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The green bond market is worth $100bn, but with $1trn needed to fund the low-energy transition by 2020, we assess what it will take to move the global financial system onto a more sustainable footing
Green finance is playing a growing role in combatting climate change. During the COP23 climate talks in Bonn earlier this month the green bond market, which saw a record $81.6bn in issuances last year, passed through $100bn with a $1.5bn issuance from the China Development Bank. The initiative is forecasting $130bn in issuances by the end of this year.
Last year saw the launch of the world’s first bourse for securities related to climate change in Luxembourg, which listed bonds worth $74bn in its first year of operation, while corporations such as Apple are issuing green bonds to finance a raft of sustainable projects.
The latest is Ørsted, formerly Dong Energy, which sold off its oil and gas business this year. The company raised €1.25bn within 10 hours to fund new and existing offshore wind power projects and convert CHP plants from coal to sustainable biomass.
The carbon bubble we have on our hands now will make the sub-prime bubble that led to the 2008 crash look like Bambi standing next to T-Rex
But there remains a huge funding gap. According to the New Climate Economy initiative the world needs to double its current investment, to about $6trn, between now and 2030 just to meet global clean energy infrastructure needs.
Christiana Figueres, the former UN climate chief who launched the Mission 2020 campaign this year, says $1trn is needed by 2020. This message is reinforced by the IFC, which in a new 155-page report, urges the private sector to mobilise more capital to low-carbon solutions.
But is a global financial system that is tied up in short-term profits rather than long-term solutions capable of championing a new age of green finance?
The green bond is a central block of green finance, and as with any debenture offers investors differing returns depending on the risk involved. An investment in an operational solar park, for instance, is considered low-risk, and is reflected in a yield of perhaps 6%, while investing in riskier projects, such as drilling for a new geothermal plant, would bring in double this return.
At the same time HSBC announced $100bn in sustainable finance, it has been criticised for being lead funder for a 1,200MW coal plant in Vietna
China is now one of the leading issuers of green bonds and last year issued around 35% of the worlds’ total, an upsurge based around the country’s efforts to reduce pollution and develop renewable energy.
Individual cities are also getting in on the act and a recent report from the Climate Bond Initiative showed that cities are increasingly looking to the bond markets to finance low carbon and climate change-resilient infrastructure developments.
The move is particularly pertinent, given UN estimates that 66% of the world’s population will live in urban areas by 2050, and the impact of poor air quality, flooding and extreme weather events will increasingly threaten cities.
In December 2016 Mexico City became the first city in Latin America to issue a green bond, with a $50m bond allocated to water treatment, energy efficiency and public transport projects.
In July, Cape Town issued a $77m bond − which was four times oversubscribed − while the Canadian province of Ontario this year made its third issuance, raising $800m to help fund environmentally-friendly infrastructure projects.
There are options for smaller-scale investments, too, with companies such as Abundance Investment, which launched the UK’s first green energy ISA, allowing people to invest directly in renewable energy projects, tax-free.
The system is structured to reduce the kind of long-term investment that we need. We want the financial system to solve our problems, not cause new ones
“We want to turn investing in ISAs from something gathering dust in the forgotten corner of a bank or riding the roller coaster of global stock markets into something that makes a difference in the real world,” says Bruce Davis, managing director of the ethical finance platform.
Most green bonds, however, are focused on institutions and run into hundreds of millions of pounds, perhaps covering as many as 30 different projects. And this is where the green starts to become tinged with grey.
There’s no standard definition for what constitutes a green bond, says Nick Silver, co-founder of the Climate Bond Initiative, an international organisation working to mobilise the green bond market.
“Broadly it’s considered to label investment into things which are either helping our low-carbon future or not doing environmental damage,” he says, acknowledging that such a broad description in such a complex arena is flawed from the outset.
Is a bond that raises finance for a gas-related project green, for instance? Purists would argue that gas is a transitional fuel, something that is better than coal and oil but which still doesn’t have a role in a truly low carbon world.
Can a bond issued by a company like Exxon ever be considered green, even if it is funding renewables? And what monitoring is there to ensure that the money that’s raised is actually used on green projects?
The Climate Bonds Initiative, which seeks to drive down the cost of capital for climate projects in both developed and emerging markets, oversees a standard and certification scheme, which assesses the credentials of green bonds.
This year it was joined by Carbon Yield, launched by the Rockefeller Foundation, Lion’s Head Global Partners, South Pole Group and Affirmative Investment Management.
It uses a metric based on GHG emissions avoided per unit of capital per annum and is intended to allow issuers to communicate the carbon yield at the point of issuance, allowing investors to compare potential outcomes with other bonds.
A recent report by KMPG found that few large and mid-range companies acknowledge climate risk within their corporate reporting
Even more pressing than finding ways to assess the provenance of green bonds is encouraging investors to move away from “brown” assets. This is illustrated by HSBC, which despite announcing this month that it will provide $100bn in sustainable financing and investment by 2025, and stop financing new coal power plants in developed markets, has come under fire from environmentalists for being lead arranger and global coordinator for the financing of a 1,200MW coal plant in Vietnam.
“The scale of investment into the green sector is too small and the scale that is going into brown sectors is just way too high,” says Frank van Lerven, an economist at the New Economics Foundation think-tank. “There are real fears that climate could be the cause of the next big financial crash.”
A recent report by KMPG found that few large and mid-range companies acknowledge climate risk within their corporate reporting. This is something that the G20 Task Force on Climate-related Financial Disclosures is trying to address by encouraging businesses to disclose all their direct and indirect carbon-related risks. For banks, this means revealing the level of climate risk in the companies they are lending to, allowing investors to make more informed decisions and avoid assets that are still rooted in fossil fuels.
In France, reporting on climate risk is now mandatory, a concept Silver expects to grow. “If companies are saying they're … massively exposed on climate change, then investors have to take this seriously.”
Aviva Investors said it will vote against approving the annual reports of companies that make no effort to disclose climate risk, prioritising the worst offenders first. But it is an exception
In July, Aviva Investors said it would vote against approving the annual reports of companies that make no effort to disclose TFCD, prioritising the worst offenders first. But it is an exception. Analysis by the 2⁰ Investing Initiative shows that, despite all the evidence, investors continue to be short-sighted, and often don’t look much beyond two years, a time-frame in which brown assets can deliver a profit but longer term green projects can’t.
Nevertheless, the idea of impact investing is gaining traction. The UK National Advisory Board for Impact Investing (UK NAB) has highlighted opportunities to unlock an additional £300bn to address both social and environmental challenges, many linked to the UN’s Sustainable Development Goals (SDGs).
“Impact investing has shown its value across multiple sectors and asset classes, achieving strong returns on investment,” says Michele Giddens, chair of UK NAB. “Over the last few years we have seen an explosion of interest globally, with more and more mainstream investors coming into the space. We are reaching the tipping point."
The UK NAB is also promoting the concept of Pensions with Purpose, with savers investing in line with their values, much in the same way as socially responsible investment funds operate. So-called defined contribution pension schemes are predicted to grow six-fold to $1.7trn over the next two decades.
“Imagine a world where everyone could say: ‘I know where my money goes and the positive impact it has – as a taxpayer, saver, consumer,’” says Sacha Romanovitch, a member of UK NAB’s Advisory Board and CEO of Grant Thornton UK LLP. “A world where investing with impact is not at the expense of financial return.”
Investors continue to be short-sighted, and often don’t look much beyond two years. That is a time-frame in which brown assets can deliver a profit but longer term green projects can’t
The NEF is developing potential solutions that will redirect finance to green sectors, better aligning monetary and credit systems with ecological and social sustainability, says Van Lerven. These include requiring banks to lend a percentage to green sectors each year, or putting quantitative limits on certain types of brown lending.
Among Silver’s radical proposals is the idea of running financial markets on the values embodied by the SDGs, and introducing pension schemes that only offer a tax incentive if the money is invested in sustainable infrastructure or venture capital for new green businesses. He also believes that pressure from investors at company AGMs will become an increasingly potent force for change.
“The world is changing, that's the essence of green finance,” adds Davis. “It’s not ‘I believe in green’ as some sort of political statement; it’s an economic reality.”
Main image credit: Teun Van Den Dries/Shutterstock Inc.
Push to mainstream climate action in finance gathers steam
At COP21 in Paris two years ago, 20 public and private financial institution committed to the Climate Action in Financial Institutions initiative to mainstream climate action. The initiative has five voluntary principles: commit to climate strategies, manage climate risks, promote climate-smart objectives, improve climate performance and account for their climate action.
At COP23 in Bonn, the EIB, the world’s largest single issuer of green bonds, announced that the initiative has grown to 31 members, including eight commercial lenders, and released a Climate Mainstreaming Practices database of 50 case studies.
HSBC, one of the signatories to the initiative, announced this month that it would provide $100bn in sustainable financing and investment by 2025, while Barclays, which is not a signatory, said it has issued the first green bond from a UK bank backed by British assets, with proceeds to be used to finance residential mortgages in energy-efficient properties. The €500m transaction was almost four times oversubscribed, Barclays said.
This is one of a series of articles on green finance. See also:
Aviva Investors TFCD impact investing HSBC Climate Bonds Initiative green finance China Orsted New Climate Economy Initiative C40 Cities Mission 2020 low-carbon transition