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I.H.T. Special Report: Business of Green: Sustainable Bonds Hope to Help Fix the Planet
2010-11-04 07:38:31.924 GMT
I.H.T. Special Report: Business of Green: Sustainable Bonds Hope
to Help Fix the Planet
By SONIA KOLESNIKOV-JESSOP
(International Herald Tribune) -- SINGAPORE — Financial
experts may debate how much it would cost to shift the world to a
low carbon economy, but they agree on one thing: the amount would
be phenomenal. The International Energy Agency in Paris, for
example, has estimated that it would take $46 trillion in
additional clean-technology investments over the next 40 years to
halve carbon emissions by 2050.
Today, funds mobilized to address climate change are
primarily coming from the private sector. While there is also
some public investment, there remains a clear gap between what is
needed to deal with climate change and what is available. How to
close that gap has become a subject of intense debate.
For Ben Caldecott, head of the British and European Union
policy department at Climate Change Capital, a London-based
environmental investment manager, the answer is clear. "The only
pool of capital deep enough to finance our low carbon transition
is that held by institutional investors and players in the debt
capital markets," Mr. Caldecott said. "New green bonds are a way
of accessing this pool of money."
But, he cautioned: "Investors want to see a liquid market in
long-dated asset-backed bonds that are investment grade and those
criteria have yet to be met for green bonds. The market will buy
these new debt products, but for this to happen at scale we need
to create a liquid market first. It's a bit of a chicken-and-egg
story."
Sean Kidney, chairman and co-founder of the Climate Bonds
Initiative — an international network that advocates raising
money through the bond market for climate protection projects —
argues that "themed" bonds have long been a way to raise large
sums of money for specific purposes.
For example, "the U.S. civil war was financed with war
bonds," Mr. Kidney told delegates at a carbon conference in
Singapore last week. "Although these war bonds were targeted at
retail investors, most of the money raised came from
institutional investors."
The retail investors' campaign served to engage the
population, creating political pressures that drew in the
institutions, Mr. Kidney said, suggesting that themed climate
change bonds could be used in a similar way to mobilize retail
and institutional investors on the issue.
So far, international institutions have driven green bond
issuance. The World Bank has led the pack with more than $1.6
billion worth of green bonds issued since 2008, through 24
transactions. Proceeds from these bonds rated AAA go into a
special account for lending to approved projects.
"We developed the green bond product in response to a
specific request from a group of investors who were looking for a
high grade, fixed income product from the World Bank," Heike
Reichelt, an official in the World Bank's capital markets
department, said in an e-mail. Investors, she said, had been
looking for securities with "a plain-vanilla structure and coupon
to support liquidity, while also supporting projects that met
mitigation and adaptation criteria."
The bonds have attracted large institutional investors
including the New York Common Retirement Fund, the California
State Treasurer, the California state teachers retirement system
— and two of the three largest Swedish national pension funds,
Mrs. Reichelt said.
Other international institutions, including the European
Investment Bank and the Asian Development Bank, have also issued
green bonds. Still, the total amount raised so far has been
small, compared both with the needs of the sector and the size of
the capital markets.
Several proposals to expand the market are being discussed.
One suggestion, from the International Monetary Fund, proposes
the creation of a multibillion-dollar "Green Fund" financed by
bond sales to help developing countries deal with the effects of
global warming. The proposal suggests the fund could raise as
much as $100 billion a year by 2020.
Meanwhile, the International Emissions Trading Association,
an industry group that promotes greenhouse gas trading programs,
has proposed a green bond mechanism that would provide financing
to developing countries for specific infrastructure projects that
have significant carbon-reduction payoffs. This would be achieved
through the sale of bonds that yield both interest payments and a
flow of carbon credits, and which would be guaranteed by
multinational institutions like the World Bank or the Asian
Development Bank.
While the interest payment would be relatively low, the bond
would be attractive to investors because of the potential value
of the credits. The interest rate could also be topped up by cash
dividends linked to the performance of the underlying investment;
they could be paid, for example, from the revenue generated by
electricity sales in the case of a clean power investment.
As the bonds would be linked to specific projects, a failure
of the project to deliver agreed carbon reductions would
interrupt the issuance of carbon credits; on the other hand, in
the case of a government default, the guarantors would stand
behind the bond.
Such a structure "would enable the bonds to achieve a high
credit rating, and therefore the interest rate paid will be
relatively low," Imtiaz Ahmad, an executive director in London at
Morgan Stanley, told the carbon forum. "So, large-scale finance
will be available at a reduced-cost basis."
Still, Mr. Caldecott, says, while the issuance of government
bonds or multilateral institutional development debt would be
helpful, the more basic need is to develop self-sustaining,
liquid markets in corporate green bonds.
"What we need are low-carbon infrastructure or project
bonds, issued by corporate borrowers, that are used to refinance
cash-flow-producing assets once they're built and operational,"
he said, pointing to the British offshore wind farm industry as
an example.
Ecotricity, the largest independent green energy company in
Britain, recently announced a plan to issue "EcoBonds," the
proceeds of which would be invested in building new wind, solar
and renewable gas resources.
For now, green bonds issues by corporate borrowers are still
rare. But Mr. Caldecott says this could change with the arrival
of the Green Investment Bank in Britain, which will fund initial,
high-risk investment in technologies like offshore wind power.
The bank was announced by the previous Labour Party
government shortly before it lost the election this year; but it
has been retained by Prime Minister David Cameron as a central
plank of the agreement that binds the Conservative government
with its Liberal-Democratic partner.
Details of how the Green Investment Bank will be funded, and
what it will do, are to be unveiled early next year. One idea
under consideration is that it could play a role in developing a
liquid low-carbon bond market. The British government has already
committed £1 billion, or $1.6 billion, with more promised, for
the bank to unlock private sector funds for the transition to a
low-carbon economy.
Copyright 2010 The New York Times Company
-0- Nov/04/2010 07:38 GMT
