France’s substantial swing to the far right in Sunday’s election puts a question mark over the country’s commitment to environmental, social and governance targets, and unscrupulous companies might seek to take advantage of any scarcity of green debt.
The National Rally won 33.2% of the first round vote, versus 28% for the far left New Popular Front, and 22.4% for incumbent president Emmanuel Macron’s Ensemble alliance.
The second round comes this Sunday, and parties in the centre and left are scrabbling to try to stop the National Rally from getting an overall parliamentary majority. This includes encouraging tactical voting and even pulling candidates out of the race so as not to split the vote.
Whether this will work or not remains to be seen but the rise of the populist right in France, and the potential re-election of Donald Trump in November’s US presidential elections, causes serious concerns for ESG investors.
Climate change doesn’t win votes
Marine Le Pen’s National Rally and Donald Trump have similar approaches to ESG, ranging from scepticism to outright rejection of internationally agreed protocols.
In France, National Rally wants to end subsidies for renewables and stop wind power, as well as cancelling the 2035 European Union deadline for selling new cars running on petrol or diesel.
One of the first things Trump did when he came to power in 2017 was to pull the US out of the Paris Agreement on climate change.
Much of the right’s appeal to voters is the promise of returning society to past values and traditions. These values become more extreme the further right down the political spectrum one goes, but carbon fuels and existing oil jobs are much more popular with the right voter base than new green technologies and personal restrictions that advocates say will protect the environment.
This has the potential to have a direct impact on the integrity of the ESG bond markets.
Money has poured into ESG funds at a rate of knots this year — with $16bn-equivalent going into Western Europe in the first five months — and the momentum behind ESG investing means it is highly unlikely to fade away.
If the US and France slow down or stop green projects, such as no more wind farms, for example, then ESG investors will have fewer places to put their money and they will be left with two choices.
They could either look to invest further afield, or they could loosen the standards of what they consider green.
The second option will be brutally damaging for the ESG market.
Taxonomy is a weak shield
The European Union’s Taxonomy for sustainable activities protects, to a degree, against issuers doing this, and the greenest of green companies will no doubt remain that way.
But many labelled bonds fall outside the Taxonomy — this includes most green bonds, which are widely regarded as the elite tier of ESG structures.
The most difficult part of complying with the Taxonomy, a target which is already considered to be tough to hit, is proving that the green bonds “do no significant harm” to any other sustainability objective.
Without the shield of the Taxonomy, there is going to be pressure to lower the standard for what assets can be considered green, and therefore permitted to be used as collateral for a green bond.
Some might baulk and say that the market would never do such a thing, but one only has to look to the sustainability-linked bond market to see that issuers, and their fee-paid ESG structuring banks, are sometimes happy to throw out half-baked, unambitious targets in an attempt to sell bonds to the ESG investor crowd.
Since their arrival in 2021, investors have complained that SLBs are often not ambitious enough in their targets. There were even a few cases in the high yield market of SLBs being callable before the sustainability targets were due to be tested.
The market has absolutely shown itself willing to slap an ESG label on a deal that has nothing to do with protecting the environment.
And that was sustainability-linked deals before the populists came into power.
If Western politics do swing right, as currently looks likely, then sustainability-linked structures have the highest potential to be manipulated by polluting companies looking to get some good press while doing nothing to protect and grow ESG values.
Having demand significantly outweigh supply for new ESG debt makes it more likely that bonds with unambitious targets will be snapped up.