Banks are likely to create new green financial products, according to a report from S&P on Monday.
Banks are already involved in the European Union’s Energy-Efficient Mortgage Action Plan. The initiative aims to build data to support the view that the probability of default and loss given default on a green mortgage are lower than on a standard mortgage.
In this way, the capital charge on a green mortgage should be lower relative to a standard mortgage. This would enable lenders to pass on the lower cost of financing a green property loan relative to a vanilla loan.
According to S&P, the refurbishment of properties to reduce their carbon intensity is particularly crucial in Italy, where the building stock is on average among the oldest in Europe.
Financing for SMEs
The Italian government could also help facilitate green growth by responding to market calls for a consistent sustainability strategy that informs policy, “particularly for increasing access to green finance for SMEs”, said S&P.
In 2015, Italian parliamentarians passed the Green Act, a wide-reaching national strategy for sustainable development.
The government a year later laid out a roadmap for increasing flows of sustainable finance, where it identified 18 options to scale up green finance flow including “identifying innovative ways to increase access to green finance for SMEs”, S&P noted.
SMEs are the linchpin of Italy’s private sector, and any efforts to grow Italy’s green economy would need to involve increasing awareness and access to capital for the country’s four million SMEs.
In this respect, the European Secured Note has a potentially important role to play.
The dual recourse instrument is designed to fund SMEs but has yet to really get off the ground. Even so, it may yet prove a viable funding tool for Italy’s smaller banks to finance their SME loan books, if only for repo funding purposes.
But given the investor diversification that a potential green Italian ESN would offer relative to a vanilla ESN, issuers might actually be in a position to publicly distribute such deals to
For green investors, green ESNs could offer a convincing spread pick-up relative to green covered bonds. Being secured, they would probably offer issuers much cheaper funding than senior unsecured debt.
As investors would also have the benefit of knowing exactly what was being financed, they would have certainty over the greenness of assets. In a sense, green ESNs, therefore, have the capacity to leapfrog vanilla ESNs.
Major growth potential
To date, Italian green supply has mostly been dominated by corporates. But, according to S&P, Italy has also entered the green loan market and the agency expects this area “will be a major area of growth for the country given the reliance by SMEs on bank funding”.
However, green finance for SMEs faces numerous obstacles. Specifically, there are a limited set of green financing products available.
Compounding these challenges is a lack of awareness among SMEs themselves about the benefits of green investments, including the value of improved climate resilience.
Italy's new coalition government is working on a national strategy that will stress the development of the green economy and help the country to reduce carbon emissions by at least 80% from 1990 levels by 2030, in line with the EU's
According to a survey conducted by Osservatorio
In 2007, Italy became one of the first countries to introduce transparency regulation for all socially responsible investment (SRI) products. Italy was also ahead of other countries when in 2012 it set a new regulation requiring pension funds to disclose how they have integrated environmental, social, and governance (ESG) issues into their investment policies.
In March 2017, Italy’s stock exchange Borsa Italiana launched a green and social bond listing, opening a new segment on its ExtraMOT PRO market dedicated to green and social bonds.
Niche but interest is growing
Yet despite all the promise of growth and the impression that green financing is beginning to take root, the market remains a niche product.
Investors and issuers taking part in S&P’s recent Sustainable Finance & Investments conference in Milan noted the demonstrably increased interest in green and ESG finance across the country and discussed what more needed to be done to turn this interest into action.
According to participants at the roundtable, about 40%-50% of institutional investors now ask about ESG when making their investment choices, compared with just 20% a few years ago.
Investors made it clear they would appreciate a taxonomy to facilitate choosing sustainable investments. Recognising this need, the EU is in the process of developing such a green classification system.
Corporate issuers participating in the roundtable made the point that discussing green finance or issuance only makes sense if it is backed by a consistent investment strategy.
In their view, the involvement of top management was a prerequisite to ensuring that sustainability was built into business
They also stressed the importance of governance being aligned with a company's strategy. The evidence suggests good governance can be found in good reporting of sustainability by companies.
Reporting has become key for investors to build out their so-called “reporting portfolio”, which can then be used by asset managers when selecting their investments.