How to finance a green world

By Joachim Marc Christensen, Project Coordinator of the Global Opportunity Network

The COP21 in Paris is coming up and we are all hoping for an early Christmas present in the shape of an ambitious global climate deal. A present that will make sure future generations will be able to experience a white Christmas because temperatures will still dive below zero. But how do you finance a green transition on such a massive scale? We have looked at the financial world for answers.

In an otherwise conservative financial market, a new type of climate-friendly bond is emerging. Green bonds are a new class of financial assets, which allows successful funding of sustainable and climate-related projects. But in order for these bonds to be attractive for investors, governments will need to re-think financial systems. We went to London to meet Sean Kidney, one of the most prominent advisors on green bonds. He believes green bonds are the answer and that good government/investor relations are the key to making them attractive.

Turning green dollars into green bonds
At the age of 50, Australian marketing strategist Sean Kidney was in a crisis. He had a stroke, his father died, and his consultancy business went broke because he was not interested in it anymore. That was when he decided it was time for a change. He moved with his family to London and started Climate Bonds Initiative, an NGO focused on promoting green bonds. What made him shift his focus to climate issues was the state of global climate:

“I think it’s really important for us to understand how serious the stakes are now given we’ve made no progress on this for the last 20 years. In fact, the rate of greenhouse gas emissions have increased globally more in the past 20 years than it has in the previous 100 years. So I started thinking, ‘okay I better work in climate change’. I’ve just always had a personal interest in global governance.”

Climate Bonds Initiative’s mission is to grow capital into climate solutions by promoting green bonds to investors, primarily pension and insurance funds filled with trillions of dollars of investment-ready capital. But it’s not easy to convince funds to invest in green bonds:

“When there are no precedents in big green projects, no one can judge based on historical data, which is the way you normally judge creditworthiness. The consequence is that many green bonds are given a high-risk profile. That means the prizing in a high-interest environment in for example India is very high. And that makes it uneconomic.”

Investors need a reason to enter the green bond market and that is where governments enter the picture.

The ball is in the governments’ corner

Usually an investment fund has a diversification strategy, which means it spreads out its investments to reduce risk. For example, the fund might only allocate 5 percent of its investment-portfolio to high-risk assets. If green bonds are high-risk, they are simply harder to sell. Kidney describes that if governments start to provide guarantees and regulatory support for green bonds, these bonds will obtain a lower risk-profile and will then be able to compete with brown economic assets such as oil and gas. This kind of government support requires no capital and it will build trust in the investment community. Another way to facilitate green investments is for rich governments to buy down interest rates, which makes it more attractive to issue green bonds. Kidney elaborates:

“If India built a new sustainable and climate-resilient city out of Hyderabad it’s going to a cost a billion dollars or maybe 5 billion dollars. Rich governments can then help out by offering to buy down interest rates in order to secure investments. They can say: “If you’re going to build a city, just build it this way, and then you will get interest rates at half the rate”. At the end of the day we don’t shift economies in five years without the public sector being central to it.”

The COP and the positive narrative
Without a doubt, relations between governments and investors need to be reassessed to ensure that money is funneled in a green direction. But how far are we? We asked Kidney about his opinion on the COP21 and its impact on green bonds:

“For me COP’s are fantastic because they are the world’s industry space. With this particular COP I think the INDC’s (intended nationally determined contributions) are really positive. But they’re only the first step. The second step, which I’d like to see in 2016, is that all INDC’s have green investment plans: a move from abstract to practical investment in a five year horizon. Then I think we will make progress. Why? Because at the moment there’s more than enough money around to buy green deals, but there simply aren’t enough green deals. But I’m staying optimistic. At the UN Climate Summit last year, for example, there were investors who represented 43 trillion. That’s half of the world’s investment community, and the insurers representing 20 trillion said that they would undertake to increase by ten-fold the climate-improving investments by 2020. I really think there is a chance in this COP to turn the global climate narrative around from one of distress to one of hope.”

A sunny future
If governments succeed in turning their INDC’s into realistic green investment plans, the future will not be as bleak as some has predicted. Actually, it will be one of light – sunlight so to speak. Sean Kidney believes that especially advancements in the energy sector will make an enormous difference in the years to come:

“We will see a future where energy costs dramatically drop. By 2050 I expect solar to be virtually free to manufacture. Then it’s really just distribution cost. So we’ll be in a new era of cheap energy driving development of societies. The poorest of the poor will be able to catch up with everyone else. A lot of positive things can happen if we do the right things.”

Sean Kidney will keep on helping governments and investors unlock the potential of green bonds. Today he is an advisor for institutions such as the People’s Bank of China and the European Wind Energy Association. He does it not only because he thinks green bonds are good business, but also because it is the right thing to do:

“You know, what we’re really doing is learning how to manage the planet in an adult fashion, and it’s not only the opportunity but also the responsibility we need to grasp.“

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