With any luck history will look back on a time before and after COP21.
With any luck the climate talks under way in Paris right now will accelerate and scale up commitments we need to decarbonise the economy, with the focus and energy shifting from political commitments to action plans.
The signs are promising, especially for the built environment and infrastructure, according to the people we’ve spoken with. Climate bonds czar Sean Kidney on Thursday morning (midnight Paris time) was upbeat about his patch. Globally, there are huge opportunities to engage the emerging nations in the challenge while providing much needed higher-yield opportunities for investors from the old economies, who are struggling with low yields in the wake of the GFC, he said. A win-win situation. For instance India wants to rebuild its massive railway system for the 21st century, including solar panels above the tracks and 7000 new railway stations. In China, the Central Bank says it can only fund 15 per cent of the green infrastructure it needs to decarbonise its economy – saying that the balance has to come half from domestic private capital and half from foreign investment. This could be the first opportunity for outsiders to get a bite of the action inside the world’s biggest economy.
In Australia, Barry Sharkey, managing director of global capital markets for UBS, which last year underwrote Stockland’s $300 million green bond issuance with HSBC, is also upbeat about the signals from the Paris talks. They would reinforce global trends underway for this emerging asset class, he says. (But he refuses to comment on market sources who say another green bond is imminent, possibly from Westpac.)
The reports coming from Paris show that agriculture, transport, energy and cities will be key to the After COP21 phase. But it will be buildings that absolutely need to stand right at the front line of the challenge. The sector currently produces 30 per cent of global emissions, 40 per cent in countries such as the US, and soon they will account for 50 per cent of global GHG emissions.
What’s going on is actually awesome.
On the political front, no one is calling it the disaster of the Copenhagen climate talks in 2009. Instead of bickering and intransigence, there have been generally-plausible commitments from each country, mainly through the Intended Nationally Determined Contributions, or INDCs.
Even Russian president Vladimir Putin spoke up for the challenge. He said climate change was one of the “gravest challenges humanity is facing”. Russia’s efforts to reduce emissions have slowed down global warming by “more than a year,” he said.
“At the same time we have managed to double our GDP. Thus we have demonstrated that we could ensure economic development and take care of our environment at the same time.”
But the goodwill shown by politicians aside – and it’s always a good idea to leave them at least partly on the sidelines – pales by contrast to the real power shift under way in the world of finance and investment.
It’s here that the momentum shows the biggest promise, through instruments such as green bonds and climate bonds (more on this later). What’s exciting is that governments are starting to join the dots and realise that to slow the rate of climate change they need to harness the economy and industry and for all to work in unison.
This was the exciting take from Ian Lieblich, from Investa, who explains this position in more detail in an article he filed for us on Thursday from Paris.
Lieblich says that “crucially” Australia’s INDC – and those of Canada and the US – acknowledges the need for an “economy-wide” approach to emissions reductions.
Even more promising is the repeated reference in the Draft Agreement Text, to “leveraging and attracting private sector investments and promoting access to public sector technology”.
So, this is an explicit invitation to industry to scale up and build up support for what’s going on at the political level.
For Australia, this is a massive departure from the messages previously coming out of Canberra in the past few years.
Property isn’t specifically called out in the texts, Lieblich says, but “its involvement with the energy and industrial sectors leaves little doubt that the sector will feel the effects of the Paris negotiations”.
For sure it will. Read what we said at the start on the contributions to emissions reductions.
Lieblich points to the outperformance of Australian property companies in global indices to show that industry just gets on with the job regardless of government vacillations.
And yes, that’s true at the top end of the market.
But it’s far from true for any buildings below the premium top 10 per cent. If government wants industry to stump up with some serious behaviour change, then it needs to implement some policies to support the transition.
Industry never cares about what it has to comply with, as long as it’s a level playing field. Well that’s what the shopping centre behemoths like Westfield like to say when they look at retail competition policy.
Time for sticks, Gov
What we need is a blend of sticks and carrots. Please let’s not rely on voluntary programs, unless we’ve got a few spare centuries.
Our current series examining the effectiveness of voluntary programs by Dr Jeroen van der Heijden shows how incredibly hard it is to shift behaviour by voluntary methods alone.
People who run these programs do amazing work, and we know they have shifted the heavens to try to motivate small property owners to cut their own energy waste, but it’s to little avail. Most of the mid- to lower-tier owners just don’t care. It’s interesting that van der Heijden says the Better Buildings Partnership is probably the most successful voluntary program – it’s made up of the top-tier owners!
You need a bit of mandatory grunt to shift things along. Now that our New Improved Feds under Malcolm Turnbull have held up such strong hopes for more rational behaviour from Canberra, and now that they’ve signalled this shift to the world, then perhaps they will consider doing something as simple and cost free to government as expanding the Commercial Buildings Disclosure program.
It’s time we made the simple disclosure of energy consumption part of the normal commercial disclosure you are required to make in any transaction.
Just like fuel consumption in a car.
And extend it to small offices, big shopping centres, stand alone retail… houses.
In London, the built environment people we met there look to Australia as a leader in sustainability and energy efficiency and they long for a smidgen of the nous that led one of our governments to implement the Commercial Buildings Disclosure program.
This is leadership Australia, let’s run with it.
To look at COP21 in Paris and the impact it might have on the world of investment, we called Barry Sharkey who is managing director of global capital markets for UBS. We spoke to Sharkey last year when UBS, along with HSBC, underwrote the green bond issuance for Stockland; he said at the time he was flooded with interest in the deal and there seemed to be significant appetite for more.
Since that $300 million issuance there has been an issuance from the ANZ for $600 million and our sources tell us another is in the wings, from Westpac, with possibly another two on the way.
How is the market for green bonds travelling? Does Sharkey think COP would impact global momentum for green investment?
COP, he said on Wednesday this week, is “amazing, in the sense that it was probably one of – if not the – most significant concentration of global leaders in one time, partly about climate and partly about solidarity [after the terrorist attacks]”. Either way it’s a positive sign.
Sharkey doesn’t think the focus on climate and green or ethical investments is something that’s in for an instant step change in volume or demand but what he’s sure of is that demand is growing steadily.
Given it was nascent asset class the interest and demand had held up strongly, he says, and demand would grow over time. It was “an evolution rather than a revolution”.
“There is still broad support for the asset class and demand is steady” but it wasn’t “a conga line from issuers in this part of the world”.
On bonds in general there is a “general market ebb and flow that’s not specific to green bonds”, with sentiment responding to issues such as fears for the financial stability of Greece or whether the Feds would raise interest rates.
Sharkey would neither confirm nor deny market talk that there’s another green bond in the wings right now in Australia and would only say there was a number of “confidential projects” afoot and that he was unable to discuss whether they involved UBS or its competitors.
What’s clear, and what he was happy to say, was that appetite for these instruments was “unchanged”.
On pricing there was no discernible price differential between green bonds and other bonds.
But while Sean Kidney, chief executive of the Climate Bonds Initiative, is more focused on climate bonds, Sharkey probably has a “slightly broader focus – bonds could be green and environmental without being related to climate”.
“We try to be more broad about what makes a green bond.
“Lots of people are making ethical or green investments and these are more commonplace when it would have been just SRI [social responsible investments] or green funds 20 years ago.
“In a good way these principles are bleeding into more common investments.”
Sean Kidney on climate bonds and COP
According to Sean Kidney, the Paris talks are replete with events around finance, but also sectoral areas of interest, around which side events and seminars abound, on topics such as agriculture, water and cities.
The building sector has its own day – overnight Australian time – and we’ll be bringing you news of what transpires.
“There are lots of events around finance, including from emerging markets; I’m speaking at finance event tomorrow on India,” Kidney says.
He agreed with Ian Lieblich’s views above, that there was a shift to action and plans.
“There is a level of maturity emerging in discussions that says there are no free handouts. We’ve got to construct a deal that works and a deal is about being mutually satisfied,” Kidney said.
“A lot of people say there is a real sea change, a momentum shift and things are beginning to gel. It’s not the treaty. The National Climate Change Plans are still weak but the point is there is a bit of an arms race about them.
“The big initiative is to begin the process to get an agreed investment plan attached to every Intended Nationally Determined Contributions.”
A Green Infrastructure strategy for European investment launched on Wednesday, he says, which “is meant to be a platform to discuss countries’ green investment plan, shaping deal flows and how those investment plans get designed”.
So, instead of a vague five-year plan about emissions reductions targets, the question will be how, and where. So “not that you want to build a new railway system but a plan, show me where the tracks will be.”
There is much positive news happening in emerging countries as well, Kidney says, and in some ways these will offer multiple opportunities not just for the world to keep emissions down by encouraging green development, but by offering investment opportunities that could well outperform yields in “old” economies.
India, for instance, wants to shift the amount of freight it carries by rail from one third to a half. “That’s a target,” he says. And so is that it has committed to building an entire new railway network to replace its current system.
“India will leapfrog its old system with a new 21st-Century system,” he says.
One of the most impressive parts of that plan is to utilise the space above the rail tracks with solar cells.
“One of the most expensive parts of solar is the rights to land.”
India will provide that and “probably give power to the grid… or use it for running the trains…”
These are all opportunities that could well attract pensions funds plagued with low returns in their home countries and worried about how to meet redemptions.
Watch out world, he comes the green finance cavalry.