Green bonds rise as investors seek profit from a low carbon economy
On the eve of United Nations Climate Summit in New York, US treasury secretary Jacob Lew put forward the business case for combating climate change.
The central tenet of Mr Lew's speech to his Washington audience was that there did not need to be a trade off between action to cool the planet and economic growth.
"Making the right investments will make our economy stronger today, create tens of thousands of new jobs, and position the United States to lead the world in the technologies and the industries of the future," Mr Lew argued.
"If we fail to make changes now, it will be much more costly to deal with the problem later, and some options may be foreclosed entirely."
Mr Lew's comments were warmly received by backers of the UN talks who hope garner support for a new round of climate negotiations which are planned to conclude in Paris late in 2015.
The aim of the Paris meeting is to provide a policy framework to limit global temperature rises to 2 degrees Celsius above pre-industrial levels.
Finance a *'*sticking point' in climate talks
So while Mr. Lew mounted a financial case for supporting the so-called "2°C principles", what was missing was a financial plan.
That is crucial, as the investment bank HSBC recently noted: "Finance is a sticking point for the negotiations as developing nations seek financial support and a safety net to cover the impacts of climate change."
Costing a global version of Mr Lew's idea is not easy, but HSBC had a stab at it in its Financing a 2°C World report.
The World Economic Forum's 2013 estimate was for an additional $US700 billion per year - to be spent on clean energy infrastructure, sustainable transport, energy efficiency and forestry - to meet the climate challenge.
On HSBC figures, hidden financing in existing development assistance programs around the world, which could be described as 2°C financing adds up to around $US400 billion, leaving a funding gap of around $US300 billion annually.
HSBC says the problems that have "previously tipped the balance against 2°C finance" include unfavourable economics for low-carbon energy, weak policy signals and the uncertain timing of high carbon dioxide impacts.
There is also the perception that returns are lower for low-carbon energy investments, where HSBC argues that, "in reality this is because low-carbon energy does not benefit from the same level of subsidy top-up that carbon intensive fuels receive."
In its 2013 World Energy Outlook, the International Energy Agency found fossil fuels received subsidies totalling $US544 billion in 2012, five times more than the financial support for renewable energy which was calculated to be $US101 billion.
Green bonds
While 2°C financing may be new, the means of financing are anything but.
Green bonds are rapidly becoming the financial instrument of choice for the transition to a low-carbon world.
In essence they are identical to traditional bonds, except they raise funds specifically for environmentally centred, but not necessarily climate focused, projects.
In the first six months of 2014, green bond issuance has totalled $US18.4 billion - a 67 per cent increase on 2013 – and that is now forecast to exceed US$40 billion this year.
In the past week alone, three more issues raising more than a billion dollars have been launched: the state of Massachusetts, a pioneer in the business, sold $US350 million worth of environmentally friendly bonds; the big Spanish energy outfit Abengoa announced plans to raise $US642 million for new renewable energy projects; and the biggest issuer of all, the World Bank, announced yet another 10-year step-up green bond.
The $300 million green 'Kangaroo'
All up, the World Bank has raised $US6.7 billion through 70 green bond issues in 17 different currencies since 2008, including a $300 million Kangaroo bond in Australian dollars earlier this year.
Like all World Bank issues, the Kangaroo green bond enjoys the security of a AAA credit rating.
It was backed by a group of 15 superannuation funds, asset managers and insurers – such as UniSuper, AMP Capital, QBE and Aberdeen Asset Management - which consider climate issues within their investment mandates.
Green bonds encompass a broad range of endeavours.
The World Bank typically channels its funds to renewable energy and energy efficient projects that cut greenhouse emissions in developing nations.
On the corporate side, companies such as Toyota earlier this year raised $US1.75 billion to finance the development of its next generation of low-emission cars, while Unilever's $US410 million issue targeted water use and waste disposal.
What makes a bond *'*green'?
The market is still in its infancy, yet to have a unified set of principles defining what exactly a green bond is.
As publication The Economist noted earlier this year: "What makes a bond green? The answer at the moment is, if someone says it is."
Nonetheless, while the world of finance hammers out definitions and a systematic approach to environmental assessments, investors continue to plough into green bonds.
The attraction is simple.
They are earning decent returns, typically 4 to 5 per cent per annum, with low risk, in projects that are environmentally attractive.
The $US40 billion that green bonds are likely to raise by the end of the year is pretty small change in the $US80 trillion global bond market, but it is a significant step in bridging the $US300 billion 2°C financing gap identified by the HSBC report.
As HSBC concluded, "2°C panacea won’t happen overnight, nor will it be free. Over the near term, it will be more expensive than implementing 'business as usual' but, over the long run, it should be less costly."
