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Debunking the myth around sustainable investments – interview with Marcel Janssen

Marcel Janssen will be one of the speakers of the Budapest Climate Summit, to be held on 9 October 2020.

The COVID-19 pandemic has given a strong reminder about the need to strengthen the resilience of our economies. While we still don’t see the complete picture of the damages caused by the global virus outbreak, keeping up the momentum for sustainable finance can largely contribute to shifting to a more sustainable economic growth model and transitioning into a greener and low-carbon future.

CEENERGYNEWS spoke with Marcel Janssen, Partner at Dentons about the future directions of green finance and the company’s efforts to address sustainable transformation.

In order to move ahead with the sustainable finance agenda, we first have to cope with the still widely-shared misconception that investors must choose between impact (social and environmental return) and financial return.

“There is a myth about the trade-off between financial performance and impact,” starts Mr Janssen. “As institutions increasingly put pressure on their portfolio companies to improve their ESG (Environmental, Social, and Governance) performance and actively manage climate-related risks, the answer is clear.”

In its core nature, there is no trade-off between social/environmental impact and financial return, though the current market as it stands – or as it has been – is forcing an artificial choice between the two.

Mr Janssen claims that the main reason for this division is the lack of a common “cultural currency” to compare relative investments and understand the various forms of value creation.

“Taking ESG metrics into account means measuring given (long-term) risk components like climate-related physical and transition risks,” Mr Janssen explains. “Understanding and managing these risks will lead to better financial performance in the medium- to long-term.”

Integrating ESG factors into the investment portfolio can come in various ways. “For instance, experts can integrate and process ESG rating and related underlying data into fundamental analysis, a method used to evaluate a company by assessing its intrinsic value while examining related economic, financial and other qualitative and quantitative factors,” Mr Janssen points out.

As ESG metrics are now at the forefront of corporate thinking, Dentons was quick to react to assist its clients responding to and complying with sustainability-related goals and policies. Combining cross-practice and cross-sector competence, its dedicated Sustainable Finance Expert Team provides integrated and comprehensive legal and non-legal business advice, related to sustainability issues and their impact on business operations in Europe, including assessing ESG related risks and potential business opportunities.

“To be at the core of sustainability developments, we are a member of several different working groups, such as the Loan Market Association (LMA) for drafting sustainability-linked and green loan principles, or the European Leveraged Finance Association (ELFA) for drafting guidelines with regard to assessing ESG related factors and risks in underlying lending agreements and capital markets products as well as disclosure reporting,” highlights Mr Janssen.

As sustainable investments gain momentum there is also an increasing interest in financing green projects, demonstrated by the success of green bonds designed specifically to support climate-related or environmental projects.

The green bond sector now represents a liquid and diversified market which provides an effective tool for investors to meet a range of objectives, including impact and financial return.

Investor appetite for green bonds continues to grow, and emerging market issuers are also likely to benefit from increasing demand.

“Last year, emerging market green bond issuances amounted to 52 billion US dollars (43 billion euros),” points out Mr Jansen. “This is a 21 per cent increase from 2018, bringing the outstanding bonds to 168 billion US dollars (141 billion euros).”

Central and Eastern Europe is also poised for growth over the coming years, taking the first steps to jump-start its nascent green bond markets. Some countries in the region (including Poland, Slovenia the Baltic states and most recently Hungary) have already done pioneering work and issued green bonds that were successful on the market and generated interest among investors.

Power purchase agreements (PPAs) constitute another emerging market segment that has a key role in financing and developing renewable electricity projects. These are long-term contract under which a business agrees to purchase electricity directly from a renewable energy generator.

This model has clear economic and environmental potential and there are many benefits associated with PPAs such as significant carbon footprint reduction, avoiding long-term commodity price risk and of course public recognition. However, there are also additional unique risks posed by corporate PPAs.

“Corporate PPA’s may provide a hedge against increasing electricity costs, however, it may also be a disadvantage […] if it only assumes an increase in electricity prices and no decrease as we have seen last year,” says Mr Janssen adding that a PPA may become more complex if sophisticated pricing structures are agreed (that allow for price re-openers in case of significant market movements).

I expect that the commitment of corporates to use corporate PPAs will increase in the coming years. In particular, I see many opportunities in new markets as we have seen large corporates teaming up with their key suppliers to increase the share of renewable energy throughout the supply chain. This brings about very innovative transactions.

“Traditional financing models will not be sufficient to meet climate commitments as the investments are too large for utilities,” says Mr Jansen.

In order to keep up the momentum for sustainable finance regulators must also step up and push ahead with implementing policies that aim to reorient capital flows toward sustainable investments and manage financial risk stemming from climate change.

This was also the driving idea behind the EU Taxonomy Regulation a long-awaited milestone in the sustainable finance market, that has now entered into force. The taxonomy is basically the EU’s answer to the question: What is green?. It helps investors, companies, issuers and project promoters to define the environmental performance of economic activities across a wide range of industries, and sets requirements corporate activities must meet to be considered sustainable.

The taxonomy is one of the key elements of the EU Action Plan on sustainable finance. According to Mr Janssen, the unified EU classification system will definitely help to accelerate clean investments.

“If we can find new creative ways of financing, if governments can put in place strong and sustainable policy frameworks, if different actors can be aligned and accept their role in the new reality and new access to capital can be found, then the transition can be realised,” concludes Mr Janssen.

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