Analysis: France’s blockbuster green bond a potential turning point for the asset class

The French government is throwing its weight behind the green bond market in a way that could help take the asset class mainstream.

Yesterday, Responsible Investor reported that the French Treasury would issue a benchmark-sized green bond, with a roadshow starting this week. RI can now confirm that that roadshow is expected to last two weeks and cover Europe (managed by Credit Agricole) and Asia (managed by Morgan Stanley).

It is being driven by senior ministers including Minister for Ecology Ségolène Royal and Minister of the Economy, Finance and Industry, Michel Sapin.

What will follow, if market conditions allow, is a “multibillion”-euro Obligations assimilables du Trésor (OAT) – in line with the liquidity of the French government’s conventional bonds and with the potential to become the biggest green bond in the world.

That title is currently held by China’s Bank of Communications, which issued a $4.4bn deal in November. The OAT will be able to be tapped again in future, if there is demand. The French government says it hopes the bond will “develop the green bond market in France to reach critical mass”.

Some €10bn of projects have been identified as eligible for financing by French sovereign green bonds in 2017, selected by a dedicated green bond committee.

Beyond its size, and the fact it will have a long-dated tenor of between 15 and 20 years, the interesting thing about the French deal is its scope: proceeds will not be used exclusively to finance climate change mitigation – as is common with green bonds. More than half is expected to be channelled into other areas, based on the country’s overall environmental laws and commitments. The government, local authorities, state agencies, households and corporates will use the proceeds to support France’s Energy for Transition Green Growth Bill, created in 2015, as well as giving weight to its energy and ecology transition label for funds (TEEC).

The weighted average for each environmental category is expected to be: 44% for mitigation, 26% for adaptation, 21% for biodiversity and 9% for pollution control – although some projects will span more than one category.

Preferred projects will include those where state-financing is required because there is no potential for commercialisation.

Retrofitting residential properties to make them more energy efficient will be one major area of focus, but others are more unusual. Eleven examples of projects were outlined in the framework, including investment into satellites for climate and ocean observation and research into solar panels for roadways.It’s unusual for green bonds to finance non-tangible assets, in part because of the difficulties around impact reporting.

In 2015, Schneider Electric issued a green bond to finance research and development into reducing carbon emissions, but that is the only green bond to have significantly financed non-physical projects or ‘systems’.

“It’s a unique approach,” says Tanguy Claquin, head of Sustainable Banking at Credit Agricole CIB, which is also the sole structuring advisor on the deal. “It’s also a deal where France underlines that some long-term climate-related investments, for instance in science and infrastructures, can only be done by states.”

Other sectors and projects identified as potential recipients for financing under the bond include national parks, certified forestry, support for organic farming and the circular economy, the financing of energy efficient cities, alternatives to lorry use, pollution observation and support to develop marine energy.

Vigeo Eiris has provided a second-party opinion on the bond, which has not yet been made public, and the state will do an ex-post environmental analysis as part of its reporting commitments.

Many expected France to be the first to come to market with a sovereign green bond, after it confirmed plans to do so back in September. The country has been making waves in sustainable finance, introducing Article 173 in 2015, a ground breaking law requiring investors and companies to disclose on climate-related issues, and hosting COP21, at which governments from around the world agreed targets for emissions reductions.

But it was pipped to the post on green bonds by Poland, which came to market abruptly in December with a €750m deal to finance renewable energy, clean transport, agriculture, afforestation, national parks and the rehabilitation of landfill sites.

Poland has been considered by many to be an obstructive force in climate negotiations over the past five years, having opposed many green initiatives at European level, such as amendments to the carbon markets and commitments to reducing coal consumption.

“The French transaction will be a multibillion-euro deal from one of the most important countries in the Eurozone,” says Claquin. “It’s also coming from a country that has been a leader on climate change so far”.

Indeed, the government states that the green bond is part of a bid to “make Paris a leader in green finance” – a mission that will put it in competition with London, Luxembourg, Dublin, Hong Kong and others.