth funds and public university endowments.
PFIs are not a homogeneous group of institutions like their private counterparts. The weight of public investment funds (about 25 trillion dollars) is much higher than that of public banks (6.5 trillion). The assets under management of PFIs are much lower than those of institutional investors (90 trillion) and large private banks (95 trillion).
In terms of geography, private/public funds and private banks are the prerogative of developed countries, while public banks are mainly found in middle-income countries. Green banks mainly concern developed countries.
Regarding their resources, public funds have fewer short-term liquidity constraints related to their long-term savings than commercial banks and banks. mutual fund. Finally, most public banks benefit from the state guarantee to obtain cheap resources.
A belated and uneven climate commitment
With regard to their missions, the commitment of IFPs to the fight against climate change is quite uneven. Regarding public banks, it appears to be a priority for some BNDs when the MDBs rather prioritize the fight against poverty, hunger, health and education. Only the green banks have a mandate exclusively dedicated to the environment: their field of intervention is however limited because they are local and small in size. For their part, public funds are not explicitly tasked with the climate, but they have been gradually encouraged to integrate environmental, social and governance (ESG) criteria following international initiatives (PRI in 2006, COP21 in 2015).
An inventory of the climate-related investment policies of leading European IFPs reveals an uneven but also belated commitment. He is old on the Sustainable Development Goals (SDGs) for KfW (1980’s) and the Norwegian sovereign wealth fund in responsible investment (2004) and rather recent for the Dutch pension fund ABP and the University of Oxford and the EIB with climate plan (2015).
Overall, PFIs display more or less quantified investment objectives and make declarations of intent. For example, the EIB has pledged to devote 25% of its investments to mitigating climate change over the period 2015-2020. And the ABP fund announced the objective of reducing the carbon footprint of its portfolio to 30%.
Discrepancies between declarations and actual practices_
Comparing declarations of intent with practices, however, some discrepancies emerge.
Indeed, if the Norwegian sovereign wealth fund has a responsible investment policy, it still continues to exploit oil fields, particularly in the Arctic. Likewise, he has a substantial portfolio in the oil and gas sector at the end of 2018 – $37 billion. As for disposals of carbon assets, they only concern oil companies that do not invest in renewable energies: oil majors such as Total, BP or ExxonMobil are therefore spared.
The EIB for its part continued, in parallel with its green investments, to lend 13.5 billion euros to activities linked to fossil fuels. With around 25 billion euros, the transport sector also dominated the volume of loans from 2015 to 2018, the same volume as energy efficiency and renewable energies combined.
In the end, one of the major obstacles facing the analysis of the climate investment strategies of European PFIs is the lack of transparency. The implementation of the commitments made since 2015 is in fact not verifiable, due to the voluntary and optional nature of the publication of financial and extra-financial information on green investments compared to those of the fossil sectors, on disposals of assets or shareholder engagement…
Several avenues are possible to strengthen the action of IFPs in terms of climate. Certain recommendations of the Task Force on Climate Related Financial Disclosures could be made mandatory and their implementation made public in the annual reports of these institutions in order to improve transparency. Furthermore, central banks could have an important role in accelerating the financing of the energy transition by refinancing public banks, which would make them less dependent on the markets.