Smart investment money is on a low-carbon future

AT THE end of May, industry funds supremo Garry Weaven gave Australia's $1.4 trillion superannuation industry a serve for failing to do its fiduciary duty and invest to avoid irreversible, catastrophic climate change.

He used strong language, calling for radical action by super fund trustees to reappraise asset allocation and stock selection, and to influence the behaviour of corporate Australia.

"Generally speaking," he said, "no one in super has been prepared to take a root-and-branch approach to restructuring their investment strategy in line with the scientific facts of climate change and a judgment about the world's response."

Enter the London-based, non-profit Climate Bonds Initiative chaired by Sean Kidney, an Australian. It aims to initiate a new market in green bonds. For Kidney, bond markets are the key to raising the capital needed to decarbonise the global economy which the International Energy Agency estimates will require investment of $US1 trillion ($A930 billion) a year for the next 40 years.

Much of that investment will be in clean energy and transport infrastructure producing steady cash flows such as a solar thermal power station sitting in the desert with low maintenance and running costs. Decarbonisation, he says, "is a fixed-income opportunity because most of the assets required are going to suit fixed-income investments".

Happily, in the wake of the financial crisis, pension funds worldwide especially defined-benefit funds trying to match foreseeable, long-term liabilities are restructuring their investment portfolios out of equities and into bonds.

Worldwide, funds under management by global bond traders reached $US105 trillion in 2010. Last year, more than $US6 trillion of new bonds were issued. "The challenge of redirecting just 1 per cent per year of funds under management into building the low-carbon economy is eminently achievable," says Kidney.

About $US12 billion of bonds backed by investments related to climate-change solutions have already been issued internationally and Kidney expects that to hit $US20 billion within a year.

The initiative has established a climate bond standards board including the Australian Investor Group on Climate Change, the Carbon Disclosure Project and the Natural Resources Defence Council in the US. The $US190 billion California State Teachers' Retirement System has just joined the board. The first climate bond under the standard hundreds of millions, likely to be issued in Australia is coming within weeks.

Similar international standards will follow on solar, biofuels, energy efficiency, broadband and so on. Initial support is likely to come from ethical or socially responsible investors starved of options in fixed interest, but ultimately Kidney hopes the climate bond market segment will grow big enough to be included in the global bond indices used as benchmarks by big fund managers.

Long term, Kidney hopes for concerted government action. When governments wake up to the urgency of action on climate change, he argues, "they'll start doing what the US does and preference . . . green investments . . .

"All these pension funds are floating on the back of a government scheme funnelling money into their coffers. Those guys getting paid a quarter of a million dollars to run a pension fund . . . their salaries depend on us, the voters, making a policy decision to throw money at them. That's fine, but it is an artificially created pool of money and there has to be a licence-to-operate consideration."

paddy.manning@fairfaxmedia.com.au

Twitter: @gpaddymanning