European banks’ green bond issuance ‘skewed away from clean energy investments’
European lenders are ‘failing to unleash the potential’ of green bonds, with lending heavily concentrated on building improvements, despite evidence that clean energy delivers a higher impact on emissions avoidance
Europe’s largest banks are failing to capture the full set of opportunities in green bonds, which account for a mere 1% of bank balance sheet assets, according to new research conducted by the Institute for Energy Economics and Financial Analysis, a US-based independent thinktank.
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The review, conducted among Europe’s 47 largest banks with a combined AUM of €35trn, shows that there remains significant room to allocate more to the transition, with many of Europe’s largest banks only allocating a fraction of their eligible assets to green bonds. ING, Lloyds and Banco Sabadell are cited as examples of banks which have over 75% of their eligible green asset pools unallocated.
The European green bond market is also concentrated, with 15 banks accounting for more than 75% of total issuance. Crédit Agricole, Société Générale, BNP Paribas, CaixaBank and Santander are among the largest private financiers of the transition.
While total green bond issuance is growing, with some €240bn issued by banks cited in the review, roughly 70% of issuance is currently centred on buildings, such as energy-efficient mortgages. This represents a significant loophole, as banks can earmark eligible mortgage balances to green bond proceeds, even if the funding does not directly fund new building upgrades, the authors point out.
In contrast, clean energy lending accounts for less than a third of total bond issuance, and banks are still lagging behind on capitalising on grid infrastructure buildouts, the report argues.
“This composition of allocations does not squarely address Europe’s clean transition and resilience needs,” said Kevin Leung, sustainable debt analyst, credit markets Europe, at IEEFA. “More credible green bond programmes should therefore actively align funding with a well-represented set of transition-critical assets, which have low climate risk exposure.”
When it comes to emissions reduction impact, bonds funding clean energy projects appear to be significantly more effective. They account for more than 90% of avoided emissions per year, despite representing less than a third of debt issued, the research shows.
Bank's shortcomings in funding the transition have increasingly caught the eye of long-term asset owners. Among others, Brunel Pension Partnership and thr Church of England Pension Board have been engaging with Barclays, Bank of America, Goldman Sachs and Morgan Stanley calling for disclosure of a Clean Energy Financing Ratio. Brunel has also used credit manager selection as a lever, examining how credit managers integrate ESG factors into lending decisions.
