Climate conscious financers bet on reputation and disclosure

Photo by Markus Winkler on Unsplash

A slightly bent top roof is clearly seen from Google map. The 20-story office tower used to house investment bankers, providing a variety of financial services to international investors around the world. Shin-Kasumigaseki office tower stands next to Kasumigaseki building, a monumental skyscraper in 1960’s.

After coming back from America to Tokyo in mid-1980’s, I didn’t have a slightest idea that I work as research assistant of investment bank on the 19th floor of Shin-K building. The floor of the bank was split into east and west. The eastern wing was central part of Swiss Bank Corporation International, an investment arm of Swiss Bank Corporation, known as United Bank of Switzerland (UBS). The eastern wing housed dealing rooms and research department where I spent most of working hours.

In the northeastern area with thick walls, any in-house employee could sneak into stock and bond trading rooms. To this day, bond dealing is a mysterious part. I worked with equity analysts without interacting with traders in bond dealing. One day, a bond dealer came to join the bank along with his young secretary. Both of them sat all day long without talking with any other colleagues, facing several square displays with keyboards.

A several months passed by and what I heard was astounding. They disappeared with a huge loss on government bond futures, a financial instrument. Without notifying branch manager of betting $10m, a bond dealer lost everything and disappeared from the office.

On September 19th, the Economist published an episode, “Climate finance, the meaning of green.” A British newspaper explains that what is called green bond, a corporate debt raised for environmentally conscious project, created a debt of $271bn or 4% of total bond issuance worldwide. A new study of the Bank of International Settlement addressed a question of the purpose of green bond. The issuance, however, didn’t lead to either the low cost of borrowing or decarbonization. What is the green bond for?

Proponents argue three benefits; reputation, disclosure, and linkage. This is very optimistic and unrealistic argument. For a start of discussion, let’s take the reputation first. One banker claims that a green bond sends a virtuous signal to regulators in the government. This will result in a wider pooling of lending than conventional bonds. Even if these things sound true to debt financing, bankers don’t usually justify the signal and subsequent creation of non-conventional bond market. This financial instrument doesn’t lower the cost of borrowing in discount or gain the returns from lending the debt to large firms. Lenders may be able to gain a popularity but the reputation does not work in bond dealing in the financial industry. It still lies in the financial performance in the industry.

The second concern is the disclosure segment of the financial activity. The newspaper argues that climate conscious investors face less risk. Bond issuers will be paying the original value with some interests even if the green projects fail. The loss from the project failures can be compensated by a guarantee of corporate issuers. Those firms typically disclose the project details in the size and location. Such a business practice is mostly welcome but does this do any good in financial market? Lastly for linkage to other green bond to generate additional borrowing, a group of green lenders encourage the issuers to start a new project for funding such as renewable technology. Benefit is not clear.

Climate change has little to do with corporate financing when the large firms engage in greener and cleaner projects. It is a problem of doing less on fossil fuels to produce clean energy and lower the excessive profits from energy, utility, and material industry. It is a topic of corporate governance, which constrains the excessive behavior and unwanted business practice of emitting carbon dioxides. If bond dealing in banking industry today involves in any element of green financing to do good for a society, it is a pleasant surprise. But it is highly unlikely.

Taught marketing @ universities in Tokyo for a decade, ex-I-banker & mgmt consultant @ Kurt Salm (Accenture Technologies now), Georgia Tech educated