Friday, January 17, 2014

Green Bonds May be the Climate Success Story of 2014

The cleantech story of 2014 may very well be the growth of green bonds, (aka climate bonds). A growing number of financial institutions and state governments are issuing green bonds to generate funding for sustainable development and clean energy technology. This rapidly emerging financial instrument is capable of significantly advancing global efforts to combat climate change.

Green bonds may very well be able to meet the Herculean funding challenge we have ahead of us. It is widely understood that there are technological solutions that will reduce our emissions and keep the temperature from climbing beyond the widely agreed upon 2 degree Celsius upper threshold limit. However to get there we will require massive capital investments of 36 trillion by 2050 or an average of 1 trillion per year.

As recommended in the recently released Ceres' Clean Trillion Report, green bonds are an important vehicle to finance the low carbon economy. Green bonds and asset-backed securities are ideal for investors who including those who cannot afford to build a field of solar panels or wind turbines.

Bonds are a simple investment vehicle for both the private and institutional investor to access the green market. A growing consensus is building pertaining to the particular form such bonds will take. On January 13, 2014, a set of principles for green bonds was agreed upon by environmental groups, issuers and investors. Essentially these principles revolve around three primary recommendations well known to any SRI investor.

1. Transparency
2. Disclosure
3. Integrity

Support for these principles comes from a consortium of some of the biggest names in investment banking (Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Banking, JPMorgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan Stanley, Rabobank and SEB).

According to Ceres chief Mindy Lubber, the growth in the green bonds is evidence that banks are starting to see the potential of low carbon infrastructure projects. The impetus for investment is not due to moral preoccupations, environmental activsm or social concern, it is being driven by self interest and bottom economics. If we are to succeed in providing the massive amounts of financing required we will have to leverage the power of the market. That means profit must be the incentive bringing investors to the table.

As Lubber said, “We need to move the climate debate from a treehugger issue to an on-balance sheet financial risk, and we need to act based on the economic risks and opportunities.”

The World Bank developed the Green Bond concept in 2007/2008. A total of more than $3.3 billion worth of the bonds have been issued by the Word Bank since their creation. In the past 18 months the market for these types of investments has doubled, from $5 billion to $9.5 billion.

In 2013 alone $10 billion of green bonds were issued, including $500m from Bank of America and a similar amount from HSBC. Investors in these green bonds include Zurich Insurance, JP Morgan and Daiwa Securities.

In 2013 International Finance Corp (IFC) issued $1 billion of green bonds that will finance climate-friendly projects in the developing world. Demand could not keep pace with supply and now the IFC plans to issue at least $1 billion in green bonds per year. The European Investment Bank set prices for its first Climate Awareness Bond which will finance renewable energy and energy efficiency. The state of Massachusetts also issued $1.1 billion of green bonds.

It has been widely reported that sustainability investments provides both a competitive advantage and better ROI. Likewise, for private and institutional investors, climate change is both an investment risk and an opportunity.

Investors are increasingly worried about the risks posed by global warming and green bonds offer an attractive opportunity for an increasingly climate risk averse investment community.

Socially responsible investing is growing well beyond its origins as a niche investment into a powerful financing vehicle. It is not overstating the point to say that green bonds could very well save the world from the ravages of climate change while helping investors to turn a tidy profit.

© 2014, Richard Matthews. All rights reserved.

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