More muck = less brass

by Adrienne Lawler
September 20, 2018

In a turnaround from the old adage ‘where there’s muck there’s brass’ the Director of CPD (protectors & promoters of ethical Investment policies) has shared this interesting report from ratings house Moody’s supplying evidence of why doing the right thing environmentally also produces the best financial returns.

Bank loans for green project finance have lower default risk than non-green, finds Moody’s

19 September 2018 

Project finance bank loans for green use-of-proceeds projects demonstrate a lower risk of default compared with non-green projects, according to a new report from Moody’s Investors Service. 

The analysis identifies a 10-year cumulative default rate of 5.7% for green use-of-proceeds projects, such as renewables projects, and 8.5% for non-green use-of-proceeds projects, such as roads and ports. 

The trend is particularly pronounced in developed markets, and in power and ‘infrastructure’ sectors, according to the study.

However, Moody’s said the difference is unlikely to be because of the greenness of the projects, pointing to an even lower rate of default for loans for projects that could not be labelled as green or non-green. 

“The 10-year cumulative default rate for project loans whose use-of-proceeds could not be determined was 2.9%, somewhat lower than corresponding default rates for both green and non-green projects,” said Andrew Davison, a senior vice president at Moody’s. “This suggests that the difference is likely due to subsample characteristics other than greenness.” 

The study, called Default and recovery rates for project finance bank loans, 1983-2016: Green projects demonstrate lower default risk, focused on 5,859 projects that align with Moody’s definition of infrastructure.

It then used the Green Bond Principles suggested categories for eligible green projects to identify which of these could be defined as green. 

Ten-year cumulative default rates were found to be lowest for green use-of-proceeds projects in the infrastructure industry sector (5.8%) and the power industry sector (5.7%). Non-green use-of-proceeds projects in the power industry sector (7.5%) and the infrastructure industry sector (10.5%) had substantially higher 10-year cumulative default rates. 

“Renewable power projects often benefit from contracted revenue streams, which reduce a project’s susceptibility to revenue risk in comparison to merchant power projects. This may be a contributing factor to the lower default rates observed for green use-of proceeds power projects compared to non-green use-of-proceeds power projects, particularly in advanced economies,” the report argues.

The study also broke the results down into advanced and developing countries. It found that green use-of-proceeds projects exhibit lower default risk than non-green use-of-proceeds projects in advanced economies, and both exhibit similar default risk on average in emerging market or developing e

Recent posts

Leave a comment