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Think tank: Governments should help develop green asset-backed securities

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Think tank: Governments should help develop green asset-backed securities

Global authorities should develop a more robust market for green asset-backed securities, according to the Institute for Climate Economics, a Paris-based think tank.

In a report discussing financing assets compatible with a "low-carbon and climate resilient [LCCR] economy," the group said public policy should focus on increasing the share of those LCCR bonds that that are labeled as "green," and develop a market to securitize LCCR assets.

The demand for green bonds, debt that finances projects aimed at accomplishing environmentally friendly goals, has grown rapidly in the last 10 years, with total bonds outstanding now totaling $221 billion, according to the nonprofit Climate Bonds Initiative, which seeks to encourage the expansion of the market.

But green bonds are not financing many projects that will be instrumental in the shift toward a greener global economy. The Institute for Climate Economics said a large part of the increase in LCCR investment will be targeted low-emission vehicles and energy efficiency in buildings, which is mainly carried out by individuals and small and medium-sized enterprises, or SMEs.

"[Green] bonds are not really used to finance what is needed," Benoît Leguet, managing director of the think tank, which was founded by Caisse des Dépôts et Consignations and Agence Française de Développement, investment arms of the French state.

"It might be quite provocative, but basically they are not used to finance small-scale projects, they are not used to finance dispersed projects, they are not used to finance upstream ... development of bankable projects," he told a conference in Paris on Dec. 14.

Investments carried out by individuals and SMEs cannot be directly funded by bond markets. From these categories only assets primarily financed through bank loans could indirectly reach the bond market, for example via asset-backed securities, the group said in the report.

Various public policy measures could foster the development of a securitization market for LCCR assets, such as creating a warehousing entity for small-scale loans, or introducing a requirement for banks to disclose the proportion of green loans they hold. Some could also target investors, for example through credit enhancement schemes, to incentivize their investment in climate-aligned asset-backed securities.

Leguet said investments had to take place on a smaller scale to finance a low-carbon economy.

"Size matters: it is quite easy to finance large projects with green bonds. It's a little bit more difficult to finance small projects," he said.

"The people that will do the investments are either households or small and medium enterprises so not necessarily people who have access to the green bond market so that raises an issue of how the green bond market can contribute to the financing needs of the low-carbon carbon resilient transition."

The think tank also said policymakers should look at measures such as subsidizing the additional costs of green labeling in countries that do not have an active green bond market.