Davos speech: An 8 point plan for Mobilizing Bond Markets for the Low Carbon Transition
Posted on 26. Jan, 2012 by Sean Kidney in blog
This was the handout to go with a talk I’ve just given in Davos (thank you to the Corporate Knights/Inflection Point Capital Management ”Global 100 Dinner” for inviting me). Let me know what you think – what sounds right, what needs more work?
The Context
We need a FAST transition; the emissions horse is about to bolt and we have yet to significantly deploy solutions that will allow us to rein it in.
The needed climate change solutions will require a lot of investment. The International Energy Agency (IEA) estimates that, worldwide, $1 trillion of investment in energy, transport and building sectors are required each year above business as usual . According to the UN Environment Programme, if the sustainable management of natural resources such as forests, fisheries, agriculture and water is included, an average additional annual investment of $1.3 trillion is required out to 2050.
Public sector balance sheets are, to say the least, constrained. The bulk of the money is going to have to come from the private sector, in particular from the $75 trillion of assets under management by institutional investors.
This is possible to achieve. Investments in climate resilient infrastructure, from renewable energy to energy efficiency, typically involve high capital expenditure that creates secure and predictable long-term assets — very close to what pension funds and insurance investors are looking for.
Investment in these assets have so far focused on equity; but bonds are a great funding instrument for such high capex, long-life projects. On top of that we are, in the light of the crash of the past few years, entering the Age of Bonds. Institutional Investors have realised that high returns in equity can be illusory and have been busily shifting across to the bond market; that market is now worth $99 trillion compared to $55 trillion for equities, the reverse of a few years ago.
Climate Bonds, asset-backed or ring-fenced bonds issued to raise finance for climate change solutions, have been developed as one means of tapping that market.
But funds are still not flowing; how do we get some action? Here are 8 steps:
1. To create deal flow, think big.
Investors say there are simply not enough big deals on offer — bond markets want deal flow lumps of half to one billion dollars and investors will only buy if there’s going to be liquidity as a result of large volume issuance. Which means the bigger the opportunities the more investors will be interested.
In equities this is beginning to change, with landmark deals such as PensionDanmark’s recent acquisition of a huge offshore wind farm from Dong energy. Bond opportunities remain few.
One of the big challenges is that both the renewable energy and energy efficiency markets are much more disaggregated than traditional energy sectors with many small projects. Bond investors need scale; those smaller projects need to be aggregated into larger offerings suitable for the appetite of the big investors.
Banks providing project finance are having to recapitalise, a process that is going to happen with even more vigour as new Basel III regulations come into force. That means they are curtailing their smaller business and project lending, and will squeeze even more in the future.
Other players, like utilities and governments, are similarly constrained in their financing capacity.
If banks and utilities are to be major players in growing the Climate Economy, we need them to change their focus. They need to be project developers and financiers, dealing with the upfront risks of setting up new energy infrastructure.
Once they’ve done that they should be flipping what will then be low-risk assets and loan portfolios into the calm waters of the institutional investor ocean, using equity and asset-backed security offerings, and aggregating smaller offerings to do so as well.
Governments may have to kick start this process. Connecticut and Pennsylvania, for example, are setting up warehouses to buy up energy efficiency loans and securitise them. The UK Government is working with financiers to set up a “Green Deal Warehouse”. These aggregation facilities need to be big, and we need them everywhere. The same lesson applies with applies to wind farms.
But post-crash, the securitisation market is on life-support and the appetite for exposure to renewable energy assets is low. Apart from government getting the new regulatory environment right, to revive it we’re going to have to take investors on a journey of understanding.
The Climate Bonds Initiative has developed a mechanism for issuing “asset-linked” corporate climate bonds. These are fully backed by corporate treasuries but report on the performance of the underlying asset as part of the package. Institutional investors have expressed strong interest in this style of debt. Five of the world’s largest insurers, for example, publicly called in December for more aggregation, and for standardisation of products as climate bonds .
The corporate climate bond market can then be developed with partial treasury guarantees, ensuring that investment grade ratings are maintained, until investor and market maturity allow the development of a fully asset-backed market.
2. Engineer investment grade offerings.
When institutional investors say “big deals” they mean low risk big deals.
For better or worse, the yield curve in the bond market is not going to change — the demand is for investment grade, although BBB, A and AA will do just fine.
As most people in the renewable energy field would appreciate, ratings agencies persist in over-estimating policy and resource risks for renewables, while under-estimating the carbon penalty risk for coal and oil companies.
Until there is a longer track record for at-scale renewable investments to counter perceptions of “novelty”, major deals are likely to depend on various kinds of public sector support, from the nature of power purchase agreements (such as feed-in tariffs) and tax-breaks (common in the US), to low-cost loans to show how its done (as KfW Bank is providing for offshore wind farms in Germany) and regulatory support (in some markets just removing subsidies for fossil fuel energy is all that’s needed).
What’s needed is a grand pact between governments and institutional investors: government engineers a stream of large scale investment opportunities and does everything it can do make sure they are investment grade; in return institutional investors turn on the taps.
3. Be clever about public sector risk-sharing.
Public support doesn’t always have to be fiscal. There are many options, from guarantees to knocking heads together to regulatory measures, all which can encourage institutional investors.
Insurance products could include:
> First loss and selective loan guarantees. Well known tools for development banks; a lot more could be done with them in renewable energy investing and other climate change solutions.
> Policy risk insurance (e.g. building on the under-utilised Multilateral Insurance Guarantee Agency).
> Currency risk insurance (like the scheme run by the Dutch Government for development finance).
But regulatory support can also work:
> The UK’s Green Deal legislation collects energy efficiency loan repayments through the utility bill and ties those loans to the dwelling not the mobile dwellers. The legislation effectively de-risks investments by ensuring that default rates will be minimal (everyone pays their power bills). On the back of that loan portfolios can be built and securitised.
> In Germany the Covered Bond (Pfandbrief) market is worth nearly a trillion dollars. By extending that legislation to cover renewable energy assets German can hugely expand institutional investor access and participation in the renewables market and lower borrowing costs.
> In Japan the government is legislating to give preferential treatment renewable energy bonds over other unsecured debt. This tactic has worked for the Japanese nuclear utilities; it can work for renewables.
In summary, the mantra has to be leverage leverage leverage (of private finance), but can be regulatory leverage as much as financial.
4. Build green enabling institutions.
We know that the solutions have to involve new forms of private/ public risk sharing. We also know that the “understanding” gulf between Treasuries and investors is astoundingly large. Rapid change requires special purpose teams and institutions operating at the border between investors and government and tasked with finding quick ways to achieve change.
Green Investment Units and Banks are needed where State banks are not strong.
Where they already exist they need to be greened. The European Investment Bank, for example, is the world’s largest clean energy lender – but they have a dark side that uses cheap public money to build new coal-fired power stations. It’s policy lunacy because it means the EU’s bank is undercutting EU emissions reduction targets (let alone the world’s). They should be switching that dark side money to the light side and then leveraging it, for example by offering guarantees for qualifying climate bonds. Same thing applies to all the development banks (ask the EBRD about their coal lending!)
While we’re at it, can we cut back 100% project lending by development banks in favour of leveraging private finance? The EIB for example talks a lot about leverage but doesn’t do that much; it’s still lending 100% of funds willy-nilly. Time to better stretch that public sector balance sheet.
5. Give tax incentives for climate bonds.
This is not rocket science; it’s been used for many years to support the oil and gas industry in the US for example. Just a matter of defining what your qualifying universe is and doing it.
Very little treasury loss can be a big boost to investment.
The Climate Bonds Standards and Certification Scheme (see point 7) is designed exactly to support this.
6. Build an economic recovery narrative.
The money is there, much of it parked in cash, sitting out the crash.
Shifting the economy by building productive investments is a recipe for a long-term economic stimulus plan. And that’s what it would be.
The economy needs a narrative to right itself. A green growth narrative does that, while addressing the single most substantial threat of our era.
Part of that narrative is signalling where we can expect to see the economy go. As we address climate change we will need to revamp our economies across every sector.
7. Use Climate Bond Standards as a screening and preferencing tool.
Climate Bonds offer a tool to help investors and policy-makers to rapidly scale-up finance and action for the transition to a low carbon economy.
There is growing appetite from the investment community for investment-grade bonds that are specifically targeted at financing the low-carbon economy. However, in order for the market to grow and for liquidity to develop investors need tools to help them monitor and verify the climate effectiveness of their investments.
There are many benefits to Climate Bond Standards:
> Governments need to be able to signal encouragement for and track private capital financial flows in investment-poor areas of the economy.
> Institutional Investors, particular public sector funds that dominate the rankings of largest funds in the world, need to be able to signal investment areas they are interested in and assure the public that institutional capital is being invested in their interest.
> The public needs to know that a vehicle for catalysing large-scale financial flows to ensure future environmental stability is available and that the financial sector is supporting this future.
A large and liquid Climate Bond market will stimulate innovation from banks, issuers and policy makers alike and will make an important contribution to bridging the financing gap that currently exists.
8. Make it easy for politicians.
This is where real work is needed. Investors are aware of the risk of climate change; organisations representing $20 trillion have been calling for change for years — without huge success.
That’s because too many politicians are focused on the short-term, caught in the headlights of the fossil fuel lobby (just go to Washington DC and feel the number of coal and oil lobbyists around).
If concerned bond investors and business issuers are to see the policy settings needed to address climate change, they have to get better at packaging politically sellable solutions, not just making inchoate demands like protesters in the street.
That means working on and supporting industrial and investment plans that can address the challenge; that means showing how multiple sectors of the economy can be engaged in the task; and that means developing marketing campaigns to get those plans adopted and helping politicians see how they can successfully sell those plans to voters.
It’s time to match the fossil fuel lobby.
$3bn of 20yr wind bonds / Japan preferencing RE bonds (go Tokyo!) / Dark side of heroic EIB / Special 25% off Enviro Bonds Conf 15 Feb / US PACE bonds lifeline / Hear Kiernan raging / and more
Posted on 23. Jan, 2012 by Sean Kidney in blog
> The European Investment Bank is a hero bank – it’s the world’s largest clean energy lender – but they have a dark side that uses cheap public money to build new coal-fired power stations. It’s policy lunacy because it means the EU’s bank is undercutting EU emissions reduction targets (let alone the world’s). They should be switching that dark side money to the light side (and offering guarantees for qualifying climate bonds). See this useful overview about just how EIB lending is tying countries to carbon-dependent paths for 40 years, by CEE Bankwatch campaigner Manana Kochladze. Read more.
> Bonds from renewable energy companies will get preferential treatment over other unsecured debt under plans being considered by the Japanese Government to foster clean energy. This tactic is already used to help utilities raise funds for energy infrastructure — such as the nuclear plants now closed after post-Fukushima reviews. Debt issuance is a critical way of raising funds for investment, so extending the legal protection to renewable energy companies will be a big step in opening up the energy system to new players. Read More
> RWE has raised £600m in 22 year bonds to build offshore wind farms. Two weeks ago Dong Energy issued a 20 year £750m corporate bond and a €700 hybrid capital bond (hybrid capital bonds are like convertible bonds), we assume to fund their ambitious renewables development. They should consider doing an asset-linked Climate Bond!. RWE and Dong may have been inspired by renewables developer Iberdrola, who raised €600m last October. Who says bond markets are dead in the EU?
> If you’d like to come to the 2012 Environmental Bonds conference in London, 15 Feb, you can now get a 25% discount, simply because you’re a Climate Bonds friend! It’s a line-up full of Climate Bonds experts. All you have to do is Click Here.
> A Californian court ruling could revive the use of PACE bonds to finance residential energy efficiency improvements. Excellent! Read more at Environmental Finance and PACENow.
> Ideas for investing: new Science article on 14 most effective measures for reducing climate change, like encouraging a switch to cleaner diesel engines and cookstoves, building more efficient kilns and coke ovens, capturing methane at landfills and oil wells, and reducing methane emissions from rice paddies by draining them more often. They could cut emissions by half. Read More.
> New article by Sean Kidney in Canadian Corporate Knights magazine: “There’s a train leaving the station, one with a green paint job …” Read more.
> Good story in Scotland’s Holyrood magazine. “The City could rehabilitate itself and help combat climate change by focusing on clean finance, but the market will need new instruments and new skills….” Read More.
> Join me for coffee with legendary Innovest founder Matthew Kiernan as he rages on “How does refusing to take into account the biggest threat the planet faces make you a prudent investor?” – London 31 Jan @ 4pm. Email for details.
The true story of US CREBs and QECBs / China ups solar target 50% / Singapore+climate+insurance
Posted on 11. Jan, 2012 by Sean Kidney in blog
1. Did you hear that China raised its 2015 solar energy target from 10 to 15 GWp just before Christmas? They have around 3 GWp now, and they’d already raised their target to 10GWp after the Japanese nuclear disaster. In contrast, Germany has 25 GWp of installed solar. China is likely to direct banks to offer cheap finance, although there have been indications of a debt market beginning.
2. If you’re in Singapore 30/31 Jan you might be interested in the Annual Climate Change Summit for Asia’s Insurance Industry. You’d get the chance to hear our SE Asia coordinator, Louis Perroy, speak, and to meet our Indian co-chair, Sumantra Sen.
3. Where did all the CREBs and QCEBs go? Mystery solved.
The US has for a long time used tax credits to promote the development of oil and gas and other industries. With tax credits the bond issuer still pays a coupon, but their payment is subsidized, effectively lowering the rate of interest paid.
The Obama administration brought in a big program of credits for renewable energy bonds. The plan was that States, large local governments, tribal governments and public power bodies would issue bonds to finance energy efficiency or renewable energy. The US Treasury states that some $5.6bn of allocations to over 1800 applicants have been made for these tax credits. This would seem to suggest that there were $5.6bn of bonds out there, but when we went looking we found we could only find out information about a few of them.
A report late last year by the US National Association of State Energy Officials has helped explain what’s happening. It seems that only a small part of the approved tax credits have actually led to a bond being issued.
The Government allocated $2.4bn for Clean Renewable Energy Bonds (CREBs) and $3.2bn for qualified energy conservation bonds (QECBs). After some investigation, Bloomberg New Energy Finance calculates public issuance at $646m, although they believe there is also a private placement market of up to $400m. That would bring total issuance up to around $1bn. I.e. bonds have been issued for less than 20% of allocated tax credits – that’s a severely under-utilized public finance mechanism!
Renewable energy financing consultant and former Ernst & Young senior partner, Jonathan Johns, has previously written for us on the benefits of tax-exempt bonds. I asked him what was going on.
First, he said that “he’s not that disappointed”. He says that “these are nudge rather than demand pull measures and require participants to pull schemes together and go through various procedural hurdles involved. In a way they illustrate the future challenges of the industry as it seeks new sources of capital from the bond markets.”
Jonathan says that nudge mechanisms are often undersubscribed. “It’s interesting to note that those states with a strong record in renewables, e.g. California have used very high percentages of their allocations (which are based on population) whereas some more equivocal states have not. For other states there will be a natural cap on appetite if there are state or local borrowing limits.”
“There are lessons to be learned for the US and other jurisdictions – future schemes need to be more streamlined and remove some of the barriers – and also be accompanied by focus on demand stimulation and distribution channels for the bonds themselves.”
“Tax exempt bonds are a cost effective form of support, as relief is limited to the interest on the capital and not based on the capital itself. There’s also a relatively high payback per job created, with that payback localised when there’s a strong energy efficiency component – that’s been the case in over 50% of QECBs issued.”
A relatively large number of bonds issued are for small schemes in the $1m to $5m range. In other jurisdictions this has been difficult to achieve, with bond issues confined to recycling of large scale project finance portfolios.
Johns thinks it’s important to build on the CREB/QECB story and take the bond market to its next stage of development through the Climate Bonds Initiative and other mechanisms. Positive thinking.
Webinar invite 11 Jan: “Evaluating Clean Energy Public Finance Mechanisms”, new UNEP SEF Alliance / Climate Bonds Initiative / Irbaris report
Posted on 04. Jan, 2012 by Sean Kidney in blog
Join us for a Webinar on January 11, 2012
Space is limited. Reserve your spot now at:
https://www1.gotomeeting.com/register/825499744
The UNEP SEF Alliance will host the webinar on Thursday, January 11, 2012 at 9 am EST (New York time).
The webinar will cover the results of the recently released SEF Alliance/Climate Bonds Initiative /Irbaris report, “Evaluating Clean Energy Public Finance Mechanisms“. The report evaluates government funding of programs supporting the low-carbon, clean energy economy; it also examines the effectiveness of different types of public finance mechanisms at different stages of the clean energy continuum and how they perform in different environments.
The call will feature the report’s principal authors, Karl Mallon and Padraig Oliver of Climate Bonds Initiative and David Lyon of Irbaris, to give an overview of their findings. The report can be downloaded at http://www.unepsefalliance.org.
You can use your computer’s speakers, a USB headset, or telephone for the audio portion of the webinar. Please contact Maria@cleanegroup.org with any questions. Pre-registration is required for this free event.
Time Conversions:
9 am US (New York)
6 am US (California)
2 pm UK/Ireland
3 pm Central Europe
4 pm Eastern Europe
7.30 pm India
10 pm Singapore
1 am Australia (Sydney)
Title: UNEP SEF Alliance Webinar: Evaluating Clean Energy Public Finance Mechanisms
Date: Wednesday, January 11, 2012
Time: 9:00 AM – 10:00 AM EST
After registering you will receive a confirmation email containing information about joining the Webinar.
System Requirements
PC-based attendees
Required: Windows® 7, Vista, XP or 2003 Server
Macintosh®-based attendees
Required: Mac OS® X 10.5 or newer
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?