Banks are the agents of change
The United Nations and the European Union have introduced prevailing frameworks and targets to boost development in a sustainable manner.
Highly supportive and at the forefront of tackling this challenge, Societe Generale stands by its clients to help them have a positive impact on society at large through an offering that harmonises a long-standing environmental and social expertise.
As far back as 1992, Financial Institutions forged partnerships with the United Nations predicated on sustainability, now an area of finance accepted as essential in the transition to sustainable and responsible financing. Twenty-five years later, the prevailing framework for green financing and climate is the UN 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals. We have made specific commitments as a Group in terms of how we are going to contribute and stop doing certain things that are not contributing to these goals.
On October 23, 2019, Societe Generale was a signatory to the latest international legislation, the UN’s Principles for Responsible Banking, a charter that followed close on the heels of the Poseidon Principles, an initiative co-founded by Societe Generale and created by ship financiers to tie lending to emission reduction targets created by the International Maritime Organisation.
We are ahead of the pack as an agent of change, in business lines but also at the top management level with our Board and Chief Executive Officer very much putting sustainable finance at the heart of the strategy of the Group.
The European Union has also introduced important commitments and set targets for climate and energy, with the stated aim of cutting greenhouse gases by 40% from 1990 figures by 2050. A requirement for one third of energy to be derived from renewables is in the final mix: we are now at 15% and the maximum required to adapt to this target is reckoned to be almost €300 billion per year.
There are now numbers being put in front of this transition and a need for a far more inclusive economy, based on impact, which has been identified as a deficit of US$5 trillion to $7 trillion per year to transform the economy to a more sustainable path. Three years ago, we committed to contribute €100 billion to financing the energy transition between 2016 and 2020, including €85 billion of green bonds. We are already ahead of that target, in terms of accruals, and we will above it by 2020. We also made a commitment to provide €15 billion to renewable energy, where we are at €20 billion. In September the Group committed to raising a further €120 billion between 2019 and 2023 for the energy transition, comprising €100 billion of sustainable bond issues and €20 billion dedicated to renewable energy through advisory and financing. Furthermore, over the last two years, we have doubled our funding of renewable energy to more than €23 billion.
The EU’s latest initiative is defining clean energy and sustainability by means of a taxonomy project that aims to define sectors, standards and doing business in a way that is compatible with the objective of sustainable finance, specifically energy.
There is a debate on how to put in place different measures that could further stimulate activity especially with green bonds, but there are other green financing vehicles. For green bond issuance, the bank is ranked in the top five globally and in Europe, relying on a team of specialists in green finance diffused across the bank who can go along to client meetings. We also have sustainability-linked loans and revolving credit facilities, where the interest rate can be lower if the borrower fulfils certain sustainability goals, which creates a strong incentive.
More complex incentives are also being considered to make sure that green bonds are preferred vehicles for raising finance, providing, for instance, tax incentives (at the borrower or investor level), or eventually letting borrowers depreciate infrastructure that serves as an underlyings to green issuance. Furthermore, tax shields are being considered, as is allowing banks to assign less capital towards projects that comply with the taxonomy. This initiative is not yet there: why on earth would you put less capital in a green project, because capital should be estimated on the probability of default and the resulting losses, but you could argue that green projects are less likely to default, because you are not going to get fined and reputational risks attached to it.
Further advances have been pioneered by the bank in investment products that have sustainable assets as underlyings, whereby it finances sustainable assets that it keeps as loans on the balance sheet and then issuing notes indexed to those assets, giving investors access to those projects.
Positive Impact Finance is a speciality of Societe Generale, promoted by UNEP-FI and probably the most sophisticated way to look at a project’s contribution to the sustainable economy. In 2018, we financed €12 billion of positive impact projects and lead managed €18 billion of green and sustainability bonds. We are in the founding group and one of the codeshares of these initiatives globally.