Jean-Michel Lalieu: Will the crisis boost investment in a more sustainable economy?

Julie Becker: I am convinced that we have no other choice and that the crisis has reinforced this feeling. Funding requirements are enormous. They will be necessary mainly on the social level and will therefore aim at measures to preserve employment, safeguard small and medium-sized enterprises, but also support for the health sector, access to care, vaccine development or investment in additional medical equipment. These needs are at the heart of the covid-19 obligations that have already been launched. Many social bonds have already been issued for billions of dollars to fight this crisis.
For the first time, the African Development Bank issued a colossal amount of $3 billion. The Development Bank of the Council of Europe has just issued $1 billion, the European Investment Bank has also issued $1 billion, while the World Bank has launched an $8 billion bond, the largest amount ever issued by a multilateral development bank. The development of the more sustainable real economy was already on the global agenda, the current crisis can only accelerate the implementation of this.

Should we not still expect a return to traditional recipes to revive the economy?

Plans have always been used to revive the economy after the great historical crises... The New Deal after the Great Depression, the Marshall Plan after World War II… Today, it is not a question of rebuilding infrastructure, but of rethinking our behaviour, especially the way we consume, taking into account the social impact and the environmental impact. We are talking about a recovery plan, but for me it must by necessity be a green or sustainable recovery plan. The recovery will have to be built in a sustainable way. I really like the European Commission’s expression, “wave renovation”.
Rather than rebuild or redress, it is really a matter of renovating, in the literal sense of the term: improving by giving a new form, taking into account the energy transition and climate change. Renovating is a review of how we act, govern, spend or invest. It is also about sourcing in a totally responsible way, consuming sustainably and producing sustainably. In fact, we need to focus on a sustainable growth model.

What can be done in practice to ensure economic activity recovers while ensuring that it is oriented towards a sustainable pattern?

At the European level, the Green Deal is already at the heart of the recovery to establish a framework that encourages sustainable investments and to avoid rescue plans being put in place without taking into account the environmental impact. Another positive sign is that 180 personalities--MEPs, ministers, business leaders, NGOs, think tanks--have recently called for a “European Alliance for a Green Revival”.
That’s a good start. Renewable energy could also accelerate the economic recovery by boosting global GDP gains by nearly $100 billion by 2050, according to a report by the International Renewable Energy Agency. Then, very concretely, at national level, it could also be assumed that financial aid is conditional or not subject to repayment if the beneficiaries review their business model and systematically integrate sustainable elements into their processes, in their supply chain or strategy. This would be the case for a baker who would buy exclusively organic flour highlighting environmentally friendly agriculture or a hairdresser who would use environmentally friendly colouring products… It is essential to integrate these environmental elements into the recovery.

"Renewable energy could also accelerate the economic recovery by boosting global GDP gains..."

Without giving the economic players time to roll out the old recipes…

Don’t give them the time! That’s why I like the renovation concept. We must not rebuild in the strict sense of the word, we must continue, but differently. This will have to be done through education and assistance in the development of sustainable technologies that will make it possible to produce sustainable products in a competitive manner.

Are green or sustainable bonds not likely to find themselves competing with sovereign debt as a result of this crisis?

There is no antagonism between the two. States have implemented massive economic support programmes, but they do not compete with sustainable obligations. Many states have already issued green bonds (Poland, France, Belgium, Chile, etc.). The risk, in my view, is not so much that green bonds will compete with sovereign bonds, but that governments will give in to the comfort of a traditional revival.

We must ensure that they will put in place the necessary framework, at the state level, to allow sovereign wealth funds to issue green, social and sustainable bonds to get the economy out of the crisis. Indeed, a sovereign fund can issue pure state debt or issue thematic debt – a green, social or sustainable bond. But in this latter case, it must make an effort of prior documentation and put in place a regulatory framework. The risk is that it will not put this framework in place so that it can act more quickly.

At the heart of the crisis, did you perceive different behaviours on the part of investors with regard to sustainable investments?

Investors who were already convinced before the crisis of the need to invest sustainably are even more convinced today. We have also seen that the crisis puts the social on the radar of major investors. Everyone is mobilising, and the major social bonds I mentioned earlier were issued when there is a great deal of volatility in the markets. This complicated context has not affected bond issues at all.

The Luxembourg Green Exchange had a very good start to the year with the introduction of more than 60 new green, social and sustainable bonds, and its activity was still very strong in March and early April. This is a very reassuring signal for the sustainable finance market. March 2020 was an exceptional month for social bond issues. They totalled $7 billion globally, while the monthly average of social bond issues in 2018-19 was $1.2 billion. In addition, all these new obligations, linked directly to the covid-19 crisis, were oversubscribed. These types of financial instruments are very much in demand. And demand is always higher than supply.

How do explain this phenomenon?

Rates are not particularly favourable, so I see a strong motivation. I imagine that, for these investors, this is a way to contribute to the fight against the health crisis. But as part of the current move towards the energy transition, institutional investors will have an obligation, in the future, at European level, to demonstrate how they take sustainable criteria (ESG) into account in their investment policy. These are great opportunities for them to do that. Faced with these new behaviours, there is a clear lack of sustainable investment products.

The stock markets literally collapsed at the beginning of this crisis. Have prices of sustainable stocks changed differently from the general trend?

In general, sustainable investments are doing much better than traditional investments. In terms of equities, a recent analysis by HSBC Bank has shown that companies with a good ESG rating that derive more than 10% of their revenues from climate projects performed better than traditional companies. Novethic has also shown that, in the face of the covid-19 crisis, sustainable business strategies pay off. So, since the beginning of the crisis, companies with the best environmental, social and governance ratings have shown greater resistance to the current economic and financial shock.

At the fund level, many studies show that ESG funds have a more positive correlation in the recession and Standard & Poor’s announced that ESG funds have performed better than the S&P 500 Index. Also, on the Luxembourg Stock Exchange, the performance of our Lux RI Fund index, like the MSCI World SRI index, compared to the traditional indices--Luxx, Cac 40 and Dax--shows that sustainable values were significantly less impacted.

"Companies with the best environmental, social and governance ratings have shown greater resistance to the current economic and financial shock."

Will the Luxembourg Stock Exchange propose new ways for green finance?

We announced in mid-April that we would waive the listing fees for social or sustainable bonds that are issued on LGX in response to the Covid-19 crisis. It is our response to the global crisis that we are experiencing today and an encouragement for issuers that are mobilising in the right direction. We have already listed such products issued by the EIB, the African Development Bank, the Council of Europe Development Bank and the World Bank. We also work continuously to raise awareness and educate investors and civil society in general. To this end, we are very soon considering the creation of a “green scholarship school”.
We are also putting in place a centralised database of data needed to understand, analyse, measure and compare one obligation to another. Finally, in terms of sustainable finance, we will continue to welcome to our platform issuers that commit to greater transparency and accountability for how they invest the funds loaned to them. Whether through green, social or sustainable bonds, or transition bonds when the market has agreed on a common definition.

What exactly are we talking about when we talk about transition obligations?

In the context of these obligations, it is no longer just the type of project financed that matters, it is the issuer’s overall strategy that is taken into account and the objectives that it has committed to achieve, whatever the project directly financed by the obligation. It is through these kinds of obligations that we will expand the range of products that we welcome on our platform, while always requiring the greatest transparency.

And what will the green exchange academy project consist of?

Many financial institutions and investors would like to contribute to sustainable development, but they do not have the necessary knowledge of market practices. Education is the key! LGX’s expertise is frequently sought and we assume our responsibility. The aim is therefore to offer tailor-made training modules on a wide range of topics related to sustainable finance, thus enabling issuers, investors, asset managers and students to develop their knowledge, create and support sustainable investment products, and help direct future capital flows towards sustainable investment projects.

We have already been offering sustainable finance training for several months to internationally recognised financial institutions, in partnership with IFC, and at the national level for banks such as BIL. We collaborate with major business schools, such as the Stockholm School of Economics, but also universities, including the University of Luxembourg. So, it’s about bringing all these initiatives together… the launch is coming!

The collapse of oil prices is not good news for those advocating for an increasingly green economy…

Indeed, this collapse makes this energy cheap at the expense of renewable energies. But the volatility of oil prices also challenges the profitability of fossil energy projects, which are becoming much less attractive. In the end, it is therefore favourable to major renewable energy projects.

According to recent analyses, oil prices are expected to rise in a post-coronavirus world. Renewables, on the other hand, will be much cheaper and easier to connect to power grids than conventional fossil-fuel power plants. Finally, we must not forget that price is no longer the only driver of consumption! In our countries, renewable energy has become very popular, while fossil fuel power plants are at the heart of the carbon emissions problem.

This article was originally published by Paperjam and was translated exclusively by Delano. The original article can be found here.