tag:theconversation.com,2011:/global/topics/green-bonds-23432/articlesgreen bonds – The Conversation2023-11-07T19:35:03Ztag:theconversation.com,2011:article/2140632023-11-07T19:35:03Z2023-11-07T19:35:03ZMaking money green: Australia takes its first steps towards a net zero finance strategy<p>Just north of Jamestown in South Australia, 70 kilometres east of the Spencer Gulf and next to a wind farm of nearly 100 turbines, stands the world’s <a href="https://www.cefc.com.au/where-we-invest/case-studies/sa-big-battery-a-game-changer/">first big battery</a>. </p>
<p>Built in partnership with <a href="https://www.tesla.com/videos/powerpack-hornsdale">Tesla</a> and financed and operated by <a href="https://www.energy-storage.news/upgrade-at-tesla-battery-project-demonstrates-feasibility-of-once-in-a-century-energy-transformation-for-australia/">Neoen</a>, a French multinational renewable energy developer, the <a href="https://en.wikipedia.org/wiki/Hornsdale_Power_Reserve">Hornsdale Power Reserve</a> and other big battery projects could stimulate a homegrown battery industry, contributing many <a href="https://fbicrc.com.au/wp-content/uploads/2023/03/Charging-Ahead_Final-Report_Full-17-March-2023-1.pdf">billions of dollars and thousands of jobs</a> to the Australian economy. But for that industry to rise, it will need money.</p>
<p>Australia aspires not only to transition its economy to net zero emissions, but to become a green energy superpower. That means building a host of solar and wind farms, batteries, electric vehicle charging stations, upgrades to the grid and to all kinds of buildings, as well as investments in new technology. </p>
<p>These investments and big infrastructure projects don’t come cheap. Getting to net zero emissions by 2050 requires investment in renewable energy of A$754 billion in power generation alone, according to <a href="https://www.uts.edu.au/sites/default/files/2022-06/Supercharging%20transition%202021%20Update%20-%20Oct%2022%20update.docx.pdf">research</a> by the <a href="https://www.uts.edu.au/isf">UTS Institute for Sustainable Futures</a> and funded by Future Super.</p>
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<h2>The size of the green finance challenge</h2>
<p>By 2030, the world will have to invest <a href="https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-a-decade-of-data/">an estimated US$4.3 trillion</a> a year – roughly <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true">the GDP of Japan</a>, the world’s third-largest economy – in climate finance. These financial flows need to grow by 21% a year, on average. Without this enormous increase, the economic transition will not happen in time to avoid the worst impacts of climate change. </p>
<p>The scale of financing means that superannuation funds and other big institutional investors <a href="https://www.theaustralian.com.au/business/financial-services/super-funds-voice-concerns-over-reaching-2030-green-targets/news-story/43aed4b3d27a80c1f8cc349390acc4a8">must be involved</a>. They need to know where their money is going, and whether investments are genuine or a case of “greenwashing”. They need certainty that companies in which they invest have solid plans to reduce their climate risk, and the ability to ask the companies questions when they don’t.</p>
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<a href="https://theconversation.com/australias-new-dawn-becoming-a-green-superpower-with-a-big-role-in-cutting-global-emissions-216373">Australia's new dawn: becoming a green superpower with a big role in cutting global emissions</a>
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<p>But current financial regulation is not set up to support such best practice. To give just one example, default superannuation funds lack the <a href="https://www.apra.gov.au/sites/default/files/2022-12/Methodology%20paper%20-%20MySuper%20Heatmap.pdf">benchmarks</a> – measures of performance assessed by the Australian Prudential Regulation Authority – they need to invest in start-up businesses that are developing clean energy technologies. </p>
<p>Successive Australian governments have been slow to grasp this reality, and we are now playing catch-up with many other countries. </p>
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<h2>Australia releases its strategy</h2>
<p>The <a href="https://treasury.gov.au/consultation/c2023-456756#:%7E:text=The%20strategy's%20policy%20priorities%20are,Australian%20Government%20leadership%20and%20engagement.">Australian government’s Sustainable Finance Strategy</a>, <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/new-steps-albanese-governments-sustainable-finance">released by Treasurer Jim Chalmers</a> last Thursday, lays solid foundations for this recovery. Yet more needs to be done if Australia is to achieve the strategy’s stated ambition to be a global sustainability finance leader.</p>
<p>The strategy is arranged around <a href="https://treasury.gov.au/consultation/c2023-456756#:%7E:text=The%20strategy's%20policy%20priorities%20are,Australian%20Government%20leadership%20and%20engagement.">three core pillars</a>. The first focuses on creating access to information that is credible, accurate and of practical value. It seeks to ensure markets operate efficiently and money flows to where it is most needed.</p>
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<p>From July 1 2024, large Australian companies and financial institutions will have to <a href="https://www.climateworkscentre.org/news/mandatory-climate-related-financial-disclosures-for-australian-companies-explained/#:%7E:text=Under%20Treasury's%20proposal%2C%20companies%20will,requiring%20substantial%20forward%2Dlooking%20information.">disclose information</a> about the impacts of climate on their business, the risks climate change poses to their operations, and how they plan to decarbonise. </p>
<p>The disclosure requirements will be based on <a href="https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures/#:%7E:text=IFRS%20S2%20requires%20an%20entity,related%20risks%20and%20opportunities%20that">internationally accepted standards</a>, to ensure Australian and overseas investors can compare data across companies and countries. </p>
<p>The government is also supporting the development of an <a href="https://www.asfi.org.au/taxonomy">Australian sustainable finance taxonomy</a> – a set of criteria that enables investors to evaluate whether and to what extent an investment supports sustainability goals. </p>
<p>A taxonomy spells out which investments result in real decarbonisation, and reduces the likelihood of false claims about the sustainability of projects and investments. A government agency will manage the taxonomy, which will start as a voluntary code but may eventually become mandatory. </p>
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<p>Large companies will also be required to disclose their net zero transition plan, if they have one. With companies representing <a href="https://acsi.org.au/wp-content/uploads/2023/08/Promises-Pathways-Performance-Climate-reporting-in-the-ASX200-August-2023.pdf">80% of the market capitalisation</a> of ASX 200 companies pledging to achieve net zero emissions, the government wants to ensure their plans are credible. It wants the corporate regulator, the <a href="https://asic.gov.au/">Australian Securities and Investment Commission</a> (ASIC), to set out its expectations of the plans – a welcome step.</p>
<p>The second pillar focuses on building the capabilities of Australia’s financial system regulators to manage risk and to clamp down on greenwashing – the practice of making misleading or deceptive claims about the environmental benefits of activities or assets. </p>
<h2>Fighting greenwashing</h2>
<p>ASIC Deputy Chair Karen Chester believes the economic cost and loss of investor confidence caused by greenwashing “<a href="https://asic.gov.au/about-asic/news-centre/speeches/climate-change-urgency-integrity-ambition/">cannot be overstated</a>”. Her organisation has set out guidelines to help financial institutions identify it. This year ASIC launched its <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-043mr-asic-launches-first-court-proceedings-alleging-greenwashing/">first three legal actions</a>, including one against the local arm of US investment giant <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-196mr-asic-commences-greenwashing-case-against-vanguard-investments-australia/">Vanguard</a>, and another against <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-215mr-asic-commences-greenwashing-case-against-active-super/">Active Super</a>, which allegedly falsely claimed it had eliminated investments, such as coal mining, that posed too great a risk to the environment and the community. </p>
<p>The third pillar concerns government leadership and engagement. Such a large and rapid increase in the scale of private sector finance requires growth in a range of financial assets, including shares, bonds and other kinds of debt. </p>
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<a href="https://theconversation.com/why-australia-urgently-needs-a-climate-plan-and-a-net-zero-national-cabinet-committee-to-implement-it-213866">Why Australia urgently needs a climate plan and a Net Zero National Cabinet Committee to implement it</a>
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<p>The government is supporting the development of a <a href="https://www.rba.gov.au/publications/bulletin/2023/sep/green-and-sustainable-finance-in-australia.html">green bond market</a> by issuing <a href="https://www.moneymanagement.com.au/features/all-eyes-australias-inaugural-sovereign-green-bonds">Australia’s first green sovereign bond</a> in June. These bonds are designed to establish standards for lending and borrowing for all green finance; they will also help the government to fund projects such as electric vehicle charging infrastructure. </p>
<p>Finally, the strategy recognises the importance of <a href="https://www.adb.org/what-we-do/funds/australian-climate-finance-partnership">collaboration across the Asia-Pacific</a>. If Australia achieves its goal of becoming a regional sustainable finance hub it would not only benefit our national interest but help Pacific Island nations to raise the finance to decarbonise. </p>
<h2>What’s missing from the strategy?</h2>
<p>The strategy does not focus on <a href="https://www.uts.edu.au/sites/default/files/2022-10/Advancing%20climate%20skills%20in%20the%20Australian%20financial%20system%20FINAL_0.pdf">green finance skills</a> and competencies. Yet these capabilities, ranging from a basic understanding of what business activities are unsustainable to specialist expertise in the use of scenario analysis to assess climate risk, are essential to the net zero transition. </p>
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<p>LinkedIn’s recent <a href="https://economicgraph.linkedin.com/research/global-green-skills-report">Green Skills Report</a> shows that, globally, the finance sector is lagging behind other sectors in building green skills. And Australia ranks only 30th in a list of countries on its share of talent for green finance.</p>
<p>Australia’s financial system must urgently transform itself to meet the climate challenge. If the financing of the transition were a bicycle race, Australia has now caught up to the global peloton. The next step is to take the lead.</p><img src="https://counter.theconversation.com/content/214063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alison Atherton is a member of the Australian Sustainable Finance Institute's Capability Reference Group</span></em></p><p class="fine-print"><em><span>Gordon Noble does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If big money is going to invest in clean energy and technology, the rules have to be clear. Australia’s launch of a green finance strategy last week was a good start but there is further to go.Alison Atherton, Program Lead, Business, Economy and Governance at the Institute for Sustainable Futures., University of Technology SydneyGordon Noble, Research Director, Institute for Sustainable Futures, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1688672021-10-24T15:30:37Z2021-10-24T15:30:37ZHave stock exchanges become more environmentally friendly?<p>The 2008 financial crisis had a major impact on the behaviour of global stock exchanges. Exchanges – widely blamed for the crash – suffered a crisis of ethics and <a href="https://www.imf.org/external/pubs/ft/fandd/2008/06/pdf/kodres.pdf">investor confidence</a>, forcing them to try to improve their image and their business conduct.</p>
<p>Over the same period, there has been a growing awareness of the importance of sustainability and the role of businesses in acting to protect the environment, culminating in the calls to action surrounding the upcoming UN climate talks known as <a href="https://page.theconversation.com/cop26-glasgow-2021-climate-change-summit/">COP26</a>.</p>
<p>To respond to the challenges facing the financial sector, a number of stock exchanges have adopted new practices and products to make capital markets more environmentally friendly. In a <a href="https://innover.sciencesconf.org/">recent analysis</a>, I explore how exchanges have adapted to the new context, and the policies they have implemented to become more green.</p>
<p>I drew on various data sources, including stock exchange websites and sustainability, corporate social responsibility and annual reports. The sample comprises 85 stock exchanges around the world. This article focuses specifically on the measures taken to protect the environment. </p>
<h2>Green products</h2>
<p>Environmental measures taken by stock exchanges can be divided into two categories. The first concerns efforts to directly contribute to protect the environment via internal policies. </p>
<p>These will be familiar to many, including recycling, reducing the use of major resources like water and electricity, promoting electronic rather than paper documentation, acting to lower greenhouse gas emissions, waste management, reducing plastic and food waste, and planting trees and reforesting. Such efforts are usually accompanied by educational programs for employees to raise environmental awareness. More originally, some exchanges have embarked on green building projects: the Canadian Exchange has made sure 78% of its total office footprint is <a href="https://www.usgbc.org/leed">LEED Platinium certified</a>, one of the most widely used green building rating system in the world.</p>
<p>The second category includes financial tools such as green bonds that finance environmental projects and facilitate green transition.</p>
<p>Among the sample of exchanges, 42% have developed sustainability-related indices and 30% have a sustainability bond-listing category mostly related to environment. Most of these are in North America, the Asia-Pacific and Europe and they represent the largest markets in the world.</p>
<p>One of the exchanges that has contributed most to the green securities market is the Luxembourg Stock Exchange, which in 2007 listed the world’s first green bond: the European Investment Bank’s ‘<a href="https://www.eib.org/en/investor-relations/disclaimer.htm">Climate Awareness Bond</a>’. In 2016, the exchange launched the <a href="https://www.bourse.lu/green">Luxembourg Green Exchange</a>, or LGX, a new platform dedicated exclusively to green securities. LGX is considered the only exchange-operated platform currently dedicated entirely to green, social and sustainable instruments.</p>
<p>While exchanges in developed countries are the pioneers in this environmental transition, my analysis shows that an increasing number of exchanges in emerging markets are also engaging to a green, low-emissions and climate-resilient world.</p>
<p>The Moscow Exchange created two sustainability indices in 2019: the <a href="https://www.moex.com/en/index/MRRT">Responsibility and Transparency Index</a> and the <a href="https://www.moex.com/en/index/MRSV">Sustainability Vector Index</a>. In the same year, the exchange issued green bonds promoting energy and environmental projects. Also in 2019, Shanghai launched its own <a href="http://english.sse.com.cn/markets/greensecurities/">green securities indices</a>.</p>
<p>Half of the exchanges in the sample had written guidance on environmental, social and corporate governance, or ESG, reporting. Some of these, including the Malaysia and Johannesburg exchanges, asked listed companies to disclose whether they publish reports that consider ESG issues. Others, like the Nasdaq, provide their users with <a href="https://data.nasdaq.com/databases/NESG/overview">ESG performance metrics</a> for their listed companies.</p>
<p>Some exchanges promote dialogue between issuers and investors on ESG issues through capital market events. For example, before the pandemic, Borsa Italiana held sustainability events to encourage investor-issuer discussions on ESG issues.</p>
<p>The case of the <a href="https://www.ey.com/es_cl/lavozdelmercado">Santiago Exchange</a> is interesting – it generated an index that offers listed firms an analysis of their own stakeholders’ perceptions of their ESG practices. It also published a survey of market agents’ perceptions of the sustainability practices of the main Chilean companies.</p>
<h2>Disparities between exchanges</h2>
<p>The analysis shows that most stock exchanges worldwide have jumped on the green bandwagon and undertaken efforts to address environmental issues.</p>
<p>But the findings highlight the great disparities among them in terms of initiatives undertaken, which can partly be explained by the voluntary nature of sustainable engagement and the absence of a regulatory framework that could guide the transition (which some <a href="https://sseinitiative.org/publication/how-exchanges-can-embed-sustainability-within-in-their-operations-a-blueprint-to-advance-action">argue is necessary</a>).</p>
<p>These disparities can also be explained by the differences in their development. Most of the exchanges that introduced financial environmental tools represent the largest and the most developed markets in the world.</p>
<p>This exploratory study is a first step in analysing the contribution of exchanges to more sustainable finance and it opens the way for further research. We still need to understand whether the measures outlined in this article lead to effective outcomes both within exchanges and in society as a whole. </p>
<p>We also need to explore the contribution of these exchanges to solving other sustainable development challenges, in particular, social issues such as the promotion of gender equality and advancing financial literacy.</p><img src="https://counter.theconversation.com/content/168867/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Faten Ben Slimane ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>I analysed more than 80 stock exchanges worldwide to find out whether they were embracing green initiatives.Faten Ben Slimane, Maître de conférences en sciences de gestion, Université Gustave EiffelLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1641082021-07-21T13:06:22Z2021-07-21T13:06:22ZGreen bonds can help finance clean energy – as long as the projects they fund are transparent<figure><img src="https://images.theconversation.com/files/412144/original/file-20210720-15-1vk2mdu.jpg?ixlib=rb-1.1.0&rect=485%2C296%2C5479%2C3574&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Green growth?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-finance-money-conceptsave-prepare-future-1536940751">Shutterstock/Freedom365day</a></span></figcaption></figure><p>Ahead of hosting the <a href="https://ukcop26.org/">climate change summit</a> in Scotland later this year, the UK government appears keen to demonstrate its green credentials. So far it is <a href="https://lordslibrary.parliament.uk/climate-change-targets-the-road-to-net-zero/">not on track</a> to meet its own carbon-free goals, but in a move that may well accelerate progress, it recently announced plans to release <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/998127/20210630_UK_Government_Green_Financing_Framework_Final.pdf">£15 billion worth of “green bonds”</a> to fund environmental projects. </p>
<p>Put simply, green sovereign bonds are like any other bonds – a form of government borrowing from investors. The UK is offering a “standard” green bond, which can be bought and sold at any time, and also a type of green saving product, with a three-year fixed interest rate aimed at households. Anyone aged 16 or over with a UK bank will be able to invest anything from £100 to £100,000 in the scheme.</p>
<p>The idea is that the money invested is earmarked solely for projects that address climate change and other environmental issues. These might include initiatives such as developing low carbon buildings and transport, adapting to climate change and protecting ecosystems. </p>
<p>Importantly for investors, green bonds don’t carry the risk of the individual project, which is on the shoulders of those issuing the bonds, in this case the British government. For the green economy more generally, the bonds also signal government commitment to the cause, raising overall investor confidence in environmentally friendly investments.</p>
<p>It has become an increasingly popular way to raise funds. Green bonds now represent roughly 1% of the total bond market, and since 2016 the number of green bonds issued has been growing at an annual average <a href="https://www.climatebonds.net/2021/03/uk-announces-debut-sovereign-green-bonds-ignite-britains-market">rate of 60%</a>. Last year, global cumulative issuance (supplying bonds) reached <a href="https://www.climatebonds.net/2021/03/uk-announces-debut-sovereign-green-bonds-ignite-britains-market">US$1 trillion</a> (£725 million).</p>
<p>Most green bond issuers are private corporations, including <a href="https://www.theguardian.com/sustainable-business/2016/mar/20/apple-green-bond-environment-energy-toyota-climate-change?dm_t=0,0,0,0,0">Apple</a>, <a href="https://www.esgtoday.com/toyota-financial-services-issues-1-6-billion-asset-backed-green-bond/">Toyota</a>, <a href="https://www.endsreport.com/article/1535203/unilever-issues-250m-green-bond%5D">Unilever</a>, and <a href="https://www.sse.com/news-and-views/2017/08/sse-issues-biggest-ever-green-bond-by-uk-company">SSE</a>, Britain’s second largest energy supplier. But an increasing number of national governments have been getting in on the act. </p>
<p>Poland and France were the <a href="https://www.weforum.org/agenda/2017/07/what-are-green-bonds-explainer">first European countries</a> to do so, and Germany recently issued a 30-year <a href="https://www.reuters.com/article/bonds-green-germany-idUSKBN25T2UP">bond worth €6 billion</a> (£5.1 billion). The US, Canada, Australia, and emerging economies such as China, Brazil, Chile and Mexico have also issued government backed green bonds.</p>
<p>The UK green bond scheme is likely to be one of the world’s largest, and may provide much-needed finance for environmental initiatives. But it is essential that issues of integrity, impact and transparency are properly considered so investors can be sure their bonds are funding projects that make a difference. </p>
<p>Including specific targets (and a measure) for projects, such as reducing carbon, is also important. Likewise, the duration of projects should <a href="https://www.generali-investments.com/uploads/2021/02/b0949f648a1fb0198a14fbbd6d404065/white-paper3_green-bonds_vfinal3-002.pdf">align with the lifetime</a> of the bond, so if a ten-year bond finances a five-year project, it needs to be replaced at that point by something similar.</p>
<h2>Green shoots?</h2>
<p>So how can investors in green bonds assess their impact in terms of contribution to climate mitigation? The UK’s “<a href="https://www.gov.uk/government/publications/uk-government-green-financing">Green Finance Framework</a>” – the system by which the bonds are issued – has been independently assessed using a widely adopted set of rules known as the “<a href="https://www.icmagroup.org/assets/documents/Sustainable-finance/2021-updates/Green-Bond-Principles-June-2021-140621.pdf">Green Bond Principles</a>”. These provide an accepted benchmark for assessing the environmental integrity and possible impact of the bonds.</p>
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<span class="caption">A green meeting later this year.</span>
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<p>That impact on dealing with issues such as climate change will only become clear in the years to come. But for the moment, it is possible to take a positive view about the policy and its potential impact on what are essential projects: cleaner transport, more renewable energy and improved energy efficiency. </p>
<p>The bonds also send a clear signal about the UK’s broader commitment to its green objectives, which can help inspire additional investor interest in environmental projects. In terms of monitoring projects, the scheme will be open to scrutiny by investors and other organisations, including the media. People with green saving bonds can then actively assess the impact of their investments on the environment – while benefiting financially from a fixed and secure return.</p><img src="https://counter.theconversation.com/content/164108/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Catarina Araya Cardoso does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Green bonds also encourage environmental investment elsewhere.Catarina Araya Cardoso, Lecturer in Economics, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1392652020-05-26T12:16:44Z2020-05-26T12:16:44ZMunicipal bond yields show investors willing to pay premium for debt that addresses climate change<figure><img src="https://images.theconversation.com/files/337228/original/file-20200524-124810-uaof2g.jpg?ixlib=rb-1.1.0&rect=65%2C105%2C5361%2C3506&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bond investors have shown a preference for funding cities' green projects. </span> <span class="attribution"><span class="source">AP Photo/Mark Lennihan</span></span></figcaption></figure><p><em>The Research Brief is a short take about interesting academic work.</em></p>
<h2>The big idea</h2>
<p>Municipal bond investors are increasingly confident that as climate change accelerates, cities will be forced to prioritize projects that seek to mitigate the consequences, according to a <a href="https://doi.org/10.3905/joi.2019.1.111">newly published analysis of bond yields</a> I conducted. </p>
<p>The findings suggest investors believe such climate-related investments are safer – and more likely to be repaid – than other types of long-term city projects that may have less of a chance of happening because of limited funds. This can be seen in the higher prices – and lower rates of return – investors are willing to pay for longer-term municipal bonds certified by the <a href="https://www.climatebonds.net/">Climate Bonds Initiative</a> compared with similar debt that doesn’t carry that certification. </p>
<h2>Why it matters</h2>
<p>Cities and other governments <a href="https://www.weforum.org/agenda/2019/09/climate-change-won-or-lost-in-cities-or-by-cities/">have for years</a> been <a href="https://www.wired.com/story/cities-climate-change-equity-paris-agreement/">fiercely debating</a> what if anything to do about climate change. My research shows that there’s a reward, in terms of relatively low financing costs, to pursue long-term climate action now. It suggests investors have already acknowledged the consequences of human-induced climate change are real and have created a financial incentive for those cities that are trying to adapt. And this could help fuel a faster transition to a low-carbon world. </p>
<h2>What still isn’t known</h2>
<p>It’s unclear if this climate project premium holds for other types of debt, such as that issued by companies or federal governments. The market for Climate Bonds Initiative-certified bonds is still quite young, with <a href="https://www.climatebonds.net/certification/certified-bonds">about US$120 billion issued</a> worldwide since 2014 – just a drop in the bucket for a bond market <a href="https://www.sifma.org/wp-content/uploads/2019/09/2019-Capital-Markets-Fact-Book-SIFMA.pdf">worth more than $100 trillion</a>. </p>
<h2>What other research is being done</h2>
<p>Beyond the market that I looked at, there is a much larger market for self-labeled “green” and climate-aligned bonds that are not certified. Researchers are trying to determine if investors are willing to pay a premium – dubbed a “greenium” – when bonds are issued by corporations or governments to fund any environmental or climate-related projects. Currently, the results have been inconclusive, as <a href="https://www.gsb.stanford.edu/faculty-research/working-papers/wheres-greenium">different studies</a> have reported <a href="https://www.brookings.edu/wp-content/uploads/2018/07/Wurgler-J.-et-al..pdf">conflicting results</a>. If a premium on all green and climate-aligned bonds exists, this would supply further evidence of an investor subsidy provided to borrowers who claim to use their proceeds for environmental or climate-related purposes.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/139265/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carolin Schellhorn does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research suggests investors expect cities will have to prioritize funding for efforts to combat and adapt to climate change in the future.Carolin Schellhorn, Assistant Professor of Finance, St. Joseph's UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1230442019-09-08T18:37:46Z2019-09-08T18:37:46ZHow green are green bonds? Ratings can help investors know<figure><img src="https://images.theconversation.com/files/291123/original/file-20190905-175682-zn6itl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Since the Industrial Revolution, humans have invested in machines and other technologies to help them increase productivity and improve their lives. Unfortunately, one of the side effects of many of these advances is that we’re now grievously damaging the planet. </p>
<p>We’re now reconsidering our relationship to the environment, as demonstrated by <a href="https://www.fridaysforfuture.org/">Greta Thunberg and the Fridays for Future movement</a>, but an even bigger revolution is what’s required. The International Energy Agency (IEA) estimates that cumulated costs of approximately 50 trillion USD are needed <a href="https://www.iea.org/publications/freepublications/publication/WEIO2014.pdf">until the end of 2035</a> to significantly lower our CO<sub>2</sub> emissions and reach the goals of the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement">2015 Paris Agreement</a>.</p>
<h2>Are green bonds part of the solution?</h2>
<p>The necessary investments in energy efficiency and CO<sub>2</sub> and carbon-emission savings are large, but the financial market has already begun to promote investments in sustainable projects. One possible solution are “green bonds”, which are earmarked for climate and environmental projects. Green bonds are not new: in 2007 a <a href="https://theconversation.com/as-big-business-goes-green-green-bonds-ready-for-takeoff-52294">“climate awareness bond”</a> was issued by the European Investment Bank. However, the number and the volume of green bonds has massively increased since the first issue. As of today, <a href="https://www.climatebonds.net/green-bond-segments-stock-exchanges">14 international stock exchanges</a> have launched a dedicated green bond section.</p>
<p>The advantage of green bonds is that companies can focus on sustainable projects and investors can support them. <a href="https://www.mdpi.com/2071-1050/11/4/1098">Research shows</a> that green bonds may even enjoy a negative premium compared to their “brown” peers and thus can be financed less expensively.</p>
<p>While it sounds straightforward, the main issue lies in the general character of the bonds. A green bond has the sustainable aspect, but no other differences from conventional ones. Bonds represent a form of debt financing from investors to borrowers, but the borrower can be various, and all companies can be potential issuers. Currently, most of the issuers are sovereigns and development banks, but also companies, such as <a href="https://www.apple.com/newsroom/2019/04/apple-tops-clean-energy-goal-with-new-supplier-commitments/">Apple</a>, release green bonds. Theoretically, it would be possible that firms from pollution-intensive industries issue ostensibly “green” bonds. As the cash from the bond goes directly into the hands of the firm, it is important to define the use of proceeds. The International Capital Market Association (ICAM) developed <a href="https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2018/Green-Bond-Principles%20--%20-June-2018-140618-WEB.pdf">Green Bond Principles</a> which are voluntary process guidelines.</p>
<h2>Labeling and greenwashing</h2>
<p>The voluntary process shows that there are currently no hard definitions what is a green bond or what is a sustainable investment. The market is not standardized; therefore it can be very hard to define what is green and what is not. Market standards and certifications could be one important aspect to increase the popularity of this segment while building the investors’ trust. The European Commission is currently working on an <a href="https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190306-sustainable-finance-teg-interim-report-green-bond-standard_en_0.pdf">Action Plan on Financing Sustainable Growth</a> to set a comprehensive strategy to further connect finance with sustainability.</p>
<p>Bonds that are issued in the green segment of big stock exchanges, such as the London Stock Exchange, need to have a green label which must be certified by an agency. An independent party has to confirm the green character of the bond. From the investor’s side, besides regular reporting, a label might be a good guaranty that their money is invested in sustainable projects. The question that now arises is who has the competencies to issue green labels. A third party that is certifying the green character of the investment might just give labels to <a href="https://www.investopedia.com/terms/g/greenwashing.asp">greenwash</a> conventional bonds. If there is not enough transparency in the green labels and green labeling agencies start a market competition, the quality might be affected. The agency with the easiest requirements might win the battle and low standards would be established.</p>
<h2>The race for the pole position</h2>
<p>Besides the certification of the green bond character from a third party, investors want to know more about the sustainable character of a company. It can be very difficult to assess and compare the sustainability level of a company. Similar problems can be found in the past. More than 100 years ago, people who invested in railroad bonds were not able to calculate the probability of default. They asked John Moody whether he could rank the probability of default, and from this the credit-rating market arose. However, the market is associated with several issues, <a href="https://theconversation.com/credit-ratings-old-risks-and-new-challenges-for-financial-markets-118081">from regulatory aspects to agency problems</a>. It is quite likely that the “green labelling” or “sustainable rating” market will have similar issues. The question is whether and how we can learn from the past.</p>
<p>The market for green and sustainable finance is rapidly growing, and a number of <a href="https://cbey.yale.edu/sites/default/files/Responsible%20Investing%20--%20Guide%20to%20ESG%20Data%20Providers%20and%20Relevant%20Trends.pdf">environmental, social, and governance" (ESG) rating agencies</a> have established themselves. Their business model is similar to that of established firms such as Moody’s or Standard & Poor’s, but their analytical approach can vary. Some companies have a background in collecting data and they mainly use the market ones, such as Bloomberg or MSCI. Others, such as Sustainalytics, are ESG-exclusive data providers, have an approach similar to classical rating agencies and provide unique methodologies to assess the ESG quality of a firm. Finally, there are also other companies that focus on specific targets among the three aspects of ESG.</p>
<p>ESG ratings and classical credit ratings also have in common the possible risk for the rated company. If the firm receives a poor ESG rating, investors might refrain from buying equity, and sales could also fall. BP and Volkswagen are good examples of what happens if your ESG score is suddenly lowered.</p>
<h2>Who are the new players on the market?</h2>
<p>Regulators and investors have to start thinking now whether and how they want to establish green-label institutions and agencies as new players in the financial market before they become too important to be regulated. Alternative concepts to the business model of classical rating agencies already exist. It might be possible that ESG criteria are not rated by individual analysts but rather from a group of (independent) experts. <a href="https://www.impaakt.com/">Impaakt</a>, for example, just started an alternative service using a crowd-based approach.</p>
<p>The big question is what will be the standard definition of ESG criteria in the future. For example, if an oil company is labelled as “ecological” because it has a reduced energy consumption, does this really mean that it is ecological? ESG investing should be transparent and therefore it is important that ESG ratings methodology behind follow a holistic approach based on regulated methodologies.</p><img src="https://counter.theconversation.com/content/123044/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Florian Kiesel ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Since the first “climate awareness bond” was issued in 2007, the green-bond market has flourished. But how can investors judge their risk and effectiveness?Florian Kiesel, Assistant Professor of Finance, Grenoble École de Management (GEM)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1187492019-06-16T17:23:53Z2019-06-16T17:23:53ZCanada’s financial markets are stunting our growth and undermining our future<figure><img src="https://images.theconversation.com/files/279671/original/file-20190616-158927-r3zn22.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4000%2C2994&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Embracing sustainable finance will help Canada build a green economy — and ensure all Canadians will flourish.</span> <span class="attribution"><span class="source">Gustavo Quepo/Unsplash</span>, <a class="license" href="http://artlibre.org/licence/lal/en">FAL</a></span></figcaption></figure><p>The <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en">European Union</a> and <a href="https://unepinquiry.org/publication/establishing-chinas-green-financial-system/">China</a> recently tabled extensive proposals for sustainable finance that will jump-start their clean innovation. While the world is moving forward, the United States is turning inwards and backwards. </p>
<p>Which direction will Canada go?</p>
<p>How Canadian industry reacts to <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html">Canada’s Expert Panel on Sustainable Finance</a> will be telling. This federal government-endorsed panel has recommended policies and programs that will transition Canada’s financial sector towards sustainable growth. Canadian industry will either react with reticence and revulsion, or it will embrace the opportunity to play in international capital markets that reward a long-term outlook. </p>
<h2>What is sustainable finance?</h2>
<p><a href="https://hbr.org/2019/05/the-investor-revolution">Sustainable finance</a> is not a tax. It’s an incentive that directs the flow of capital to projects that create value for all Canadians, not just a handful of wealthy investors. </p>
<p>It encourages investors to widen their criteria in evaluating investments not just by the financial returns but also on environmental, social and governance performance grounds. Such criteria have been shown to reduce the investment risks and encourage long-term growth. These types of investments have incubated numerous new financial products, including green bonds, sustainability-leveraged loans and impact investments.</p>
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<a href="https://theconversation.com/green-bonds-are-taking-off-and-could-help-save-the-planet-89643">Green bonds are taking off – and could help save the planet</a>
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<p>Currently, many investors make money off other investors. For example, <a href="https://www.lrb.co.uk/v41/n05/donald-mackenzie/just-how-fast">high-frequency trading</a> is estimated to influence 40 to 50 per cent of the volume of all assets. These traders “beat the market” by milliseconds. After an investor puts in their order to make a trade, high-frequency traders rush ahead of the investor’s trade, leading to a higher price for buyers and lower prices for sellers. </p>
<p>As well, capital markets favour short-term returns. The flight risks of short-term capital make it difficult for the corporate sector to transition to a clean economy, which often requires heavy investments in research and development and technology. </p>
<p>Sustainable finance helps solve both problems. It puts the real economy and the long term back into focus. It recognizes that speculative investor behaviours and short-term capital flows can undermine a resilient financial system and society. </p>
<h2>What if we don’t embrace sustainable finance?</h2>
<p>The failure to embrace sustainable finance will hurt all Canadians, not just capital markets. There is the risk to our economy, because it is so carbon-intensive. Canada’s economy relies heavily on natural resources. In fact, relative to all of the other G7 economies, Canada’s is the most heavily dependent of natural resources. </p>
<p>When the rest of the world transitions away from carbon, Canada’s corporations will be lassoed with a heavy load of stranded assets. The <a href="https://www.cdp.net/en">Carbon Disclosure Project</a> recently reported that the <a href="https://www.straitstimes.com/world/europe/worlds-biggest-companies-foresee-14-trillion-climate-cost-hit-report">world’s 215 largest companies anticipate that US$1 trillion are at risk from climate impacts</a>. The Bank of Canada has acknowledged <a href="https://www.theglobeandmail.com/business/commentary/article-the-bank-of-canada-declared-climate-change-a-financial-risk-now-what/">the risk to Canadians under different climate scenarios</a>.</p>
<p>Second, there is the risk to Canadians with pension plans, given the current short-term speculative behaviours of financial markets. Short-term investments undermine long-term returns. The failure to embrace sustainable finance puts at risk not just our own well-being heading into old age, but the welfare of our children. </p>
<h2>What if we do embrace sustainable finance?</h2>
<p>Sustainable finance will spur innovation that will create new, agile, clean, forward-looking businesses. These businesses will enable new technologies, such as fuel cells, platform software that links buyers and sellers, and product formulations that reduce the use of plastics and toxins. </p>
<p>However, doing so requires Canadian investors, businesses and society to look to the future of what is to come, rather than stay locked into the past. </p>
<p>There is no need for Canadians to play catch-up. We can lead. Canada’s educated, healthy and diverse workforce, along with our strong capital and physical infrastructure, puts us in an enviable position to lead innovations on the world stage. </p>
<h2>A call to government and business</h2>
<p>There’s no question sustainable finance will redirect capital and, thereby, create winners and losers. Resources will be redistributed. </p>
<p>The winners will be those who create real wealth and look to the future. The losers will be those who have profited simply through arbitrage, rather than creating real value. The winners will often be new market entrants that are small- and medium-sized. These will include the young and the old, and often those who have been left out of the traditional economy. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3008%2C1967&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/279252/original/file-20190612-32335-1jm7fg3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The winners will be those who look to the future.</span>
<span class="attribution"><span class="source">Chris Barbalis/Unsplash</span></span>
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<p>But the likely losers have a vested interest in keeping the status quo. These people will fight sustainable finance, because they are anchored in the past. </p>
<p>Canadians have faced transitions before. We saw the collapse of our East Coast fisheries, the Québec and British Columbia forestry industries and, more recently, the Alberta oil and gas industry. We have shown tremendous resilience managing these previous transitions. And, through these transitions, we have found new opportunities. </p>
<p>Capital markets will open up such new opportunities. Sustainable finance will remove us from the day-to-day accelerating treadmill, which is exhausting business and eroding the health of the planet.</p>
<p>The time has come to leave the past behind and transition to a new economy that seeks long-term prosperity for all Canadians.</p><img src="https://counter.theconversation.com/content/118749/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Diane-Laure Arjaliès is a member of the academic advisory of the Principles for Responsible Investment and an Independent Expert associated with the French Social Investment Forum (FIR). </span></em></p><p class="fine-print"><em><span>Tima Bansal does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There is no need for Canadians to play catch-up on sustainable finance. We can lead.Diane-Laure Arjaliès, Assistant Professor, Ivey Business School, Western UniversityTima Bansal, Canada Research Chair in Business Sustainability, Western UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1188142019-06-16T17:23:51Z2019-06-16T17:23:51ZSustainable finance: Canada risks being left behind in low-carbon economy<figure><img src="https://images.theconversation.com/files/279435/original/file-20190613-32317-16kzdxz.jpg?ixlib=rb-1.1.0&rect=81%2C135%2C5925%2C3872&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Global investors are already mobilizing capital to take advantage of investment opportunities in climate-smart infrastructure, emissions-reducing technology and updated electricity grids. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Earlier this spring, the most in-depth analysis to date on Canada’s changing climate provided clear evidence that <a href="https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/Climate-change/pdf/CCCR_FULLREPORT-EN-FINAL.pdf">Canada is warming twice as fast as the global average</a>. As we increasingly experience the physical impacts (flooding, extreme weather, forest fires), we will experience the financial impacts as well in the form of both increasing market risks and unprecedented investment opportunities.</p>
<p>For the financial sector, this is a pivotal moment where it can realign its structures to ensure global capital flows toward solutions that will protect Canada’s economy and our prosperity, more broadly. However, Canada’s financial community has yet to fully grasp the numerous challenges and opportunities that climate change presents for us in the transition to a low-carbon economy. </p>
<p>On June 14, <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html">an independent panel of experts</a> released recommendations on what Canada’s financial system needs to do to support this transition. The key message: we must <a href="https://www.canada.ca/en/environment-climate-change/services/climate-change/expert-panel-sustainable-finance.html">empower our financial sector to design a made-in-Canada sustainable finance system</a> so that Canadian firms can compete successfully among their global peers over the long term.</p>
<p>In its simplest definition, sustainable finance means aligning all of our financial systems and services to promote long-term environmental sustainability and economic prosperity. That includes channelling investments toward climate solutions and managing climate-related financial risks. </p>
<p>Canada has the talent, resources and institutional muscle to define sustainable finance for our economy. We need to grow and harness that capacity now, if we want to captain our own ship through one of the most significant global economic transitions in history.</p>
<h2>Much to lose, but more to gain</h2>
<p>According to the Economist Intelligence Unit, <a href="https://eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf">a 2C global warming scenario will trigger global financial losses of roughly US$4.2 trillion</a>. With 6C of warming, those losses balloon to $13.8 trillion. That represents about 10 per cent of the global assets currently under management. </p>
<p>Losses at this scale will have wide-reaching implications for investors and the asset-management industry. Everyday people who are depending on investment income for their retirement will find themselves in dire straits. That includes every Canadian counting on the Canada Pension Plan.</p>
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<img alt="" src="https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/279436/original/file-20190613-32347-1hov67.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Climate change is expected to trigger global financial losses in the trillions, but there are also opportunities for investment.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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<p>On the flip side, <a href="https://newclimateeconomy.report/2018/executive-summary/">there is tremendous value — some $26 trillion worth — to be gained by shifting economies to avoid worst-case climate scenarios</a>. This represents massive and economy-wide investments in <a href="https://unfccc.int/news/ifc-sees-usd-34-trillion-climate-investment-opportunity-in-south-asia">climate-smart infrastructure</a>, <a href="https://www.edc.ca/en/blog/cleantech-canada-growing-global-markets.html">emissions-reducing technology</a>, <a href="https://www.nasdaq.com/article/clean-energy-and-smart-grid-infrastructure-industry-report-and-investment-case-cm1122346">updated electricity grids</a>, to name just a few examples. <a href="http://www.climateaction100.org/">Global investors are already mobilizing capital</a> to take advantage of these opportunities.</p>
<p>The question for Canada is: how do we attract global investment while, at the same time, protecting Canadian assets, investors and firms from risk? </p>
<p>In essence, this is what sustainable finance is about — harnessing our financial systems to help accelerate the activities, decisions and structures that will put Canadian industries and our economy ahead of the curve without ignoring the environment.</p>
<h2>We can’t afford to fall behind</h2>
<p>Other global players are already acting. <a href="https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en">The European Commission has spent the past two years mobilizing expertise</a> to build a financial system that supports sustainable growth. It has made significant progress in establishing disclosure rules for climate-related financial risk and creating unified definitions (a taxonomy) on what can be considered environmentally sustainable economic activity. </p>
<p>For example, this includes defining the labels and criteria for green financial products, which will, among other things, significantly shape the direction of <a href="https://www.climatebonds.net/2019/03/climate-bonds-launches-green-bonds-state-market-2018-report-london-annual-conference">the rapidly expanding green bond market</a>.</p>
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<a href="https://theconversation.com/green-bonds-are-taking-off-and-could-help-save-the-planet-89643">Green bonds are taking off – and could help save the planet</a>
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<p>The problem is these rules and definitions are being pioneered elsewhere and are unlikely to benefit Canada. They may even penalize us, because they are designed for economies significantly different from our own. </p>
<p>For example, there is a current gap, and huge opportunity, to <a href="https://www.theglobeandmail.com/business/commentary/article-clean-finance-needs-to-include-traditionally-dirty-industries/">pioneer financial mechanisms</a> and incentives could be created to expedite the sustainable transition of higher-emitting sectors like oil and gas and agriculture. </p>
<p>This requires our leadership. </p>
<p>If we allow others to direct the innovations in sustainable finance, we will find ourselves without the financial tools and structures that Canada’s resource-rich economy needs to determine its own path through a global transition.</p>
<p>The expert panel’s report is our wake-up call. It is time to catch up and get ourselves to the table. Our financial sector — and the broader ecosystem including our accountants, lawyers and actuaries — needs to start answering some big questions. </p>
<p>What does meaningful, responsible and consistent disclosure look like in a Canadian context? How do we create incentives and opportunities to draw in private capital to boost clean tech innovation across our economy and to invest in climate-resilient infrastructure? <a href="https://www.bloomberg.com/news/articles/2019-06-05/companies-make-progress-but-not-enough-gauging-climate-risk">How do we better assess risk and the value of assets through a climate-smart lens</a>?</p>
<p>We must, and we can, build the knowledge, understanding and capacity of our financial system to rise to these challenges. We can do this by investing in the research, education, professional training and the collaboration necessary to lift our current generation of professionals to the next level, while preparing an emerging generation to lead. </p>
<p>For those of us in the financial sector, this is about the future of our industry. For all Canadians, it’s about the future of our economy and well-being. Let’s get started now.</p><img src="https://counter.theconversation.com/content/118814/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr. Sean Cleary, CFA has previously received funding from SSHRC for finance research projects; although not specifically related to sustainable finance. He is a CFA charterholder and is a member of the CFA Society Toronto Advisory Council. </span></em></p><p class="fine-print"><em><span>Ryan Riordan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We need to equip Canada’s financial sector to steer us through a global economic transition on our own terms.Sean Cleary, BMO Professor of Finance, CFA, ICD.D, Queen's University, OntarioRyan Riordan, Associate Professor & Distinguished Professor of Finance, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/896432018-01-04T22:42:28Z2018-01-04T22:42:28ZGreen bonds are taking off – and could help save the planet<figure><img src="https://images.theconversation.com/files/200747/original/file-20180103-26172-2amc8q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The coal-fired Plant Scherer, one of the top carbon dioxide emitters in the United States, stands in the distance in Juliette, Ga. </span> <span class="attribution"><span class="source">(AP Photo/Branden Camp)</span></span></figcaption></figure><p>The “<a href="http://www.corporateknights.com/channels/leadership/the-tragedy-of-the-horizon-14531832/">tragedy of the horizons</a>,” a term coined by Canada’s Mark Carney, governor of the Bank of England, has been haunting the financial sector ever since climate change began posing serious threats to the planet.</p>
<p>As Carney put it: Can the financial sector address long-term climate change problems when most investments are made for the short term?</p>
<p><a href="https://hbr.org/2017/10/the-rise-of-behavioral-economics-and-its-influence-on-organizations">Behavioural economics</a> has shown us that people lack the ability to think long term, and this has been the Achilles heel in our fight against climate change. However, there’s now evidence that the “tragedy of the horizons” could be overcome due to changes in both our behaviour and our financial system.</p>
<p>Over the past few years, the idea of business-as-usual in the financial sector has been questioned by many. The wisdom so far has been to invest in what provides us with the lowest risk and has long-term stability. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200746/original/file-20180103-26157-12284q3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Bank of England governor Mark Carney is seen here in Toronto in 2016 participating in a discussion on climate change initiatives for the financial sector in Canada and the world.</span>
<span class="attribution"><span class="source">(THE CANADIAN PRESS/Chris Young)</span></span>
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</figure>
<p>However, <a href="http://www.csap.cam.ac.uk/media/uploads/files/1/climate-change--a-risk-assessment-v9-spreads.pdf">in the age of climate change, notions of risk and stability are constantly changing</a>. </p>
<p>Today, investors assess risk not just in terms of financial risk, but also social, environmental and governance (ESG) issues that may be critical to financial returns. <a href="https://www.neiinvestments.com/pages/about-nei/about-ethical-funds/what-is-esg/">Investors are demanding that investment firms start to factor in ESG components.</a> </p>
<h2>Green bonds changing financial sector</h2>
<p>Green bonds, debt finance tools that have traditionally been used to raise long-term capital with low risk, may be answering the call for behavioural change in the financial sector.</p>
<p>Ever since the Industrial Revolution, bonds have played a critical role in financing infrastructure in cities and towns. A <a href="https://www.climatebonds.net/files/files/CBI-SotM_2017-Bonds%2526ClimateChange.pdf">green bond transforms these infrastructure-related investments into low-carbon, climate change-resilient alternatives</a>. Green bonds don’t just have the capacity to address risk and stability in a way that considers the long-term impact of climate change — they can also change the way we think about money and returns as well.</p>
<p>With <a href="https://www.climatebonds.net/">US$100 billion invested in green projects in 2017 alone</a>, socially responsible investment products like green bonds have the potential to create massive change.</p>
<p>Green bonds not only provide similar financial returns as regular bonds, but also allow for a bonus “green” return from their investments. These bonus moral incentives could finally be starting to create a social and environmental conscience in the financial sector. Indeed, <a href="https://www.forbes.com/sites/christopherskroupa/2017/10/12/investing-in-the-age-of-climate-change/#4acadb641825">as more investors push for green bonds, climate change awareness continues to grow</a>.</p>
<p>That means investors, and the financial sector as an extension, are starting to think long term about climate change. What’s even more exciting is that the transformation to a low-carbon financial system is happening simultaneously around the world. </p>
<p>Several countries <a href="http://www.greengrowthknowledge.org/learning/green-economy-roadmap">are issuing what are known as green economy road maps</a>. <a href="http://www.worldbank.org/en/topic/climatechange/brief/green-bonds-climate-finance">Private sector green bonds</a> are on the rise, and the <a href="https://news.vice.com/story/world-bank-and-axa-insurance-slash-billions-of-dollars-in-fossil-fuel-investments">process of divestment from fossil fuels</a> has begun. </p>
<h2>Impact on global financial system</h2>
<p>There is now momentum for innovation in the financial sector, and it’s changing how we think about our traditional investment portfolios, banking, credit and even fintech.</p>
<p>For a long time, socially responsible investing and its products were a niche market. However, with <a href="http://www.wealthmanagement.com/mutual-funds/will-sri-evolve-beyond-niche-market">the advent of the green bond, this niche market is transitioning to the mainstream</a>. According to the Climate Bonds Initiative, the market has surpassed the US$100 billion mark, <a href="https://www.climatebonds.net/files/files/CBI-SotM_2017-Bonds%2526ClimateChange.pdf">with $116.8 billion being issued in 2017 alone</a>. That’s substantially more than the money that flows across global borders as official developmental aid for tackling climate change.</p>
<p>To really understand the magnitude of the impact of green bonds, let’s look at the size of the market. </p>
<p>Currently, climate-aligned bonds are <a href="https://www.climatebonds.net/files/files/CBI-SotM_2017-Bonds%2526ClimateChange.pdf">estimated to total US$895 billion, which is a $201 billion increase from the previous year</a>. Out of that $895 billion, approximately $221 billion are labelled as green bonds. This growth is encouraging, but there’s room for a much larger market given the increasing number of extreme weather events linked to climate change.</p>
<p>As those major floods and monster hurricanes continue, industries like the <a href="https://www.wsj.com/articles/what-homeowners-insurance-wont-cover-if-a-hurricane-hits-1504897428">insurance sector will be less likely to take on clients or insure assets that do not meet climate change resilience</a> standards. This is where having low-carbon, infrastructure-related investments from green bonds in a climate-resilient economy will make a big difference. </p>
<p>Interestingly, <a href="https://www.climatebonds.net/files/files/CBI-SotM_2017-Bonds%2526ClimateChange.pdf">governments and public institutions account for almost 68 per cent of this amount, and developing countries such as China are currently leading the market</a>. This exponential growth points to two things: Governments have a key role to play in the transitioning of this market, and perhaps this transition will be driven by emerging economies like China’s.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/200750/original/file-20180103-26157-626s7r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A man and a child wear masks during a heavy pollution day in Beijing, China, in 2016. China announced plans to curb greenhouse gas emissions over the next several years.</span>
<span class="attribution"><span class="source">(AP Photo/Ng Han Guan)</span></span>
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<h2>The regulatory impact</h2>
<p>So how much of an impact can government pressure have on the shift to a low-carbon economy? Looking at China as an example, our previous study at the University of Waterloo <a href="https://www.cigionline.org/sites/default/files/pb_no.79.pdf">shows such pressure has indeed resulted in creating both financial and sustainability improvements in the credit businesses of Chinese banks</a>.</p>
<p>Under the Chinese Green Credit Guideline Policy, banks reduced how much environmental risk they were exposing themselves to, especially when lending to their clients. </p>
<p>The guidelines forced banks to become financially and environmentally prudent in addressing climate change risks. The study <a href="https://www.cigionline.org/sites/default/files/pb_no.79.pdf">found that there were improvements in both financial and sustainability performances, and the common linkage was the institutional impact of the Chinese public policy</a>.</p>
<p>If such regulatory pressure can be replicated in the green bond market, it could bring about a low-carbon economy. Furthermore, <a href="https://www.ft.com/content/ef9a02d6-28fe-11e7-bc4b-5528796fe35c">green bonds could soon be subject to standardizations and certifications</a>. With increasing <a href="https://www.reuters.com/article/us-emerging-bonds-green/emerging-climate-bonds-boom-but-are-they-really-green-idUSKCN1AY1F4">fears of “green-washing” and concerns from investors about being misled by the green label</a>, regulating the market would be beneficial — and could ensure green bonds continue to play an important role in fighting climate change.</p><img src="https://counter.theconversation.com/content/89643/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olaf Weber receives funding from SSHRC, University of Waterloo..</span></em></p><p class="fine-print"><em><span>Vasundhara Saravade receives funding from Smart Prosperity Institute's Environmental Economics and Policy Research Network (EEPRN). She was previously affiliated with an International Standards Organization (ISO) sub-committee on stakeholder research for the Canadian green bonds market. </span></em></p>In the age of climate change, investors have different ideas about financial risk. Green bonds take social, environmental and governance issues into consideration, and could help fight climate change.Olaf Weber, Professor of Sustainable Finance and Banking, University of WaterlooVasundhara Saravade, Masters Candidate in Environmental Finance and Sustainability Management, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/868202017-11-16T01:38:07Z2017-11-16T01:38:07ZMany small island nations can adapt to climate change with global support<figure><img src="https://images.theconversation.com/files/194841/original/file-20171115-19845-1mh17kh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">COP 22 President Salaheddine Mezouar from Morocco, right, hands over a gavel to Fiji's prime minister and president of COP 23 Frank Bainimarama, left, during the opening of the U.N. Climate Change Conference in Bonn, Germany, Monday, Nov. 6, 2017. </span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Germany-Climate-Talks/c96123b12ee940378099e30743bcb3ab/79/0">AP Photo/Martin Meissner</a></span></figcaption></figure><p>Island nations are on the front lines of global climate change. Heavy rainfall and rising sea levels are <a href="http://www.ipcc.ch/pdf/assessment-report/ar5/wg2/WGIIAR5-Chap29_FINAL.pdf">eroding shorelines and causing flooding</a>. Warming and increasingly acidic oceans are <a href="http://www.un.org/esa/dsd/resources/res_pdfs/ga-66/inputs/psids.pdf">damaging coral reefs</a> that support fisheries and attract tourists. Some island communities are already <a href="https://www.scientificamerican.com/article/township-in-solomon-islands-is-1st-in-pacific-to-relocate-due-to-climate-change/">moving or making plans to relocate</a>.</p>
<p>Fiji, a chain of 300 islands in the South Pacific, currently is chairing the meeting of the Conference of Parties of the <a href="https://cop23.unfccc.int/">U.N. Climate Change Convention</a> in Bonn, Germany. Frank Bainimarama, the prime minister of Fiji and president of COP-23, has <a href="https://cop23.com.fj/fijis-vision-cop23/">called on all nations to take climate action</a> because “we are all vulnerable to climate change and we all need to act.”</p>
<p>Fiji’s leading role in Bonn presents an opportunity for island nations to raise their voices. Islanders know that sea level rise <a href="http://dx.doi.org/10.1038/440734a">could completely eliminate their homelands</a>. Their concerns, symbolized by the <a href="http://newsroom.unfccc.int/cop-23-bonn/fijian-canoe-as-symbol-of-resilience-and-unity-displayed-at-cop23/">Fijian canoe</a> on display at the Bonn conference center, have been a legitimate and powerful force in international climate change negotiations. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"927487906284961792"}"></div></p>
<p>But it would be a mistake to assume that their only option is to abandon their islands now or at some future point. Many of these countries are taking steps today to adapt to climate change impacts. If the international community can agree on ways to limit greenhouse gas emissions and aggressively pursue local adaptation, it may be possible to preserve many island nations and cultures.</p>
<h2>Measuring vulnerability</h2>
<p>We all participate in an initiative hosted at the <a href="https://gain.nd.edu/">University of Notre Dame’s Global Adaptation Initiative</a> that works to measure <a href="http://index.gain.org/">individual nations’ vulnerability to climate change</a>. This index is designed to help governments, businesses and communities prioritize investments for a more efficient response to immediate global challenges, such as food security. </p>
<p>The index combines information on future impacts of climate change, such as changes in a country’s crop yields; sensitivity to climate hazards, such as that nation’s dependence on agriculture; and its capacity to cope with the impacts of climate change through steps such as increasing protected ecosystem areas. The first two measures describe a country’s risk, while the third indicates its ability to reduce that risk.</p>
<p>The index shows that not all island nations are equally vulnerable or prepared to deal with impacts of climate change. Among Pacific Island nations, Papua New Guinea is the most vulnerable – on a par with countries in sub-Saharan Africa. Fiji, on the other hand, is less vulnerable to change and more prepared to invest in adaptive measures. Some nations, such as the Republic of Maldives, <a href="http://dx.doi.org/10.1080/17565529.2014.900603">Kiribati and Tuvalu</a>, are considering international migration as an option for adapting.</p>
<p>Many island nations are taking steps to reduce their climate risk. For example, Fiji is working to expand its economy by <a href="http://documents.worldbank.org/curated/en/653091468333012994/pdf/937080CEN0R201060Box385412B00OUO090.pdf">investing in public infrastructure, adjusting taxes and reorienting away from agriculture toward services and tourism</a> to generate capital for investments in climate adaptation. Palau is <a href="https://doi.org/10.1371/journal.pone.0174787">expanding its network of marine protected areas</a> to reduce stresses on its reefs and fisheries. And Tonga is slowly <a href="https://data.worldbank.org/indicator/NV.AGR.TOTL.ZS?locations=S2">decreasing its economic reliance on climate-sensitive sectors</a> such as agriculture.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/L-gpHgebunY?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The prospect of relocating is wrenching for many residents of Tuvalu and Kiribati.</span></figcaption>
</figure>
<h2>Moving out of vulnerable zones</h2>
<p>Development agencies, such as the <a href="https://www.usaid.gov/">U.S. Agency for International Development</a> and the <a href="http://www.worldbank.org/">World Bank</a>, are prepared to fund projects to help island states adapt to climate change, using both hard solutions, such as sea walls and levees, and softer solutions, such as replanting coastal mangroves or installing early warning systems in case of floods. But many communities are already finding that they need to relocate away from flood-prone areas of their islands, which is a socially and economically disruptive process. </p>
<p>In Fiji, for example, coastal communities are threatened by extreme storms and rising sea levels that cause flooding, especially at high tide. The government has established a Climate Change Mitigation Fund with its own resources to help relocate villages that wish to move. The village of <a href="http://www.umcmission.org/find-resources/new-world-outlook-magazine/2016/may/june/0614risingsealevels">Vunidogolo</a> was the first to move in January 2014, settling on a site on their traditional land one mile inland. Villagers were even able to move their cemetery so that their ancestors were not abandoned. </p>
<p>Hundreds of other Fijian villages are at risk. About 40 were planning similar moves when <a href="https://earthobservatory.nasa.gov/NaturalHazards/view.php?id=87562">Cyclone Winston</a> struck Fiji in February 2016. The storm caused extensive damage: Recovery costs are <a href="https://www.gfdrr.org/sites/default/files/publication/Fiji%20DRF.pdf">estimated at US$1 billion</a>, which represents about 20 percent of Fiji’s gross domestic product. Assistance for recovering and “building back better” has flowed into Fiji, and more villages now are considering relocating. </p>
<p>The Fijian government is taking a proactive approach to financing climate-related needs. In October 2017 Fiji became the first emerging nation to <a href="https://cop23.com.fj/fiji-launches-first-emerging-market-green-bond-third-world/">issue a sovereign green bond</a>, raising $50 million to fund climate change mitigation and adaptation actions. Proceeds from green bonds are exclusively applied to projects that have clear environmental benefits and promote low-carbon, climate-resilient growth. They are attractive to investors seeking socially responsible portfolios, such as pension funds. Some of the proceeds from these bonds will be used to create more resilient village societies. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194856/original/file-20171115-19789-ma0wjo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Palau has created extensive marine reserves to protect coral reefs and other ocean habitats, which it relies on for food and tourism revenues.</span>
<span class="attribution"><a class="source" href="https://flic.kr/p/dGiwAf">Jeff~</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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</figure>
<h2>Adapting locally</h2>
<p>Moving to new locations off-island is not an easy solution for many islanders. Those who move will need income sources and social contacts in their new locations. And some moves may actually put migrants at <a href="http://dx.doi.org/10.3390/su9050720">greater climate risk</a> – for example, moving to urban areas in coastal regions that are exposed to flooding.</p>
<p>New Zealand leaders are considering <a href="https://www.theguardian.com/world/2017/oct/31/new-zealand-considers-creating-climate-change-refugee-visas">creating a new visa</a> for people migrating from areas affected by climate change. While this is a positive step, the first priority for funding agencies should be to support local adaptation within island nations. </p>
<p>For example, one recent <a href="http://dx.doi.org/10.1002/wcc.350">study</a> found that while the shapes of low-lying atolls may shift under the force of waves and tides, these islands will not necessarily erode as long as they retain enough sediment. But human activities such as <a href="https://theconversation.com/the-world-is-facing-a-global-sand-crisis-83557">sand mining</a>, sea wall construction and land reclamation <a href="https://doi.org/10.2112/JCOASTRES-D-11-00008.1">amplify shoreline losses</a>. Reducing these impacts is essential for island states seeking to adapt to climate change. Funding agencies can support those efforts.</p>
<p>Pacific Islanders have lived on atolls for <a href="http://dx.doi.org/10.1525/aa.1997.99.1.30">at least 2,000 years</a>, and have adapted to life there in spite of isolated conditions and limited resources. By pursuing climate adaptation strategies that build on their accumulated knowledge, and driving development that is economically and environmentally sustainable, they can minimize the number of communities that may have to move to other shores.</p><img src="https://counter.theconversation.com/content/86820/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Noble recently retired from the World Bank as the Lead Climate Change Specialist with particular responsibility for the Bank’s activities in adaptation to climate change.</span></em></p><p class="fine-print"><em><span>Jessica Hellmann receives funding from the US federal government and private foundations. She also advises several renewable energy and conservation organizations.</span></em></p><p class="fine-print"><em><span>Martina Grecequet does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Although climate change threatens the world’s small island nations, many can find ways to adapt and preserve their homes and cultures – especially if wealthy countries cut emissions and provide support.Martina Grecequet, Postdoctoral Research Associate, Institute on the Environment, University of MinnesotaIan Noble, Chief Scientific Advisor, Notre Dame Global Adaptation Initiative, University of Notre DameJessica Hellmann, Professor of Ecology, Evolution, and Behavior; Director, Institute on the Environment, University of MinnesotaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/872732017-11-10T15:15:33Z2017-11-10T15:15:33ZGreen finance? Why global banks are pledging billions to fight climate change<figure><img src="https://images.theconversation.com/files/194182/original/file-20171110-29358-1g7d9lo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Jordan Tan / shutterstock</span></span></figcaption></figure><p>Banking giant <a href="http://www.hsbc.com/news-and-insight/insight-archive/2017/hsbc-makes-new-sustainability-pledges">HSBC</a> has pledged US$100 billion (£76 billion) to “fight climate change”, to be spent on sustainable finance and investment over the next eight years. It also commits to increasing its own use of renewable energy and to reducing its funding of coal projects. </p>
<p>HSBC is following a growing trend among investment banks which includes a US$200 billion funding commitment from <a href="http://www.businesswire.com/news/home/20170728005062/en/JPMorgan-Chase-100-Percent-Reliant-Renewable-Energy">JP Morgan Chase</a>, the acquisition of the UK’s <a href="https://www.macquarie.com/uk/about/newsroom/2017/green-investment-bank">Green Investment Bank</a> by Macquarie, and exits from coal lending by Deutsche Bank, Credit Agricole and others.</p>
<p>I know a fair bit about such deals as I have been an energy investment banker for 25 years and now assess the sector in my research at the University of Bath and Imperial College. So how significant are these moves and what might their impact be?</p>
<h2>1. Huge capital is needed for green transition</h2>
<p>Undoubtedly the move to a green economy requires significant investment, over and above today’s levels. For 2016-2030, the <a href="http://www.oecd.org/environment/investing-in-climate-investing-in-growth-9789264273528-en.htm">OECD</a> estimates an additional US$600 billion infrastructure investment per year is needed to meet Paris Agreement climate goals, across energy, transportation and other sectors. </p>
<p>As part of this transition, green energy investment is already growing rapidly: the <a href="http://fs-unep-centre.org/sites/default/files/publications/globaltrendsinrenewableenergyinvestment2017.pdf">United Nations</a> reports doubling of clean energy asset finance over the past decade, with US$1,657 billion being raised in total 2007-2016, much of it from bank lending. So US$300 billion over the next decade from HSBC and JP Morgan, while significant, will not in itself be game-changing. It does, however, reflect the continued growth that we have seen for some time, driven by the declining cost of renewable power and broadly supportive government policies.</p>
<p>Banks are also encouraging the growth of the “green bond” market, where companies and governments raise money specifically for environmentally positive projects such as new wind farms, solar technology or more energy efficient housing – with the money ring-fenced and externally monitored. The <a href="https://www.climatebonds.net/market/explaining-green-bonds">green bond market</a> remains small, at less than 2% of annual global bond issuance. However volumes are growing rapidly and observers including the OECD see this market as important to climate finance. HSBC and other banks have been active in green bonds, issuing their own bonds and helping others access the market.</p>
<h2>2. It’s not just bank lending that is important</h2>
<p>There are concerns that bank lending may decline over time due to regulatory changes such as the Basel III framework, which requires banks to decrease their leverage and keep more capital in reserve. Governments are therefore also encouraging greater investment <a href="http://www.oecd.org/finance/principles-long-term-investment-financing-institutional-investors.htm">directly by large institutional investors</a> such as pension or life insurance funds. Increasing equity and debt investment into a better structured pipeline of clean energy projects is a challenge for policymakers and financiers alike.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=235&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=235&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=235&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=296&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=296&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194186/original/file-20171110-29364-y1dxyf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=296&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The sun is free – but solar panels aren’t.</span>
<span class="attribution"><span class="source">xieyuliang / shutterstock</span></span>
</figcaption>
</figure>
<p>Likewise, much climate-related investment is needed in emerging markets or for high-risk early-stage innovation and development. For example <a href="http://energy.mit.edu/publication/venture-capital-cleantech/">MIT</a> last year highlighted the decline in clean-tech venture capital funding, despite increased lending and investment for the deployment of existing technologies. It may be that continued overall commercial bank lending for “safe bets” (such as British wind farms that use established technology) does little to support these more difficult areas.</p>
<h2>3. What’s in it for the banks?</h2>
<p>Some question banks’ motivation: pressure group <a href="http://priceofoil.org/content/uploads/2017/06/Banking_On_Climate_Change_2017.pdf">Banking on Climate Change</a> points out that the world’s largest banks lent $290 billion to coal, liquid natural gas and environmentally sensitive oil projects in 2014-16, with JP Morgan the third-largest lender and HSBC at number eight. Announcing green finance packages is one way of deflecting criticism for such activities.</p>
<p>Likewise, the risk of climate change litigation is rising, with <a href="http://columbiaclimatelaw.com/files/2017/05/Burger-Gundlach-2017-05-UN-Envt-CC-Litigation.pdf">Columbia Law School</a> pointing to the tripling of climate cases since 2014. A recent action against the <a href="https://www.theguardian.com/australia-news/2017/sep/21/commonwealth-bank-shareholders-drop-suit-over-non-disclosure-of-climate-risks">Commonwealth Bank of Australia</a> highlights the potential for banks to be sued. In the face of litigation, now withdrawn, CBA acknowledged climate change as a significant risk, published a climate policy for the first time and withdrew from lending to a controversial coal project. Actions like those announced by HSBC this week, can be seen in the context of avoiding similar issues.</p>
<p>That said, HSBC and others may well be following growing demand from their own – particularly younger – customers for <a href="http://www.nielsen.com/uk/en/insights/news/2015/green-generation-millennials-say-sustainability-is-a-shopping-priority.html">sustainability-related products</a>. All successful organisations need to adapt to changes in customer preferences, and any generational shift in environmental views requires banks – like other companies – to adjust their marketing approach.</p>
<p>So what are we to conclude from these moves?</p>
<p>Increased green lending by commercial banks, while not the whole answer, is to be welcomed. Continuing to finance the growing deployment of increasingly low-cost renewable energy contributes positively to climate change action. In the face of increasing scrutiny of potential negative contribution by lenders – in the coal sector for example – it’s understandable that banks want to be able to trumpet their green credentials. </p>
<p>More is needed – from governments, development agencies, long-term investors and banks alike – but recent moves by HSBC and others are a step forward. It will be interesting to look back from 2020 at the relative levels of investment actually delivered to both renewables and more carbon-intensive sectors.</p><img src="https://counter.theconversation.com/content/87273/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Wilde receives funding from the Economic and Social Research Council and is employed part time by Macquarie Capital (Europe) Limited. The views expressed in this article are his own.</span></em></p>Announcing green finance packages is one way of deflecting criticism for fossil fuel investments.Simon Wilde, Research Fellow, Imperial College Business School, and Doctoral Researcher, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/719702017-02-06T07:42:34Z2017-02-06T07:42:34ZResponsible green finance: can investors make a real social impact?<figure><img src="https://images.theconversation.com/files/155434/original/image-20170203-14016-1smdjke.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Windturbines and windfarms are one example of what green bonds can finance.</span> <span class="attribution"><a class="source" href="https://pixabay.com/fr/%C3%A9oliennes-norfolk-puissance-1117890/">Diego Torres/pixabay</a></span></figcaption></figure><p>At the beginning of 2017, France <a href="http://abcnews.go.com/International/wireStory/france-issues-record-75-billion-green-bonds-45021945">announced</a> the launch of its green bonds scheme. A green bond is like a conventional bond, but one issued specifically to fund an environmental project. </p>
<p>The amount, not yet officially revealed, could be counted in billions of euros, thus constituting the first green sovereign borrowing scheme on this scale in the world. Poland <a href="https://www.climatebonds.net/2016/12/poland-wins-race-issue-first-green-sovereign-bond-new-era-polish-climate-policy">launched</a> its own green bonds scheme in late 2016, worth approximately €750 million</p>
<p>This is still considered to be a niche market, but its development potential is enormous and has <a href="http://www.reuters.com/article/us-global-bonds-greenbonds-idUSKBN14W2FX">soared over the last three years</a>, especially since the signing of Paris Agreement on climate change. </p>
<h2>How do green bonds work?</h2>
<p>Green bonds work in the same way as <a href="http://www.investopedia.com/terms/b/bond.asp">conventional bond issues</a>. Those financial tools are a form of loan made by private or public corporations, governments and institutions. Under various conditions and interest rates, they provide the borrower with external funds to finance long-term and diverse investments.</p>
<p>Green bonds concern sovereign (state), private and international business markets. They represent approximately <a href="https://www.greenunivers.com/2017/01/standardpoors-va-noter-les-green-bonds-155849/">US$ 170 billion</a>, or slightly less than 1% of the total international bond market. </p>
<p>Unlike regular bonds, green bonds are managed directly by the company’s general management rather than by the accounts management office, because of the potential impact they have on the company’s reputation and image.</p>
<p>With green bonds, it is possible to direct the amounts raised towards specific activities, assess a project’s environmental risk, track funding from the central treasury department (a report audited by a third party must allow cash flows to be monitored in the issuer’s statement), and ensure frequent reports on the use of the funds. Green bonds provide a vehicle for measuring the environmental performance of an investment project: the financing of a wind farm, setting up of renewable energy sites, green infrastructure, and so on. </p>
<p>There are many advantages for investors. They will know the precise project in which their savings are invested (“I know what I’m funding”) and will therefore be in a position to judge the quality of the issuer through the various assessments of the green bond’s environmental risk and the issuer in general.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=550&fit=crop&dpr=1 754w, https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=550&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/154434/original/image-20170126-30416-wgrfk7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=550&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Can green bonds change and really impact social and environmental issues?</span>
<span class="attribution"><a class="source" href="https://pixabay.com/fr/tr%C3%A9sorerie-argent-richesse-actifs-1169650/">bykst/piaxabay</a></span>
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</figure>
<p>The advantage for investors lies primarily in the communication and legitimacy process, given the fact that the context puts some pressure on companies to meet investors’ impact request. They can thus prove the sustainability of their process up to the stage of funding, by linking their words and their actions.</p>
<p>This also ensures that a more direct dialogue between investors and issuers can be initiated than through equity funding, which does not allow investment projects to be identified consistently.</p>
<h2>What is the real impact on the environment?</h2>
<p>But the question of measuring environmental impact remains. How can the environmental benefits of an investment project be assessed? Does the solution lie in the standard application of a measuring tool or in the ad hoc measuring of each project, given that each project is funded differently? </p>
<p>Each green bond is different and the environmental impact will therefore most probably be measured by expectations for the project, its execution and results. </p>
<p>The effort required to set up a green bond often results in the issuer requesting additional remuneration from the investor in order to compensate for the cost of this effort. <a href="https://www.bloomberg.com/news/articles/2015-09-18/investors-are-paying-extra-for-environmentally-friendly-bonds-barclays-says">Pricing is complex</a>, therefore, given that investors are <a href="http://www.triplepundit.com/2015/09/investors-paying-market-rates-green-bonds">not always prepared</a> to pay more for a project that could have been funded by a conventional bond. </p>
<p>This can create an imbalance between supply and demand, but as is the case with <a href="http://bfmbusiness.bfmtv.com/entreprise/les-green-bonds-un-modele-a-developper-877433.html">responsible equity investment</a>, green investors in the bond market are often prepared to pay more: price is not their priority.</p>
<h2>A niche market that could grow</h2>
<p>The climate talks in Marrakesh last year allowed African countries to take a closer interest in the issue of green bonds. Morocco, for example <a href="https://www.environmental-finance.com/content/news/masen-issues-moroccos-first-green-bond.html">launched green bonds</a> in November 2016 through several banks and public companies for a total amount in the region of nearly €150 million. </p>
<p>The Capital Markets Authority has said that the launch of the first Kenyan green bond <a href="http://news.xinhuanet.com/english/2016-10/26/c_135782874.htm">will be realised in 2017</a>. Other African countries such as Nigeria, the biggest economy in West Africa, are also preparing their <a href="https://www.bloomberg.com/news/articles/2016-12-09/nigeria-to-sell-63-million-of-green-bonds-in-first-quarter">own green bond launch</a>. Nigeria expects a bond issue of €63 million for the funding of green projects for the first quarter of 2017 and a second issue for the end of the year.</p>
<p>Although European countries are always considered <a href="https://www.climatebonds.net/files/uploads/2010/07/EU_GIB_experiences.pdf">to be leaders</a> in the private business market of green bonds issues, the interest and appetite for the development of renewable energy and sustainable economies is growing fast on the African continent, as it is in many <a href="http://www.lifegate.com/people/news/asia-finance-green-bonds">Asian countries</a> including India, Japan, South Korea and especially China.</p>
<h2>Taking bonds to the next level</h2>
<p>At present, as is the case with responsible investment, the green bonds market is concentrated in the hands of institutional investors and asset management companies. The majority of green bonds are issued by the Chinese market, which accounts <a href="https://www.greenbiz.com/article/why-green-bonds-are-reaching-record-highs">for almost half of the outstanding amounts</a> issued in 2016. </p>
<p>As the Chinese market is reserved for local investors, this does not allow a real expansion of the market. <a href="http://www.novethic.fr/fileadmin/user_upload/tx_ausynovethicetudes/pdf_complets/etude-greenbonds-2016.pdf">According to Novethic</a>, some green bonds are also too small to allow certain large funds to subscribe to them. </p>
<p>Taxation can also pose problems for investors. American green bonds will not be attractive for European investors from a tax point of view, as their taxation is advantageous only for investors based in the United States.</p>
<p>Does the green bond market allow investors to make a greater impact through their investments? The requirements promoted by the <a href="http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds/green-bond-principles/">green bond principles</a> for transparency, reporting, cash flow traceability and measuring the environmental impact clearly make this possible. But the market should cover broader themes than “low carbon” strategies and move towards the funding of water management, deforestation and the conservation of land and ecosystems.</p>
<p><a href="http://www.mitpressjournals.org/doi/pdf/10.1162/GLEP_a_00361">The bubble created</a> by the Paris Agreement should not suck the life out of the green bonds debate, even if it has the virtue of having initiated the debate, as these practices have now developed beyond the 2016 COP22.</p>
<p>The green bond model should also be extended beyond the environment, to social issues (social inclusion through housing and employment, health issues, community and humanitarian projects). Will the “social impact bonds” market allow social issues to be funded with traceability, reporting and impact measurement?</p>
<p>To achieve this, it will have to distance itself from the controversy over the state’s withdrawal from the social sphere in favour of private companies, and also from the debate over the financialisation of social issues.</p><img src="https://counter.theconversation.com/content/71970/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christophe Revelli is Academic Director of MSc "ESG Engineering - Finance for A New Growth" @ Kedge Business School. He's also member of the research Chair AG2R LA MONDIALE "Finance Reconsidered: Investment, Solidarities, Responsibility".</span></em></p>How to measure the real impact of green bonds? As France is issuing its first green bonds, the market in the global south could expand fast this year.Christophe Revelli, Professeur de finance responsable et conseiller scientifique du MSc Finance de Kedge Business School, Kedge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/657932016-09-22T20:28:17Z2016-09-22T20:28:17ZAustralian investors want bankable projects that help us adapt to climate change<figure><img src="https://images.theconversation.com/files/138713/original/image-20160922-21695-nn2tan.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Projects to adapt to climate change have come a long way since the 1960s when piles of cars were used to fight beach erosion.</span> <span class="attribution"><a class="source" href="http://app.griffith.edu.au/sciencesimpact/seawall-engineering/">Griffith University</a>, <span class="license">Author provided</span></span></figcaption></figure><p>Australia faces increasing costs of adapting to climate change over the coming years, but new research shows that, despite an appetite from investors to buy green bonds designed to deal with this, there are barriers that prevent this type of financing. </p>
<p>The <a href="https://www.nccarf.edu.au/content/research-projects">Griffith University research</a> involved interviews with 29 public and private sector stakeholders representing 25 organisations. These included all levels of government, institutional investors, bankers, insurers, consultants, advisors and legal experts. </p>
<p>In the past few years, the challenges of climate change have become increasingly apparent. The impacts and costs are evident, whether through record-breaking average temperatures, extreme events such as coastal erosion from East Coast Lows, droughts in north Queensland and Tasmania, or floods in Tasmania and Victoria. The need to adapt to climate change is essential, and will be expensive. </p>
<p>Globally, investment in adaptation amounts to <a href="http://unctad.org/en/PublicationChapters/wir2014ch4_en.pdf">US$20-25 billion, leaving a $60-$100 billion investment gap</a>. In Australia, <a href="http://australianbusinessroundtable.com.au/assets/documents/Report%20-%20Social%20costs/Report%20-%20The%20economic%20cost%20of%20the%20social%20impact%20of%20natural%20disasters.pdf">the economic cost of natural disasters</a> exceeded A$9 billion last year alone. It is forecast to rise to A$33 billion per year by 2050 – according to conservative calculations. </p>
<p>Government at all levels will not be able to pay for adaptation. Therefore, there is a need to think about how best to promote adaptation as an opportunity for the finance sector. </p>
<p>The research shows investors are looking for green bonds that support bankable and scalable projects helping Australia adapt to climate change and mitigate its effects, but that also generate a return on investment. However, there are no agreed ways to demonstrate when a city, infrastructure or coast has successfully adapted to climate change. So not only are there no standards around green bonds for adaptation, these bonds don’t exist yet in Australia. </p>
<p>The bonds that governments and corporations use to raise capital for projects are different to bank loans. They are issued over a specific time and have a set face value when issued that is paid back upon maturation. </p>
<p>Most green bonds demonstrate green credentials through projects that reduce carbon emissions, which mitigates climate change. Green adaptation bonds would incorporate elements or projects that “climate-proof” investments or increase resilience to extreme events caused by climate change.</p>
<p>Green bonds have performed extraordinarily well in the market. For example, the global value of these bonds has <a href="https://www.climatebonds.net/market/history">tripled from to US$11 billion in 2013 to over US$36 billion in 2014</a> and <a href="https://www.climatebonds.net/files/files/CBI-HSBC%20report%207July%20JG01.pdf">almost US$56 billion mid-2015</a>. However, there is still a need for these bonds to support adaptation projects in Australia such as seawalls, beach restoration or stormwater upgrades. </p>
<p>A key problem in getting green adaption bonds financed is that the bulk of responsibility for adaptation falls on local governments, which typically do not have the means to negotiate directly with investors, let alone access private sector funds. </p>
<p>Another barrier is that many adaption projects aren’t aggregated. The research shows that, to bring adaptation projects to the notice of investors, projects have to be substantial in size – at least A$20-25 million.</p>
<p>At the moment several large adaptation projects would need to be aggregated to make up a green bond, which are usually issued at around A$300-400 million. Suitable investments also must demonstrate a cash flow and return on investment, but the size of this is variable.</p>
<p>Yet the research findings still provide some hope that private sector financing for adaptation can become a reality. There is substantial interest and willingness to finance adaptation bonds in the private sector. As one research participant, Emma Herd, <a href="http://www.igcc.org.au/resources/Documents/IGCC_Adaptation_Guidance_web_Full_FINAL.pdf">CEO of the Investor Group on Climate Change (IGCC), stated</a>:</p>
<blockquote>
<p>“Investors know that a certain level of climate change is now locked into the system and will increase the physical risks and costs for business, infrastructure and the economy. Investing today to increase resilience to the physical impacts of the future is critical for reducing the costs of climate change.” </p>
</blockquote>
<p>In addition to this, private sector financiers in Australia already have some experience dealing with the risks posed by climate change, often as part of their environment, social and corporate governance requirements. Investors can build on this existing knowledge and protocols to seek out the opportunities represented by adaptation bonds. </p>
<p>All of this is backed up by Australia’s strong track record in climate finance. For example, the Victorian government and the National Australia Bank (NAB) are recognised leaders in the development of large-scale climate or green bond investment, along with the likes of the European Investment Bank. NAB issued Australia’s first climate (certified) bond in 2014, while the Victorian government recently <a href="http://www.premier.vic.gov.au/victorian-green-bonds-an-australian-and-world-first/">made headlines</a> as the first state or federal government in the world to issue a climate-certified green bond. </p>
<p>The research calls for rethinking and reforming partnerships between local and state government and private sector investors. An example is amending treasury standards to allow local governments to work with the private sector for investment. It also highlights the need for developing adaptation bond standards. </p>
<p>In some cases, a combination of public and private funding may be the only way forward. Still, any private sector investment is a way to stretch public money for adaptation further, something that will be increasingly important over time.</p><img src="https://counter.theconversation.com/content/65793/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Zsuzsa Banhalmi-Zakar receives funding from the National Climate Change Adaptation Research Facility. </span></em></p><p class="fine-print"><em><span>David Rissik does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To pay for the increasing costs of climate change Australia should have green bonds that finance projects that help us adapt. However research shows there are barriers to financing these bonds.Zsuzsa Banhalmi-Zakar, Visiting Research Fellow at Griffith Institute for Tourism, Griffith UniversityDavid Rissik, Deputy Director (General Manager), National Climate Change Adaptation Research Facility, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/522942015-12-16T19:29:24Z2015-12-16T19:29:24ZAs big business goes green, green bonds ready for takeoff<p>The climate summit in Paris has shown that global big business is now <a href="https://theconversation.com/the-earth-has-moved-big-businesss-radical-climate-shift-is-now-unstoppable-52119">also on board</a> with the transition to a low-carbon economy. </p>
<p>However, the most promising instruments in finance for promoting green investing, particularly <a href="http://treasury.worldbank.org/cmd/pdf/What_are_Green_Bonds.pdf">green bonds</a>, have been around for almost a decade now, starting with the European Investment Bank (EIB) <a href="https://www.climatebonds.net/files/uploads/2012/11/EIB_CLIMATE_AWARENESS_2012.pdf">Climate Awareness Bond</a> in 2007. </p>
<p>Why haven’t green bonds entered the mainstream of finance, and what is holding them back?</p>
<p>To be clear, the rise of green bonds has been dramatic: whereas issuances amounted to only US$4 billion in 2010, they were nearly ten times that amount by 2014, representing US$37 billion in new issuance volume. However, green bonds haven’t yet achieved a critical mass because their growth stems from a small base, given that global fixed income constitutes <a href="https://www.climatebonds.net/2014/05/9-useful-facts-about-global-bond-market">US$80 trillion</a> in outstanding value.</p>
<p>An important factor constraining the wider proliferation of green bonds is the fact that their issuance is still relegated to a few large players. The largest emitters of green bonds remain the <a href="http://treasury.worldbank.org/cmd/pdf/What_are_Green_Bonds.pdf">large multilateral development institutions</a> which collectively accounted for almost half (44%) of new issuances in 2014, while the corporate sector accounted for another one-third of the total. </p>
<p>The World Bank alone has conducted 100 green bond transactions <a href="http://www.mcgill.ca/channels/news/green-bond-coupling-sustainability-finance-257274">in 18 different currencies</a> that cumulatively represent more than US$8.5 billion.</p>
<p>Having such a concentrated base of issuers is insufficient for a wider introduction of green financial instruments, and new institutional players, particularly private sector entrants, are required to enlarge the green bond market.</p>
<p>Looking back, an overarching reason for limited private sector participation in green bonds was that “green credentials” were less important in past corporate cultures. However, with the <a href="https://theconversation.com/backstage-at-cop21-why-business-support-for-a-climate-deal-is-on-the-up-51275">cultural shift taking place</a> as seen at COP21, more entities are expected to “green-up” their <a href="https://theconversation.com/explainer-which-businesses-are-at-cop21-and-what-do-they-want-51630">business models</a>.</p>
<p>It is important to note that, because green bonds are properly certified as climate-friendly financial instruments, they only represent a portion of a larger, more loosely defined “climate-aligned” bond market. </p>
<p>While not officially labelled as “green” bonds according to <a href="http://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/GBP_2015_27-March.pdf">environmental rubrics</a> this market accounts for more than <a href="http://www.climatebonds.net/files/files/CBI-HSBC%20report%207July%20JG01.pdf">US$600 billion</a>.</p>
<p>The green bond market also suffers from a lack of project diversity. For the broader “climate-aligned bond market” that includes green bonds, the two largest segments are transport (nearly 70%) and energy (another 20%), but transport is almost entirely rail networks backed by state entities. Only 10% of the “climate-aligned” market covers the remaining construction, agriculture, waste management, and water categories.</p>
<p>It is heartening to see that developing countries have taken the lead in issuing “climate-aligned” securities (not necessarily certified as green bonds), with <a href="http://www.climatebonds.net/files/files/CBI-HSBC%20report%207July%20JG01.pdf">China alone</a> accounting for 33% (US$164 billion) of the climate-aligned issuances. India (US$15 billion), Brazil (US$3 billion), and South Africa (US$1 billion) are also among the emerging markets engaging in the climate-aligned capital raising process.</p>
<p>In Australia, the scope for green bond issuances is extremely promising, but in the context of the overall Australian <a href="http://www.rba.gov.au/speeches/2014/sp-ag-150414.html">A$1.5 trillion</a> bond market, green bonds still reflect a <a href="http://www.climatebonds.net/files/files/CBI-HSBC%20report%207July%20JG01.pdf">minute portion</a> of the issuances, and the country has generally <a href="http://www.smh.com.au/business/energy/australia-lags-as-global-market-for-green-bonds-set-to-treble-in-2015-20150714-gibzl4.html">lagged behind</a> in its adoption. This is partly due to regulatory uncertainty and <a href="http://www.smh.com.au/federal-politics/political-news/tony-abbott-has-escalated-his-war-on-wind-power-20150711-gia3xi.html">political hostility</a>. However, there’s actually a strong <a href="http://www.cleanenergyfinancecorp.com.au/media/releases-and-announcements/files/successful-green-bond-issuance-marks-new-stage-in-australian-clean-energy-financing-market.aspx">interest</a> in green bonds in Australia, as the 2015 green bond issuance of <a href="http://www.businessspectator.com.au/news/2015/5/28/renewable-energy/australian-investors-lap-anz-green-bonds">A$600 million by ANZ</a> bank and <a href="http://www.bnpparibas.com.au/en/2015/07/22/green-bonds-grow-in-investor-popularity/">this South Australian A$200 million</a> wind farm project evidently show. </p>
<p>In fact, most of the major Australian banks, including <a href="https://www.climatebonds.net/standards/latest-certifications/national-australia-bank">NAB</a>, <a href="http://www.westpac.com.au/about-westpac/sustainability-and-community/news-stories/news/5-may-aussie-green-bond">Westpac</a>, and <a href="http://www.businessspectator.com.au/news/2015/5/28/renewable-energy/australian-investors-lap-anz-green-bonds">ANZ</a> are dipping their toes in the space. To facilitate stronger growth in Australia, however, non-bank financial institutions will also need to be part of the equation, which is why it is encouraging that sectors such as <a href="http://www.thefifthestate.com.au/products-services/rating-tools/gbca-gets-on-board-with-climate-bonds-initiative/75173">the property market</a> are turning to green bond vehicles for raising capital.</p>
<p>The outlook on market volume growth for green bonds is overwhelmingly positive. <a href="http://www.bnpparibas.com.au/en/2015/07/22/green-bonds-grow-in-investor-popularity/">Some forecasts</a> are suggesting the green bond market will treble again this year as it did in 2014, touching US$100 billion. Given the growth and engagement on the “greening” of finance, green finance could soon become mainstream.</p><img src="https://counter.theconversation.com/content/52294/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Usman W. Chohan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Green bonds haven’t yet reached critical mass, but that could soon change as big business gets on board.Usman W. Chohan, Economist, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.