How climate bonds can save the planet

Addressing climate change is expensive. The International Energy Agency estimates the world must invest a whopping $1 trillion a year into clean energy by 2050 if we are to have any chance of keeping global warming to 2°C and avoid the worst impacts of climate change on the environment, the community’s health and the global economy.

Governments simply don’t have that sort of money. This is where green bonds, essentially debt instruments used to fund environmentally friendly projects, come in.

There are a number of fascinating green bond projects around the world.

World Bank Green Bonds have funded projects like biomass district heating in Belarus, which seeks to replace natural gas with a local renewable fuel source of wood chips and wood wastes; the closing of open dumps in Brazil with the building and operation of environmentally safe landfills; solar photovoltaic systems for remote or dispersed populations in Peru; energy efficiency investments in Turkey; rehabilitating, upgrading and replacing boiler houses, insulting piping and introducing building level meters and other energy efficiency investments in the Ukraine; developing more efficient use of drinking and irrigation water in Tunisia; increasing energy efficiency systems in Uzbekistan; and enhancing sustainable forest management in the Russian Federation.

Green bonds have also taken off in India. Bloomberg reports that the Export-Import Bank of India sold the country’s first green dollar bonds in a $500 million issue at 2.75 percent to support Indian Prime Minister Narendra Modi’s $160 billion push into solar power.

Danish wind-turbine manufacturer Vestas issued a Euro 500 million (AU$719 million) bond last month. The money raised would go to fund wind energy

“This green bond allows Vestas to diversify and optimise its funding structure in favour of longer term funding at attractive terms,” Marika Fredriksson, executive vice president and chief financial officer of Vestas said. “The bond is the first corporate green bond, issued by a company dedicated exclusively to wind energy, and it underlines Vestas’ strong position as a leader in the renewables industry.”

In October last year, Stockland issued a $300 million green bond to invest in green building projects.

National Australia Bank two months later launched a $150 million offering that included a $75 million commitment from the Clean Energy Finance Corporation. The bonds were used to fund renewable energy undertakings around the country, including wind farms and solar power projects in the ACT, NSW, South Australia, Tasmania, Victoria and Western Australia.

Overseas, we have seen Spanish utility company Iberdrola issuing a €750 million Green Bond program to fund renewable energy and smart metering, Toyota Financial Services launching a US$1.75 billion Green Bond to fund financing of sales and leases of hybrid vehicles like the Toyota Prius, and Unilever issuing £250 million green sustainability bond for fast moving consumer goods projects around the world on the strict proviso they will reduce greenhouse gas emissions as well as produce less waste and water. The Bank of America has issued a $500 million green bond to fund green investments such as renewable energy and energy efficiency projects.

French power company GDF SUEZ last year issued a green bond of €2.5 billion. The bond, which was three times oversubscribed with French, German and UK institutional investors, raised funds for renewable energy projects such as wind farms and hydroelectric plants, and for energy efficiency projects such as remote and smart metering and the construction of integrated district heating networks powered by low-emission biomass plants.

To get funded, projects have to meet criteria in five areas: environmental protection, contribution to local development and the wellbeing of local communities, fair and ethical relationships with suppliers and sub-contractors, human resources management, and good corporate governance.

GDF SUEZ chairman and chief executive Gérard Mestrallet said: “This unusually large issue will serve the strategic priorities and sustainable growth strategy of GDF SUEZ in renewables and energy efficiency in Europe and throughout the world.”

The Nordic Investment Bank issued a $700 million seven-year bond. Again, it’s oversubscribed. Lars Eibeholm, vice-president and head of treasury at NIB said the bank had been issuing climate bonds since 2011 but until now they had only been taken up by one or a handful of investors. But now the bank was issuing these to a broader market to expand its investor base.

“Now we are thinking of giving the broader market of mainly socially responsible investors access to NIB’s green lending through a larger and more liquid issue,’’ Mr Eibeholm said.

“One reason for this is that the market for green bonds has developed rapidly; it is now about five times bigger than it was two years ago. From a funding desk perspective, this allows the bank to attract investors who are not normally interested in NIB’s traditional benchmarks.”

The European Investment Bank has put up a £339.2 million climate bond to help fund the transmission link for Gwynt y Mor, the second biggest offshore wind farm in the world.

Barclays is investing more than £1 billion in green bonds to finance environmentally friendly projects like wind farms. The bank said it would work with the Climate Bonds Initiative to conduct due diligence on the investment.

Still on the banks, Bloomberg reports that Deutsche Bank is investing 200 million euros in green bonds and plans purchases of a 10-year issue from the World Bank. Alexander von zur Muehlen, the bank’s group treasurer told Bloomberg that the bonds are earning “attractive returns”.

In 2013, another French power company Electricite de France launched a €1.4 billion green bond, that was twice over-subscribed, particularly from institutional investors integrating environmental, social and governance criteria in their investment decisions. In effect, EDF had attracted a new class of investor. The capital raised was to be allocated for  financing future renewable energy projects led by EDF Energies Nouvelles, a wholly-owned subsidiary of EDF since 2011.

In the same year, Swedish real estate giant Vasakronen, co-owned by four leading Swedish pension funds, issued a 1 billion Swedish Krona green bond to help green its investment portfolio.

Even Warren Buffett is getting in on the act. Three years ago, The Wall Street Journal reported that his company Berkshire Hathaway issued an $850 million green bond to help fund its $2.4 billion Topaz Solar Farm in California. The bond was oversubscribed which was hardly surprising: Berkshire Hathaway’s green bond offered investors a healthy 5.75 per cent coupon. Most green bond issues are at around two per cent.

Demand for green bonds is coming mostly from institutional investors – particularly those with a mandate to consider the environmental or social impact of their portfolios – and that’s where the big money is. Some institutions have declared investments in green bonds publicly to highlight their commitment to climate finance and sustainability. They place the investment into portfolios managed according to socially responsible investment principles, attracting investors that would not have otherwise invested in ordinary (non-green) bonds issued by the relevant issuer.

As Bloomberg tells us, institutional investors such as insurance and pension funds are the largest buyers of project bonds. And non-profits promoting low carbon investment are starting to see the value of getting money from institutions.

“We have now entered the age of bonds,” Sean Kidney, chief executive officer at the Climate Bonds Initiative said. “If we are to get real finance to get these industries at scale, we have to engage with capital markets.”

The green bond market is still in its infancy. But as the world grapples for answers on funding the battle to save the planet, green bonds are likely to take centre stage.