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Inside magazine issue 12 | Part 03 - From a corporate perspective Despite the historic (and continued) importance of multilateral development banks, corporates are a growing class of green bond issuers To understand the momentum behind green bonds, we need to answer two key questions: first, why is there a move toward funding green projects at all? And, second: why has there been such growth in the climate bonds/green bonds market specifically, versus “traditional” approaches such as public sector funding and bank loans? The private sector is growing increasingly aware of the economic costs of climate change. Unilever’s Chief Executive Officer went on record last year claiming that climate change was setting his company back an astounding €300 million to €400 million a year. 7 In its 2014 survey of business executives, Deloitte found that, of those operating in emerging markets (in other words, countries disproportionately affected by the ravages of climate change), 72 percent cited “minimizing negative environmental impacts” as an “extremely” or “very important” business concern for them, and 49 percent of their counterparts operating in developed markets said the same. 8 To a greater or lesser extent, businesses thrive when they have a dependable supply of resources on which to bank, and they can grow and develop when their supply chain is sustainable. Many companies are increasingly finding that hurting the environment also hurts long-term profits and viability. In this regard, it is interesting to note that, despite the historic (and continued) importance of multilateral development banks, corporates are a growing class of green bond issuers. 9 It pays The growing acceptance that the economic and non-economic case for departing from “business as usual” is solid has coincided with a greater understanding of the cost and pay-off that comes with getting serious about going green. Let’s take a quick look at some evidence. As a first step, our eva<strong>lu</strong>ation requires appreciating which sectors are the greatest emission offenders. We can then calculate how much investment would be required to make those sectors green(er). The chart below, taken from the IPCC’s 2014 report, makes it clear that the key “culprits,” namely energy, land use, industry and transport, require careful attention. 1. Why go green? Business as usual is hurting us The mammoth global impact of seemingly small changes in temperature can be difficult to fathom, but it is very real. A mere 5 to 6 degrees separate current temperatures from those experienced during the last ice age. 4 The International Panel on Climate Change (IPCC)’s 2014 report 5 cites, with varying levels of confidence, population displacement, violent conflict, an undermining of our food and water supplies’ sustainability, and an exacerbation of health problems as among the consequences of global warming. Global Greenhouse Gas Emissions by Economic Sector Industry 21% Other energy 10% Electricity and heat production 25% Although measuring the economic cost of climate change has proven difficult and contentious, a recent study projects that if past adaptive patterns were to be replicated into the future, we can expect that sustained global warming will lead to a drop in average global incomes of approximately 23 percent by 2100 and an exacerbation of global income inequality, as compared to projected scenarios where there is no such climate change. 6 Transportation 14% Buildings 6% Agriculture, forestry and other land use 24% Source: IPCC 2014, cited in United States Environmental Protection Agency (EPA). Global Greenhouse Gas Emissions Data: http://www3.epa.gov/climatechange/ghgemissions/global.html 100
Inside magazine issue 12 | Part 03 - From a corporate perspective Estimates suggest that transitioning to a green economy in two of the greatest climate-offending sectors, energy and land use, would mean redirecting financing in excess of US$1 trillion on an annual basis until 2050 10 and that the total investment required in transport, energy and water over the coming decade and a half will reach a whopping US$93 trillion. 11 That’s a lot of money. The good news for low-carbon advocates, though, is that the high cost is not a consequence of going “green.” As the OECD notes, the sectors identified above will require major infrastructural investment in the coming years—whether we like it or not—and adopting a low-carbon approach to transport, energy and water infrastructural developments would not significantly increase costs compared to high(er)-carbon alternatives. Indeed, the report estimates a 4.5 percent higher cost for low-carbon approaches compared to approaches which do not specifically set out to be low-carbon. In other words, the infrastructural investment required in these sectors is high—regardless of the infrastructure’s environmental credentials. As the report correctly points out, the positive impact a low-carbon approach would generate, ranging from human health to traffic management and energy sustainability, would seriously dwarf this 4.5 percent extra expenditure. 12 To take human health, consider that as of September 2015, WHO projections were estimating that in the period between 2030 and 2050, climate change would cause in the region of 250,000 additional deaths annually, from diseases such as malnutrition, malaria, diarrhea and heat stress. 13 Although the case to go low carbon is robust, a clear investment gap exists. The Climate Bonds Initiative estimates that there is an annual shortfall of over US$1 trillion in infrastructural investment and, worse still, that a mere 7 to 13 percent of today’s infrastructure projects are considered low carbon and designed in a way that makes them resilient to climate change. 14 2. Why green bonds? It’s the economy! So, we’ve identified a clear green investment gap. The question, then, is to understand the drive to “marketize” and bring in private sector investment for what is clearly a public good. The answer is that traditional approaches are increasingly seen as insufficient. 15 Clearly, governments simply do not have the capital required to carry the investment cost alone. Banks, as Deloitte’s research has shown, are similarly constrained. Coming to terms with stricter post-crisis lending standards, providing traditional loans to fund major infrastructural projects is challenging. 16 Against this backdrop, there has been a strong push for alternative and innovative financial instruments to support lowcarbon projects as well as projects that aim to generate a positive environmental impact, in areas ranging from waste management to water conservation. The Climate Bonds Initiative estimates that there is an annual shortfall of over US$1 trillion in infrastructural investment. 101
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Inside magazine issue 12 | Part 01
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Page 50 and 51: Inside magazine issue 12 | Part 01
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
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