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A synthetic path to green lending that might just work

The biggest impact investing deal to ever see the light of day — that is how a fascinating new hedge fund deal is being touted.

Impact investing is the practice of trying to make a measurable, positive societal impact as well as making a financial return on your money. The US hedge fund Mariner Investment Group reckons it has found a way to turn an investment of about $150m into $2bn of new funding for renewable energy and other green projects. 

If it becomes a template for other transactions, it could help nudge banks towards more environmentally-friendly lending, and at the same time provide an opportunity for investors who want to use their money for good works, such as furthering the sustainable development goals of the United Nations.

The deal is a new twist on what is called “synthetic securitisation”, under which a bank lays off some of the risk on a portfolio of loans to a third party.

The bank in question is Crédit Agricole of France, which is transferring a portion of the potential losses on a $3bn portfolio of infrastructure loans to Mariner, taking enough pressure off its balance sheet that it can go out and lend $2bn more. Similar deals suggest that Mariner’s investment is about $150m.

The powerful leverage in synthetic securitisations works this way. Because the bank has reduced its potential exposure to defaults on the securitised loans, they can be treated by regulators as less risky assets, and less capital has to be set aside to cover losses. The freed-up capital can be redeployed to back a further round of lending.

The World Bank’s International Finance Corporation, recognising that potential for leverage, has used similar deals to further its mission to reduce poverty. In a 2014 agreement with Crédit Agricole, for example, it wrote $90m of credit protection on a $2bn portfolio of emerging market loans that included infrastructure lending in Egypt.

Mariner, too, is no novice here. It has raised $1bn for synthetic securitisations, and signed its first such agreement (with UniCredit) in 2014. This is the first, though, in which it has pressed its partner to use the unlocked capital specifically for impact investing. 

CA says it will direct the new lending to “several green sectors, including renewable energy, energy efficiency loans for commercial real estate renovation, public transportation, and sustainable waste and water treatment facilities”.

Here is the sceptical take on the deal. CA has already made commitments to increase its green lending, promising to structure $60bn of financings over three years to fight against global warming. Meanwhile, there are countless numbers of lucrative renewable power and public transport projects that banks could finance from their own balance sheet in their ordinary course of business.

It is not clear, therefore, that Mariner’s investment makes Crédit Agricole behave in a substantially different way than it would otherwise.

There are also no contractual requirements or penalties attached to the bank’s pledge regarding the unlocked $2bn. It has promised only to use its “best efforts” to deploy the money for green project finance.

What CA has committed to is to “regularly report on the composition of the new green loan portfolio, and . . . periodically communicate on certain of the projects that have been financed as a result of this risk-transfer operation”. This does not sound like it will add up to a full accounting for the social or environmental impact of Mariner’s money — something that will upset impact investing purists, for whom measurement is the defining characteristic of such investments. 

A much more positive take on the deal is that it blazes a trail that others might follow. Firstly, it could encourage more banks to increase their focus on environmental or social lending and broaden the kinds of impact investments that might be available for innovative financing deals in the future.

Secondly, although the $1bn that Mariner has raised for synthetic securitisations has come largely from institutional investors, this deal might provide a model for other funds that are tailored to the wealthy individuals and families who are among the biggest proponents of impact investing.

And there is another positive. Inside CA and other banks, it might allow advocates of more green lending to argue — and to calculate — that such lending has a different and lower cost of capital, thanks to the money available from third parties like Mariner to support it. 

Changing the maths of impact investing might be the biggest impact of all.

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