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Inside magazine issue 12 | Part 03 - From a corporate perspective Green bonds are just one innovation within the broader “green finance” space Sources Actors Instruments Budget • General tax base including carbon taxes and financial transaction taxes • Revenues from international transport mechanisms*, fossil fuel subsidy reduction, emmissions trading schemes, etc. Private Capital (Commercial & Personal) • Savings - Pension payments - Insurance policies - Deposits • Stocks & Shares State Actors (Executive & legislature) National Public Institutions (including export credit agencies, bilateral development assistance, NDBs) Multilateral Development Finance Institutions Grants • Contribution to climate funds • Technical assistance & capacity building • Debt swaps Debt • Consessional loans • Loans • Green bonds Risk Mitigation Coverage • Guarantees • Insurance • Export credits * International taxes or carbon revenues could be collected by implementation governments or a designated international entity. Institutional Investors Private Investors Commercial (corporate/project developers & commercial banks) Personal (households & philanthropy) Equity • Contributions to sovereign wealth funds • Equity investments Carbon Offsets Public Private Source: CPI and Cicero (2015) cited in Buchner, B. and Wilkinson, J. 2015. Pros and cons of alternative sources of climate change financing and prospects for ‘unconventional finance’, Fig.2: The climate finance system in Barrett, S.; Carraro, C.; and de Melo, J. (2015) (eds.) Towards a Workable and Effective Climate Regime, p. 487 102
Inside magazine issue 12 | Part 03 - From a corporate perspective One commonly cited concern, for example, is that most projects behind green bonds are actually not new projects, but old projects or projects that would have been funded anyhow. It is clear that green bonds have emerged as one of these important innovations. As the OECD notes, green bonds are especially valuable as financial instruments. The reason for this is that critical green investment needs, such as infrastructural investment related to the renewable energy sector, are typically amenable to bond financing—combining, as they frequently do, high initial capital costs with long-dated income streams that tend to be inflation-linked. 17 Still, even if we accept the strong economic and non-economic case for green investment wholesale, and the robust argument that bonds are, for a variety of reasons, potentially a good instrument for funding low-carbon infrastructure, it is clear that the demonstrable necessity, even cost-effectiveness, of climate action does not, by itself, generate a market for green bonds. For this, we need to look more closely at issuer and investor incentives in this space. Issuer incentives At first glance, it is not clear why there is such a drive among issuers (a population comprising, in order of significance: multilateral development banks, bilateral development and trade agencies, subnational bodies and cities, energy and utilities companies, corporations and commercial banks) 18 to opt for green bonds. The World Bank 19 suggests that this is something of a long-term strategy, since market trends could see pricing variation emerge in the future, should demand for green bonds continue to grow (there is currently no price advantage for green bonds as compared to regular ones). If that is the case, indications are positive, with the Climate Bonds Initiative’s 2015 report citing “continuously growing investor demand, particularly by institutional investors and corporate treasuries … shown in oversubscriptions as well as billions in pledges … [by a range of banks] … to invest in green bonds.” 20 Moreover, as the World Bank notes, green bonds have the advantage of allowing issuers to diversify their investor portfolio. Environmentally conscious investors (forming part of the SRI investor family) are a particular and growing target population that green bonds have allowed issuers to tap into, perhaps for the first time. This enables the growth of economies of scale, which is clearly a financially attractive prospect particularly since, as the OECD notes, the bulk of costs for issuers are the upfront costs of setting up processes. 21 Green bonds have also served as a communication tool, allowing issuers to show their investors the types of climate project that they are funding, and increase their reputational capital. 22 For governments and international development banks, the incentive to demonstrate their green credentials is obvious. But there’s an incentive for corporates too (a burgeoning class comprising the green bond issuer community). Earlier in the article, we noted how sustainability is becoming a core business concern. Against this backdrop, as Zurich Insurance Group’s Responsible Investment Chief Manuel Lewin pointedly states: “Issuing a green bond is a signal to the market that here is a company that thinks about risks related to climate change and to other environmental challenges and has a plan for how to tackle them by making investments to address them. This could and should affect the broader assessment of the credit risk of that issuer.” 23 The more skeptical perspective of green bonds as a vehicle for shoring up “reputational capital,” of course, is the view of green bond issuance as either a relatively shallow marketing ploy or as an attempt to pour old wine into new bottles. One commonly cited concern, for example, is that most projects behind green bonds are actually not new projects, but old projects or projects that would have been funded anyhow, but that are now increasingly being wrapped up as green. There are also concerns that issuers might be using the green label to gain market attention in the broader corporate bond market, which is developing for reasons that are potentially broader than green finance. These concerns are partly driving the trend we are seeing for increasingly stringent (albeit currently still voluntary) standards and second opinions on the credentials of issues in the green bond space. Investor incentives For investors, a range of incentives have been cited. There is some debate, but little in the way of clear evidence, as to whether investing in green bonds is—from a purely financial perspective—preferable to regular vanilla bonds. 103
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Inside Triannually insights from De
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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 52 and 53: 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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