A non-profit London-based initiative is aiming to stimulate a new market in green bonds, writes Paddy Manning.
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
Frequently Asked Questions about this Article…
What are climate bonds (green bonds) and how do they finance a low‑carbon future?
Climate bonds, often called green bonds, are debt securities issued to fund projects that reduce greenhouse gas emissions or support climate‑resilient infrastructure. According to the article, these bonds back investments in clean energy and transport infrastructure that produce steady cash flows — for example, solar thermal plants — allowing investors to finance the transition to a low‑carbon economy via fixed‑income investments.
Why are climate bonds considered a fixed‑income opportunity for everyday investors?
The Climate Bonds Initiative argues that many assets needed for decarbonisation fit the profile of fixed‑income investments because they generate predictable, long‑term cash flows and have low operating costs. That makes them suitable for bond investors seeking steady returns, rather than relying solely on equities.
How much investment is needed to decarbonise the global economy, and where can bond markets help?
The International Energy Agency estimate cited in the article says decarbonisation will require about US$1 trillion a year for the next 40 years (around A$930 billion). The Climate Bonds Initiative believes global bond markets — which manage trillions of dollars — are key to mobilising that capital into clean energy, transport and other low‑carbon infrastructure.
How large is the bond market today, and could climate bonds attract mainstream fund allocations?
The article notes global funds under management by bond traders reached about US$105 trillion in 2010 and more than US$6 trillion of new bonds were issued last year. The Climate Bonds Initiative suggests redirecting even 1% a year of that scale into low‑carbon projects is achievable, implying potential for mainstream fund allocations to climate bonds over time.
How much has been issued in climate‑related bonds so far, and what growth is expected?
At the time of the article, roughly US$12 billion of bonds backed by climate‑related investments had been issued internationally, and the Climate Bonds Initiative expected that figure to reach about US$20 billion within a year, indicating rapid growth in the climate‑bond segment.
What standards and governance exist to ensure climate bonds fund genuine low‑carbon projects?
The Climate Bonds Initiative has set up a climate bond standards board that includes organisations such as the Australian Investor Group on Climate Change, the Carbon Disclosure Project and the Natural Resources Defense Council, and recently added major institutional members like the California State Teachers' Retirement System. These groups aim to define and police standards for what counts as a climate bond.
What does this mean for superannuation funds and pension trustees thinking about climate risk?
Industry figures quoted in the article argue trustees should reassess asset allocation and stock selection to reflect climate science and the likely policy response. The article also notes many pension funds are shifting from equities into bonds to match long‑term liabilities, a structural move that could make them natural participants in the climate‑bond market.
How can everyday investors access climate bonds and who is likely to buy them first?
The article says the first climate bond under the new standard was expected to be issued within weeks (likely in Australia), with initial demand coming from ethical and socially responsible investors looking for fixed‑income green options. Over time, the goal is for the climate‑bond market to grow large enough to be included in global bond indices used by big fund managers, which could broaden access for everyday investors.
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