Fintechs democratize green bonds for all companies

Fintechs democratize green bonds for all companies

The trend towards local and green consumption has become much stronger, especially since the Covid-19 crisis. Agriculture is recognised as essential and is regaining its colours. It must align itself with the ever-changing expectations of customers and turn to environmentally friendly production methods.

Indeed, in 2019, agriculture was the second largest source of greenhouse gas (GHG) emissions. Its emissions alone accounted for 20% of France’s total carbon footprint. All GHG emissions contribute significantly to climate change. We are already witnessing a series of disasters in our environment: pollution, famine, species extinction, fires, heat waves, floods, etc. (see the IPCC report of August 2021).

Solutions exist, starting with the redirection of financial flows towards investments that improve the ecological impact or reduce the carbon footprint of companies. This is reflected in the explosion of green bonds.

Green bonds are bonds issued on the financial markets by large companies, international organisations or local authorities. They aim to finance projects related to the ecological transition, such as the development of new, less polluting production chains in the agri-food sector.

Unfortunately today, in the case of the agri-food sector, green bonds are not accessible. The essential links of these sectors, producers, farmers and small agri-food companies, mainly VSEs or SMEs, do not meet the criteria for issuing green bonds due to their small size. 

Regulation for the benefit of the environment

The European Commission has drawn up a strategy based on a climate neutrality objective for 2050. It encourages companies to invest in projects that reduce their carbon footprint.

Elements of the draft agreement include directing capital flows to responsible investments, integrating sustainability into risk management, and ensuring transparency and a long-term view in financing sustainable projects.

This regulatory framework provides opportunities for local projects. It thus makes it possible to support the ecological transition at the territorial level, by rewarding behaviour that goes beyond usual practices.

 In order to meet these objectives, the Ministry of Ecological Transition has created the Low Carbon Label (LBC). This is a system for certifying agricultural or forestry projects. The label rewards actors in the ecological transition who reduce their greenhouse gas emissions, for example.

Green bonds, a lever for the ecological transition 

Green bonds are one of the new classes of bond debt. There is a growing demand from financiers and a diversification of issuers in this market. In France, a large number of green bonds are already in circulation, and this number is expected to increase significantly in view of the urgent need to finance sustainable development projects in our companies. 

Today, green bonds are mainly issued by large companies in the financial markets. Several fintechs are working to make green bonds accessible even to small companies’ projects and for different types of financiers.

Faced with the need to ‘make transparent’ the environmental impact of projects for investors, fintechs are offering verification solutions. They collect information provided by issuers and by external certifiers, calculating, for example, the carbon footprint. This information can be shared with investors to ensure transparency of investments. 

Any investment project must be profitable for both the investor and the issuer. The objective of the green bond issuer is to attract investors and to meet the requirements of Corporate Social Responsibility (CSR). With the advent of these calculation tools, financiers can benefit from a better interest rate throughout the project and issuers are rewarded for their efforts.

The limits of a high potential strategy

Green bonds are subscribed to by companies wishing to offset their emissions. The calculation of emissions (quotas) is based on the evolution of a carbon footprint between the greenhouse gases emitted (CO2, NO 2, etc.) and those retained through the planting of trees or hedges, for example. 

However, the selection criteria do not include companies that are already carrying out green actions and would need additional funding to continue their efforts. For example, a farm that is already engaged in low-pollution and environmentally friendly agriculture is not eligible for EU funding. 

Today, green bonds allow large companies to strengthen climate commitment and investment against global warming. In the case of farms, EU subsidies encourage them to reduce their carbon intensity but the issuance of green bonds to support their investment is closed to them. 

Fintech solutions for green bonds

In response to the need to mobilise investment to achieve the Sustainable Development Goals (SDGs) by 2030, more funds are being invested in carbon neutral economies.

Financial markets are adapting to change and are now enabling investment in the energy and sustainability transition. Indeed, financial markets and sustainability-based investments grew strongly despite market volatility in 2020, says UNCTAD’s World Investment Report 2021.

Innovations in finance are now making it easier to issue and manage green bonds. This is the case of blockchain-based issuance of green bonds via smart contracts. These improvements make it possible to improve the cost/benefit ratio for the issuer and to meet the requirements of transparency, investment efficiency and impact monitoring (of a “low carbon” action, etc.).

These innovations have the advantage of facilitating over-the-counter trading of green bonds and the mobilisation of capital for more sustainable activities. The issuance of a “tokenised” green bond represents an innovation in the world of sustainable finance. 

Faced with environmental changes, European regulations are forcing companies to modify their sustainable development policies. This economic and environmental challenge can be solved through responsible investment via financial tools such as green tokenised bonds for small companies.

This innovation is part of the action plan of the fintechs that are joining forces to think about applications on Blockchain that will make it easier to issue these bonds for SMEs and large companies alike. Some of these fintechs are developing new financial tools that facilitate financing or measurement tools that calculate the environmental impact of sustainable development projects. 

Blockchain-based green bond issuance addresses the transition investment needs of smaller companies. The tokenisation of bonds allows for the creation of accessible, low-cost green bonds. Instead of multiple monitoring audits, tokenised green bonds, capable of embedding metrics, will allow environmental impact markers to be ‘transparent’ to investors and the interest rate to be recalculated throughout the project. 

Re fundia participates in the common effort by digitising bond debt securities. Re fundia provides a secondary market place for unlisted bond financiers.