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Is Brussels green bond washing?



Is the European Commission’s bid to become the world’s biggest issuer of green bonds an elaborate exercise in “green-washing”?

Commission president Ursula von der Leyen last month announced that Brussels would use its substantial new borrowing powers to issue €225bn of its €750bn recovery debt in the form of sustainable bonds. It’s a promise that would elevate Brussels to the world’s single biggest issuer in this nascent but fast-growing portion of the sovereign debt market.

Green bonds, as the name suggests, are debt instruments whose proceeds go towards funding sustainable and environmentally friendly spending. They give investors who want to help save the planet an extra degree of legal certainty that their cash will be used to those ends.

Column chart of Global green bond issuance ($bn) showing Rapid rise of green bonds

But in a new paper from the Hertie School/Delors Centre published on Monday, authors Lucas Guttenberg and Sebastian Mack warn against taking the commission’s ambitions at face value without digging into what they really mean. The pair think there’s a risk that green bonds could prove to be a ruse to smuggle in some not-very-green recovery spending if the bonds are not done right.

As it stands, the commission wants 37 per cent of the €750bn recovery fund’s loans and grants go towards environmentally-friendly investment in its member states. The green bonds are part of this goal. However, as the paper rightly points out, the true assessment of whether or not that goal will be reached has nothing to do with whether the commission raises “conventional” or “green” debt on the markets.

The first step for the recovery fund will be the submission of national plans from EU governments, which need to lay out how they want to spend the money by next April. Brussels then has the crucial task of assessing whether the plans are up to scratch — including measuring them against environmental targets. The investments will have already been approved and money earmarked before the bonds are even issued. “It is very unlikely that issuing EU bonds as green bonds will make the expenditure under the Recovery Instrument any greener”, say the authors.

But that’s not to say that the commission’s green bonds can’t be a significant moment for Brussels and debt investors. It’s just that it won’t be easy to define in law what is green or not.

EU officials say the commission will most likely rely on Brussels’ so-called “taxonomy” for green investment as the legal underpinning to define what a green bond can or can’t be used for. A proposal from a commission-hired expert group for an EU green bond standard based on the taxonomy suggests that it will be much tougher and more exclusionary that the current definition the commission is likely to rely on when approving the recovery fund plans. Right now, Brussels is working with loosely-defined metrics that state certain percentages of an investment as being green. Critics have said it is hardly robust.

This gap between methodologies is cause for concern, say Mr Guttenberg and Mr Mack, who warn that a failure to use the taxonomy would result in a markedly lower standard for EU green bonds. “Projects that will be financed under the Recovery Instrument will significantly contribute to defining which measures qualify for green bond financing in the EU. This will not only foreshadow future EU legislation on the matter; it will also likely set a global standard.”

All in all, it is likely to mean that the already highly sensitive process of policing national recovery plans (see: Frugals) has even more riding on it than just politics. Investors are watching too.

Chart du jour: a mythical trade-off

The FT’s stellar data team has produced a numbers-rich dissection of everything we know about the pandemic so far. It includes a series of visualisations of the initial outbreak and its subsequent management around the world. The chart above shows that an often cited trade-off between saving lives and saving the economy has not borne out in reality: the economies of countries with the worst Covid-19 record have suffered the most. Read it for free here.

As of Monday, stricter socialising rules and partial lockdowns will kick in across Europe, amid growing evidence that the continent is heading for a double-dip recession.

Around Europe

  • Flanders accounts for 85 per cent of total Belgian exports to the UK — and that’s discounting the fish problem. With fresh talk of a no-deal Brexit looming, the region’s businesses — from carpet makers to fruit producers — are braced for serious disruption. More from the FT’s Big Read.

  • Brussels is being urged to send independent electoral observers to the US to ensure fair elections and the peaceful transition of power if Donald Trump loses on November 3. The call has been made by leftist MEP Martin Schirdewan in a letter to the European Commission seen by Der Spiegel.

  • Cyprus’s decision to end its “golden visa” passport scheme is encouraging other countries to fill the gap, further exposing problems within the EU about so-called citizenship-for-sale schemes. Michael Peel has more. (FT)

  • The Dutch government has suffered another Covid-19 embarrassment after prime minister Mark Rutte gave permission to the country’s royal family to go on holiday in Greece days after he announced a partial lockdown. The monarch and his wife were forced to fly back after one day. (Volkskrant)

Coming up on Monday

EU chief Brexit negotiator Michel Barnier and his UK counterpart David Frost hold a phone call on Monday afternoon to discuss what’s next for after the UK government has accused the EU of abandoning the talks. (FT) Didier Seeuws, the EU Council’s top Brexit official, might be drawn on the topic around 13.00 (CET), when he takes part in a webinar hosted by the Belgian Financial Forum on Brexit and the financial services industry.

In Luxembourg, EU agriculture and fisheries ministers meet on Monday morning for a two-day council traditionally reserved for the early negotiations on annual fishing quotas. But Brexit uncertainty has put paid to all that for a few weeks at least.; @mehreenkhn

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ExxonMobil proposes carbon storage plan for Texas port




ExxonMobil is pitching a plan to capture and store carbon dioxide emitted by industrial facilities around Houston that it said could attract $100bn in investment if the Biden administration put a price on the greenhouse gas.

The oil supermajor is touting the scheme ahead of the US climate summit starting on Thursday, where President Joe Biden plans to announce more aggressive national emissions targets and hopes to spur world leaders to increase their own carbon-cutting goals.

Carbon capture and storage, or CCS, “should be a key part of the US strategy for meeting its Paris goals and included as part of the administration’s upcoming Nationally Determined Contributions”, said Joe Blommaert, head of Exxon’s low-carbon focused business, referring to the targets that countries are required to submit under the 2015 Paris climate agreement.

Oil and gas producers have sought to highlight their commitments to tackle emissions ahead of this week’s climate talks, which promise to heap pressure on the fossil fuel industry. BP pledged to stop flaring natural gas in Texas’ Permian oilfields by 2025, while EQT, the country’s largest natural gas producer, said it backed federal methane regulations.

The International Energy Agency has called carbon capture and storage, which uses chemicals to strip carbon dioxide from industrial emissions, “critical for putting energy systems around the world on a sustainable path”.

But the technology has struggled to gain traction as costs have remained persistently high. The most recent setback in the US came last year with the mothballing of the Petra Nova project, the country’s largest, which captured carbon from a Texas coal-fired power plant.

Many environmental groups have been critical of the oil and gas industry’s focus on carbon capture, arguing it is used to justify continued investment in oil and gas production and is not economical, especially as the costs of zero-carbon wind and solar power have plummeted.

Exxon said that establishing a market price on carbon — which has been attempted by a handful of US states, Texas not among them — would be important. The US government should “implement policies to enable CCS to receive direct investment and incentives similar to those available to other efforts to reduce emissions”, Blommaert said.

Exxon declined to comment on the carbon price it thought was needed to justify the investment, but said its plan would generate $100bn of investment from companies and government in the Houston region.

The company’s plans call for a hub that would capture emissions from the 50 largest emitting industrial facilities along the Houston Ship Channel, such as oil refineries and petrochemical plants, and ship the carbon by pipeline to reservoirs for storage deep under the sea floor of the Gulf of Mexico.

The project could capture and store about 100m tonnes of CO2 a year by 2040 if developed, Exxon said. That is 2 per cent of the roughly 4.6bn tonnes of US energy-related carbon emissions in 2020, according to the Energy Information Administration.

Exxon has been under intense pressure from investors, including a proxy fight with the activist hedge fund Engine No 1, to bolster its strategy for the transition to cleaner fuels. In February, it created a low-carbon business line that it said would spend about $3bn over the next five years.

Biden’s $2tn clean-energy focused infrastructure plan would expand carbon capture and storage tax credits. The administration said it would back 10 projects focused on capturing carbon from heavy industry, but it did not endorse a price on carbon.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

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European stocks hit record after strong US earnings and economic data




European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.

The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat.

This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.

The dollar, as measured against a basket of currencies, fell 0.4 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.203. Sterling also gained 0.4 per cent to €1.389.

Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.

Haven assets such as government debt remained in demand. As prices ticked up, the yield on the benchmark 10-year US Treasury note fell 0.02 percentage points to 1.557 per cent, while the yield on the equivalent German Bund slid 0.01 percentage points to minus 0.271 per cent.

Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.

The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks not have risen together for so long since 2008, according to Deutsche Bank.

Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.

“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”

“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.

In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.

Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.

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EU split over delay to decision on classing gas as green investment




The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy under its landmark classification system for investors.

Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week. The document is designed to guide those who want to direct their money into environmentally friendly investments, and help stamp out the misreporting of companies’ environmental impact, known as greenwashing. 

The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be explicitly recognised as a low-emission technology that can help the EU meet its goal of becoming a net-zero polluter by 2050. 

Now the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse. According to a draft of the text seen by the Financial Times, the commission proposed to delay the decision in order to carry out a separate assessment of how gas and nuclear “contribute to decarbonisation” to allow for a more “transparent” debate about the technologies.

But officials told the FT that some commissioners were pushing for gas to be awarded the green label now, rather than delaying the decision until later this year. 

“There are a sizeable number of voices in the commission who want gas to be included in the taxonomy,” said one official. A final decision on whether to approve the current text or delay it again for further redrafting is likely to be made on Monday.

The EU’s taxonomy is being closely watched by investors as the first big attempt by a leading regulatory body to create a labelling scheme that will help guide billions of euros of investment into green financial products.

But the process has proved divisive, as several EU governments have demanded recognition for lower-emissions energy sources such as gas. 

Coal-reliant countries such as Poland, Hungary, Romania and others that are banking on gas to help reduce their emissions do not want the labelling system to discriminate against them. France and the Czech Republic, meanwhile, are also pushing for the recognition of nuclear as a “transitional” technology in the taxonomy.

A leaked legal text seen by the FT earlier this month paved the way for gas to be considered green in some limited circumstances. That has since been removed along with other sensitive topics such as how best to classify the agricultural sector, according to the latest draft the FT has seen.

EU governments and the European Parliament have the power to block the draft if they can muster a qualified majority of countries and MEPs against it. 

Environmental groups have hailed the exercise, and urged Brussels to stick to science-based criteria in defining the thresholds for sustainable economic activity.

Luca Bonaccorsi from the Transport & Environment NGO said delaying decisions on gas and nuclear risked allowing pro-nuclear countries like France and the Czech Republic to join up with pro-gas member states “to forge an alliance that will obtain the greening and inclusion of both energy sources”.

“Should they ally, it will be impossible to resist the greenwashing of these two unsustainable energy sources,” said Bonaccorsi. 

The delays in agreeing the taxonomy have forced Brussels to abandon an attempt to use it as the basis for EU green bonds that will be issued as part of the bloc’s €800bn recovery and resilience fund. About €250bn of debt will be issued in the form of sustainable bonds over the next few years, which will make the commission one of the world’s biggest issuers of sustainable debt.

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