Climate Bonds

Best wishes from a kayak in the middle of Sydney’s NY Fireworks

Posted on 31. Dec, 2011 by Sean Kidney in blog

It’s midnight; I’m bobbing around in a kayak on Sydney Harbour, with 1.5 million people crowded on to the foreshores around me, watching the world’s biggest New Year’s fireworks spell out ”welcome” in 16 languages.

Bye bye 2011, with its news that global emissions rose 6% in 2010 (the highest in recorded history), its insipid Durban outcome and just too many NEW coal-fired power stations built around the world (can you believe, given what every national science academy in the world says, that we’re still building new ones!).

Hello 2012. Here’s hoping for renewable energy to become cheaper than coal and oil – everywhere – and for governments to finally figure out that society-wide Green Growth policies are the best hope for both economic recovery (just listen to the OECD) and for avoiding climate catastrophe (that’s the IEA saying that). And for clean energy deal flow that successfully attracts billions in institutional investment.

Best wishes,

Ecotricity £10m bond oversubscribed; innovative Melb EE scheme writes first loan; global EE retrofits outpace green new build for first time; upcoming talks

Posted on 21. Dec, 2011 by Sean Kidney in blog

(In case you’re wondering, EE means Energy Efficiency!)

> A £10 million bond issue by independent energy company Ecotricity has been oversubscribed by 62 per cent. The firm will leverage the money raised and use it to finance more wind farms, green gas and alternative energy projects. The bond pays 6 per cent, but Ecotricity customers receive an extra half a per cent. They key to success: having a happy retail customer base to market to, and of course doing it well.

> The first privately funded loan has been signed under the City of Melbourne’s new 1200 Building Program, which provides commercial building energy efficiency retrofit loans that are repaid through municipal tax bills. Similar to PACE in the US and Green Deal in the UK, the scheme links the loan to the building rather than the building occupant, avoiding “principal agent” problems. Loan funds have been provided by NAB Bank.

> Melbourne is a sign of welcome momentum building for commercial energy efficiency retrofits. According to the US Green Building Council (a member of our Climate Bond Standards energy efficiency  technical committee), LEED energy efficiency standards are now used more by existing building retrofits than new builds. Of course this is partly because of the downturn stalling new build. However, according to a report from McGraw Hill Construction, green retrofits will grow to a third of the overall commercial retrofit market in the next three years. Flagship buildings this year range from the Empire State Building to Taipei 101, now the tallest and largest green building in the world. (The Empire State project will save $4.4m in energy costs and provide a return on investment in 3 years. Climate Bond Standards Board Member Nature Resources Defense Council was a key part of that project)

> Upcoming events:

• Climate Bonds Singapore rep Louis Perroy is speaking at the Climate Change Summit for Asia’s Insurance Industry 30-31 Jan 2012 in Singapore.
• Climate Bonds Chair Sean Kidney will be speaking in Istanbul at the “Regional and Global Climate Change: Physical Observations and Policy Choices” Conference, 16 March 2012.

12 Durban Snips: EIB mixes great works with lunacy; WB too; India solar cost down 38%; Trevor Manuel; Korea; Karen Ireton on IFC; Nedbank; Pachauri & more

Posted on 09. Dec, 2011 by Sean Kidney in blog

> The European Investment Bank (EIB) lends more to clean energy than any other bank in the world. That’s something for Europe to be proud of. But CEE Bankwatch has just shown how, in a way that undermines the EU’s emission reduction targets, the EIB also continues to lend to coal-fired power stations. In fact they lent more this year than last. It’s policy lunacy that when global emissions have just gone up 6% in one year the EU, through its development bank arm, continues to provide subsided financing that locks in new coal power plants – €5bn in 2010. Europe, get your act together. Read more.

> And it’s not just the EIB. See this note about the World Bank looking at more coal-fired power. Sigh. Read more.

> One of themes we push at Climate Bonds is the opportunity to push down renewables costs with larger scale auctions and power purchase contracts. India has this week had success with a government auction for permits to build some $700m of solar plants – it achieved a price drop of 38% on a similar auction held a year ago. Now that’s a fast “learning rate”! They’re rapidly approaching price parity. Read more.

> I’m sitting in a seminar at the Durban COP17 conference, listening to a senior Chinese Government official announcing the setting up of a new Climate Research Centre. Great initiative, but an astoundingly boring speech. A big portion of COP side events are made up of set piece speeches right out of Soviet Russia.

> Was earlier listening to a government official drone on forever about why local solar was no good because every village really wanted to be connected to a power grid, and in the process killing the chance of anyone else getting a word in. A very sharp solar entrepreneur whispered that the real story was that the grid scheme was riddled with supplier kickbacks, and as a result government policy was discriminating against (non-bribing) distributed solar solutions. That woke me up a bit.

> But then you get a gem. The Secretary-General of the Korean President’s Green Growth Commission was lively, and had a lively plan – including leveraging public funds and providing tax incentives to attract private sector capital. Admittedly their renewable energy targets are not so strong, but they are planning to invest 2% of GDP in green growth over 5 years. Plus they’re pushing for multi-national developments to have green growth lending targets of 25%! I’m with them.

> Useful OECD report on climate change outlook to 2050. Read more and be chilled.

> Standard Bank’s impressive director of sustainability management, Karin Ireton, was commenting in an EU forum that while there were loan funds available from development banks, getting it was no easy matter: “We tried to get money from the IFC. We, a big bank, found it very difficult, and when we did get through, the money was too expensive. We need some changes – every development bank has different accountability process. You end up layering transaction costs because everyone’s got different criteria and exclusions.” Yikes! Sounds like an important issue for reform if we’re to get more financing out there to address climate change.

> IPCC head Rajendra Pachauri: “Heatwaves in China that have been happening every 100 years will take place every two years by the end of the century. And the world’s mega-deltas, like around Shanghai, will be seriously affected sea level rises.”

> Discussion on a bus with a UNDP official. He’s worried that we’re sacrificing the development agenda is we put too much money into climate change. Another quote from Rajendra Pachauri: “Climate change is an issue that is at the core of development itself.” I’m with him.

> Denis Dykes is Chief Economist of big South African bank, Nedbank, speaking about lending for green growth: “Balance sheet lending will be constrained in the future. We need to tap  debt capital markets.” And what’s exciting in the area? “How Korea and China are placing green growth at the centre of their economic development.”

> South African Planning Minister Trevor Manuel: “The ravages of climate change are being felt in those parts of the world that happen to be poorest. We are feeling climate change already. The number of severe weather events in place like the Philippines has increased dramatically. Every time their infrastructure gets washed away they have to rebuild. That ends up impoverishing the global Philippino population. While this happens we are debating punctuation in the Kyoto negotiations.”

Insurers worth $3.5tn call for Climate Bonds and support Standards

Posted on 07. Dec, 2011 by Sean Kidney in blog

In a Statement headed “Creating long term value – Insurers ask for action so they can contribute to new growth“, Swiss Re, Allianz, Legal & General, Aviva and Aon Benfield yesterday said:

“We support the objectives of the Climate Bonds Initiative which aims to provide assurance for investors regarding the environmental integrity of climate bonds. This will help to address concerns around reputational risk.”

The insurers say they could help the global economy fight back to growth, and tackle climate change if issuers and regulators increased opportunities to make low carbon fixed income investments.

They called for action as the business community comes together at the climate negotiations in Durban. The insurers want to draw attention to the gap between the low carbon investment needed and the fixed income carbon investments available.

They’ve also noted the concerns we share about Solvency II. (See sections in bold, below)

FULL TEXT: below and at http://www.climatewise.org.uk/storage/climatewise-docs/Fixed_Income_Statement.pdf

Call to increase opportunities to make low carbon fixed income investments

As institutional investors collectively representing assets of more than US$3 trillion, and investment advisors, we are seeking investment-grade opportunities to invest in bonds where revenues are specifically allocated to climate change solutions.

As insurers and reinsurers we are conscious of the long term risks that climate change poses to society and how it will affect pricing of weather risk transfer solutions long term. We are also conscious of our role as large investors and see the importance of using our assets to mitigate this risk.

With a large proportion of our assets dedicated to fixed income debt, we therefore see a need to bring more attention to linking these to climate adaptation and mitigation.

I. Scaling up

We call for a significant increase in global bond issuance to be dedicated to finance for an acceleration of the transition to low carbon growth.

A low carbon economy is needed if we are to avoid dangerous climate change and the consequent social, economic and environmental costs. The International Energy Agency (IEA) estimates that investment and spending in low carbon energy technology needs to increase from current levels of approximately US$165bn per year to between US$750bn – US$1.6tr per year by 2050 in order to be on track with the UNFCCC 2 degree target. This is at least an annual four-fold increase.

The outstanding value of the global bond market is in total approximately US$95tr (2010 figures). Less than 0.1% – US$100bn - of this is positively identified by issuers or market observers as contributing to low carbon growth. The contribution to cumulative annual investment needs is therefore very small.

Market overview through Climate Bond Initiative trackingConsideration of the link between sustainability and growth is important.

Recent analysis has indicated that sovereign bonds from countries rated for sustainability have actually managed to achieve better risk-adjusted returns.

However this is not reflected in current credit ratings.
Increasing bond issuance where revenues are specifically allocated to climate change solutions would be a vital contribution to the anticipated total required to accelerate the transition to low carbon growth.

II. Addressing barriers

We would like to see consideration of incentives for all market participants to consider long term climate risks in fixed income securities.

The most significant limitations to our ability to make increased low carbon investments are: the current limited liquidity of the low carbon bond market; the lack of standardised due diligence regarding low carbon investments and how risk is rated regarding our capital requirements.

In order to increase low carbon investment we would like to see:

- An increase in sovereign bonds allocated to investments in climate change solutions

- Aggregation of low carbon themed product to increase the size of issuance

On average issuance under US$300m makes trading costs too high.

- Policies and incentives which promote commercial issuance allocated to investments in climate change solutions

We recognise the pressures on public finances, however the IEA estimates that making the right investments now will generate cumulative efficiency savings equivalent to USD$112 trillion.

- Standardisation of product that is reflected in ratings

We support the objectives of the Climate Bonds Initiative which aims to provide assurance for investors regarding the environmental integrity of climate bonds. This will help to address concerns around reputational risk.

- Consideration of how climate risk can become mainstreamed into rating agency assessments.

III. Avoiding unintended consequences in financial regulation

We would like to see financial regulation that supports objectives to make low carbon investments.

The links between financial regulation and green growth or low carbon innovation have not featured prominently in government thinking.

The insurance industry is heavily regulated. New regulation such as Solvency II will affect regulation on capital requirements. Equivalence rules mean that regulation will impact globally. There is a risk that such regulation may prevent insurers from investing in climate themed bonds undermining objectives to develop a low carbon economy that is more resilient, more efficient and less vulnerable to global shocks.

$400m WB Green Bond purchase announced by Standards Board member Bill Lockyer

Posted on 07. Dec, 2011 by Sean Kidney in blog

California State Treasurer (and Climate Bond Standards Board member) Bill Lockyer today announced the State has completed a deal to buy $400 million of World Bank green bonds.

Proceeds of bonds issued under the World Bank program finance renewable energy and other, non-nuclear, projects around the globe to fight climate change. The State will get a 0.51 percent yield on the two-year bonds – roughly double this week’s rate on two-year US Treasuries.

This is Lockyer’s second deal to buy World Bank green bonds. In April 2009, the State became the first US buyer of the bonds when it made a $300 million investment.

Bill Lockyer: “These bonds are a great investment for California and its taxpayers. We’re earning an excellent return, strengthening our portfolio and backing our policies with money in the fight against global warming.”

Sole lead manager for the transaction was Sweden’s SEB.

6 Durban snippets: Negotiations gossip x2 / China Light & Power disclosure / FAO report shows deforestation hasn’t slowed after all / Amazing fish

Posted on 04. Dec, 2011 by Sean Kidney in blog

> Negotiations briefing by an insider (our own mole): “The US is arguing for 4 years ‘reflection’, and then restarting the negotiations. (Yet the IEA says we have to have emissions going down by 2017. Yech.) Our insider is depressed – says it feels like the whole negotiations are back where they were five years ago. The US is trying to trap China into being part of the Emission Trading Scheme, but everyone knows the US can’t deliver on their own involvement. China is willing, but doesn’t want to move ahead of the US. India is making mad demands, but will probably flip and agree if it gets to the last minute. Venezuela and Brazil are playing a blocking game but can be turned. Russia and Japan will go with the flow once everyone else has agreed. China might move their position and carry the rest; if everyone else agrees the US will probably cave, but probably still won’t get it through Congress. Not looking good.

> Green Climate Fund gossip: yes it will happen, pretty much as designed in Panama. A board will be selected with broad powers to design solutions. Climate Bonds is pushing for it to be mainly used a guarantee fund to bring in private capital for mitigation and adaptation projects. Looks like we will have 6 months to pitch solution ideas.

> I’m writing this in the best event location of the conference: inside the uShaka Seaworld aquarium, where the room is designed to look like the rusty insides of an old shipwreck. The speakers are lined up in front of a huge plate glass window, stingrays, sharks, schools of fish swimming behind them – most distracting. IRENA is launching a report on scaling up renewable energy in Africa. Good report… hang on, that stingray really is massive …

> Interesting disclosure by China Power & Light rep Jenny Ng, director of group environmental affairs. (CL&P is one of Hong Kong’s duopoloy providers and, among other things, owns TruEnergy, one of Australia’s energy generators – mainly coal). At a session on Climate Finance she spoke candidly about greening energy systems; she talked of the way the Hong Kong Government simply tells them what to do under their duopoly system, and they sit down and figure out how to do it, pass through costs, etc. She contrasted this with the chaotic political environment in Australia, where a carbon tax of $23 a tonne has just been introduced by the Gillard-led Government, is a real block to getting on with investment. Mind you she also said they fought the first scheme (the “CPRS“, the axing of which helped topple the previous Rudd Government) very hard – contributing to the chaos, in hindsight. “In retrospect we probably made the wrong decision”. Halleluijah. A real argument for the strong hand of the State.

> Walking through the big hall where all the organisation booths are crowded together, I come across a TV interview with Adam Gerrard, a lead author of a scientific report from FAO on global deforestation rates, based on global satellite date over time. Seems there’s no let up in the rate at which we’re cutting those trees down. Tropical forests in South America and Africa are now going fastest, although SE Asia is not far behind. Main driver: cutting forests for commercial agriculture – palm oil plantations, cattle ranches, soy farms.

> Traveling on a bus to the fish event today, I had an interesting conversation about renewables in small countries with someone from a UN development agency. We know that dozens of developing countries rely on diesel fuel generators for energy, that fuel prices are high, volatile and crippling for their economies, and that renewable energy is typically much cheaper. So you’d think they’d be shifting over quickly – but being cheaper is not everything. Problems range from lack of local capability to existing (diesel) suppliers having a “close” relationship with the relevant government decision-makers. Some countries spend more on diesel than al their exports earn. Does overseas aid end up making the difference?

New Climate Bonds report for UNEP SEFA on Evaluating Clean Energy Public Finance Mechanisms

Posted on 02. Dec, 2011 by Sean Kidney in blog

We’ve been pressing governments – and the UNFCCC’s Green Climate Fund – to use public finance mechanisms (PFMs) to support low-carbon investments. Yet not enough work has been done on evaluating the relative efficiency of PFMs.

We’ve just completed this (quick) report (http://goo.gl/kCSgM) for the UNEP SEF Alliance, working with consultancy Irbaris. There are eight case studies – Germany, France, Canada, Ireland, the UK, China, Chile and Brazil - evaluated against a developed methodology, with “best” practices identified.

The study found that some of the best ways to measure public finance impact is not through private sector leverage but more indirect outcomes such as job creation, net economic benefit and health costs reduction. This helps illustrate the importance of the industry to the general economy beyond its support in building clean energy.

The research also underlines the importance of taking into account context-specific barriers in designing and public finance intervention to support clean energy markets. Any intervention needs to communicate clear conditions-based indicators of success to not only safeguard value for public money but also to prepare the private sector for eventual withdrawal of public support.

We’re looking at going on to a second stage, so please give us feedback on this first effort. How should we improve the methodology used? How can our analysis be better? What further case studies should we do?

Let us know what you think; deadline is 3 January 2012.

Snippets from Durban: WB Green Sukuk; Aviation awkwardness; Climate Bond meets in Durban, Paris, Australia

Posted on 01. Dec, 2011 by Sean Kidney in blog