Accordingly, if banks incorporate climate-related risks into costs and capital, they indirectly become “facilitators” of change, by reducing the cost of financing of activities that contribute most to the sustainable transformation of the economy, while at the same time discouraging more contaminating activities. The role of investors I also wish to refer to the role that investors should likewise play as facilitators of this transition. Interestingly, the emergence of “green bonds”, which was not in response to any official initiative, came well before the Paris Agreement, which could be considered to mark the beginning of the involvement of the banking sector. In fact the history of green bonds began in 2007 with the first issue by the European Investment Bank. As you know, green bonds must be used to fund projects that are directly linked to sustainability, preservation of the natural environment and transition towards a lowcarbon economy. To achieve the green bond certificate, issues must satisfy certain principles, such as the Green Bond Principles (GBP) issued by the ICMA in 2014, to be verified by external appraisal. In general, green bonds are placed among investors with higher demand and lower costs than equivalent standard issues. The market has been particularly active in recent years, especially since the GBP were published in 2014. At June 2019, green bonds outstanding amounted to an estimated USD630 billion. I believe it is highly significant that this market has developed aside of official initiatives, based entirely on private standards such as the GBP.
If we eliminate the bias in these findings resulting from the inclusion of construction and real estate activity, which should not be included under either polluting (“brown”) or “green” activities, polluting activities continue to have a lower default rate, although the gap between the two is much narrower. In any event, I believe the findings are unsurprising. Many companies labelled as “brown” have high profit margins and their ability to generate profit is partly a result of their being regulated activities and having, in many cases, a dominant market position. Moreover, to date these companies have not had to assume the cost of the pollution they cause, so in an energy transition scenario their advantage in terms of profit margin could be affected. The banking sector as a facilitator of change in the production model I should like to refer briefly to the second point I mentioned above. As indicated in the 2015 Paris Agreement, the banking sector has an essential part to play to facilitate change in the production model. Indeed this second goal is related to the first, as correctly measuring environmental risk should assist in the transition towards a more sustainable model and would, therefore, be a logical consequence of the first goal. As I have said previously, one essential feature of any viable business model is that banks identify and quantify all the costs and risks involved and pass them through to prices and capital.