Brown industries: the Transition Tightrope
Climate finance will fail in its mission if it continues to leave high emitting industries on its sidelines but a robust approach is necessary. During the whole of 2019, Natixis Green & Sustainable Hub has been developing an in-house methodology fed by market intelligence, investor survey and dialogue with issuers, SPOs providers and think tanks. This product-oriented methodology aims at accompanying companies in the funding of their transition or investors in identifying compelling transition opportunities.
Climate finance needs a two-leg approach: a green one, in synch with a transition one
Neither the world economy nor high-emitting companies are aligned on a below 2°C temperature increase trajectory. In fact, scientists tell us that we are heading towards a scenario well above 3°C. Our conviction is that Climate Finance will fail on its mission if it continues to leave high emitting industries on its sidelines.
We believe the transition of brown industries is a tightrope because a balance must be found between green puritanism, which condemns us to a niche and excludes the firms where the lion’s share of CO2 emissions lies, and transition leniency, which accommodates minor improvements, immaterial progression, and locks CO2 in the economy. This balance is likely to be reached through the simultaneous development of Green and Transition financing, though the latter needs definition, governance, products to ensure both its efficiency and integrity.
Natixis is committed to this transition journey
Last September, Natixis launched its Green Weighting Factor (GWF) to facilitate the transition of its own balance sheet. The GWF is an internal mechanism that adjusts analytical capital allocation based on the degree of sustainability of each financing. However, the transitioning of our balance sheet is dependent on the transition of our clients themselves, especially those from predominantly brown sectors. Being a reliable partner in this journey is therefore mission-critical for us.
During the whole of 2019, we have been collecting market intelligence and designing an in-house methodology to frame and accompany a meaningful transition. We conducted an investor survey answered by 75 participants totaling $9 tn of AuM. 75% are willing to invest in such transition. They are open to new holistic products, including KPI-linked bonds - although it is a nascent market - if trust is established regarding KPIs selection & calibration. We interviewed protagonists from investment firms, think tanks, external reviewers (SPOs providers), international organizations or unions to enlighten and strengthen our approach.
Our methodology frames a change management model, differentiates brown activities between the ones that are likely to need to transform, shrink or shut down. It identifies 5 transition levers for businesses. We tested it on several case studies from companies in the mining, cement, shipping, and oil and gas sectors (e.g. Rio Tinto, Lafarge Holcim, Maersk, Ørsted, Total, Engie, Neste). We identify eligibility pre-requisites, draw red-lines, and provide structuring guidance for transition finance instruments. We believe that KPI-linked instruments are best suited for transition because of their “skin in the game”, material, holistic and forward-looking features.