Brown industries: the Transition Tightrope

A research project investigating the topic of Transition in detail, more specifically that of brown industries, with the aim of providing definition, assessment methods as well as exploring relevant financing tools. 

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.

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OUR CONVICTION

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 APPROACH

Our methodology frames a change management model that differentiates brown companies into groups depending on whether they need to transform, shrink or shut down. Using case studies, we examined how the 5 transition levers we identified were actioned by  companies across the mining, cement, shipping, and oil and gas sectors (e.g. Rio Tinto, Lafarge Holcim, Maersk, Ørsted, Total, Engie, Neste). We also identified eligibility pre-requisites to be able to 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.

FORTHCOMING PUBLICATIONS (to be released in early 2020)

CHAPTER 1:
BROWN INDUSTRIES:
THE ELEPHANT IN
THE CLIMATE WAR ROOM

CHAPTER 2:
UNPACKING THE
TRANSITION BOX

CHAPTER 3:
TRANSITION LEVERS &
CASE STUDIES

CHAPTER 4:
TRANSITION
FINANCE TOOLKIT

INVESTORS' VIEWS ON TRANSITION

OUR 2019 GLOBAL INVESTOR SURVEY

In 2019, we conducted a global investor survey on the "transitioning of brown industries". It originates from the debate around the role and eligibility of high-emitting industries to climate finance and more specifically to the green bond market. It was held online between March 2019 and November 2019. We collected 75 responses from individuals working for firms totaling $9 trillion of AuM. It aimed a identifying investors' appetite and redlines when it comes to investing in brown industries' transition. That involved questioning what transition could mean, how to measure it and accordingly structure meaningful products. 

EXCLUSIVE INTERVIEWS

Julien BRAS Allianz GI

Julien BRAS

Green Bond Portfolio Manager, AllianzGI

TRANSITION ASSESSMENT METHOD IN THEIR INFANCY BUT ALREADY CRUCIAL

"It is necessary for us that the company has a medium-term transition plan. We pay high attention to this question of credibility and ambition."

 

 

Victoria BARRON

Victoria BARRON

Responsible Investment Analyst, Newton IM

PRINCIPLES-BASED RED LINES FOR AN IN-DEPTH TRANSITIONING INVESTOR DIALOGUE

 

"In our strategy, companies that are heavy emitters, which would be unprofitable under a certain carbon pricing [$140/CO2 ppm scenario], and which have no current intention of transitioning are not investable."

Yo Takatsuki AXA IM

Yo TAKATSUKI

Head of ESG Research and
Active Ownership, AXA IM

TRANSITION BOND MARKET: REGARDLESS OF FINANCING FORMATS, THE MAIN QUESTION IS WHETHER THE ISSUER IS ON THE PATH TO A CREDIBLE CLIMATE TRANSITION

"It is important that companies which are committed to meanngful decarbonisation at the corporate-level and which can adequately evidence progress should be able to secure stable and long-term fundind through the Transition Bond market."

Ladislas Smia

Ladislas SMIA

Co-Head of Responsible Investment Research, Mirova

TRANSITION REQUIRES TRANSFORMATION, NOT JUST TRIVIAL IMPROVEMENTS 

"We have to bear in mind that the longer we delay non-incremental climate action,
the tighter the remaining carbon budgets will be."

Gautier QUERU

Gautier QUERU

Fund Director, Land Degradation Neutrality Fund, Mirova

Edit Kiss

Edit KISS

Director of Development and Portfolio Management, Althelia Funds

 

NATURAL CAPITAL FINANCE ROLE IN THE TRANSITION 

"Nature-based solutions are gathering momentum and appear to be at a similar stage as renewable energies were 15 years ago.
Capital markets start to discover its unraveling potential and benefits."

 

EXPERTS INTERVIEWS

Andrew Grant

Patrick ARTUS

Chief Economist and Executive Committee Member, Natixis

LOW-CARBON TRANSITION AGENDA:
AVOIDING SOCIAL QUICKSAND 

 

"To mitigate the social effects of a CO2 tax, the most efficient solution is to redistribute explicitly the proceeds of the tax to the population, specially to the low-income people [...] in a way which is completely decorrelated from their energy consumption"

Samantha Mason

Sam MASON

Policy Officer, PCS Trade Union

UK GREENER JOBS ALLIANCE AND A JUST TRANSITION

Workers and communities should not pay the price of transition and ensure that they are protected in terms of their livelihoods and future job prospects."

Andrew Grant

Andrew GRANT

Senior Analyst, Carbon Tracker

INTENSITY TARGETS ARE FLAWED ON A PLANET THAT WORKS ON ABSOLUTES

 

"CCS and/or other means of mitigating and offsetting emissions will most likely need to be part of the solution. But there is no getting away from the need to lower fossil fuel use which will inevitably entail big changes in business models."

Manuel Adamini

Manuel ADAMINI

Head of Investor Engagement,
Climate Bonds Initiative (CBI)

WALKING THE TALK: TRANSITIONING BROWN INDUSTRIES TO GREEN

"Past green bonds issuances  have been heavily biased toward energy and buildings sectors [...] We need to activate those segments of the market that have remained absent but offer huge emissions reductions potential as well as nice yield. It’s easy to do some mapping: we’re talking cement and concrete, metals and mining, and private transport."

Christa Clapp

Christa CLAPP

Research Director, CICERO

ECONOMY-WIDE TRANSITION REQUIRES TO INCLUDE BROWN INDUSTRIES IN SUSTAINABLE FINANCE

"We need financing for all Shades of Green to solve the climate challenge. Light Green can apply to issuers-in-transition that are making emission reductions with good governance, such as climate targets and procedures to measure against those targets."

Alain Quinet SNCF Réseau

Alain QUINET

Deputy CEO, SNCF Réseau

A SHADOW PRICE OF CARBON FOR A TIMELY AND ORDERLY TRANSITION

Today, every economic sector must be tackled. A deep decarbonization of the economy requires to enlarge the perimeter of public and private actions to fight climate change."

Guillaume Neveux I Care & Consult

Guillaume NEVEUX

Founding Partner,
I Care & Consult

2°C ALIGNMENT: RISK & OPPORTUNITIES ANALYSIS BASED ON A BOTTOM-UP APPPROACH

 

While most companies are not yet 2°C aligned, we find companies’ awareness is arising.
The notion of pathway and dynamic is key: climate transition will not occur overnight but in a “transition window” of 10-20 years."

 

"THE INSTRUMENTAL ROLE OF INDUSTRY DECARBONIZATION IN IEA'S SUSTAINABLE DEVELOPMENT SCENARIO"

Andreas Schroeder

Andreas SCHROEDER

Responsible for the Industry section of the IEA's World Energy Outlook, IEA

Tiffany Vass

Tiffany Vass

Industry researcher in the Energy Technology Policy Division, IEA

Laura Cozzi IEA

Laura COZZI

Chief Energy Modeller, IEA

"The majority of the overall emissions savings (i.e. process and energy-related) are from the production of cement, iron and steel and petrochemicals; energy-intensive industries that together account for around two-thirds of total industry sector CO2 emissions today."

 

CONTACT US

Cédric Merle

Green & Sustainable Finance Expert,

 Green & Sustainable Hub, Natixis

Orith Azoulay

Global Head of Green & Sustainable Finance

Managing Director,

Natixis

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