Mobilising Bond Markets for the Low-carbon Transition – An Eight-point Plan a report by Sean Kidney Chair, Climate Bonds Initiative, London
We need a fast transition to a low-carbon economy; the emissions horse is about to bolt and we have yet to deploy solutions that will allow us to rein it in.
The International Energy Agency estimates that, worldwide, $1 trillion of investment in energy, transport and building sectors are required each year above business as usual.1
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 (and growing) 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 (capex) that creates secure and predictable long-term assets – very close to what pension funds and insurance investors are looking for. Investments 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 this, we are, in 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, which is now worth $99 trillion compared to $55 trillion for equities, the reverse of a few years ago. Institutional investors have realised that high returns in equity can be illusory and have been busily shifting across to the bond market; according to the Bank for International Settlements, that market (domestic and international) is now worth $99 trillion compared to $55 trillion for equities, the reverse of a few years ago. Governments accounted for $43.7 trillion, financial organisations $43.8 trillion, corporations $11.0 trillion and international organisations $1.0 trillion.2
Sean Kidney is Co-founder and Chair of Climate Bonds Initiative, which promotes long-term debt models to fund a rapid, global transition to a low-carbon economy. It recently launched an International Standards and Certification Scheme for climate bonds. The Initiative also promotes public sector guarantee schemes for renewable energy and public transport, green investment banks and ‘sustainable financial solutions’ suitable for residential energy-efficiency retrofits. Sean is
also a member of the UK Government’s Capital Markets Climate Initiative and a Director of the Network for Sustainable Financial Markets. He was previously marketing advisor to a number of the largest Australian pension funds, Europe Manager for Climate Risk Ltd (assessing climates risks and opportunities) and a social marketer and publisher.
E:
seankidney@gmail.com
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. However, funds are still not flowing; how do we get some action? Eight steps are discussed here.
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. This 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, however, 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
We need a fast transition to a low-carbon economy; the emissions horse is about to bolt and we have yet to deploy solutions that will allow us to rein it in.
need scale; the smaller projects need to be aggregated into larger offerings suitable for the appetite of the big investors. At the moment, the main aggregation vehicles are banks, who hang on to renewable energy loan portfolios.
However, banks that provide 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 be squeezed even more in the future. Other players, such as 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
6 © TOUCH BRIEFINGS 2012
Industry Outlook
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