The market for green bonds is growing fast, but not quite fast enough, according to Sean Kidney (photo), CEO of the Climate Bonds Initiative. Our sister platform Fondsnieuws spoke with him following the State Street Global Advisors Climate Change Seminar. According to Kidney, institutional investors need to take more initiative to encourage governments to facilitate more green investment opportunities. ‹The
advantage of public venture capital over private venture capital is that it has a much longer horizon and can therefore also be invested in riskier projects.›
Climate Bond Initiative
Founded in 2009, the Climate Bond Initiative is an NGO dedicated to mobilising bond investors to help finding solutions to address climate change. To this end, the organisation works together with institutional investors, regulators and governments.
Although the issuance of green bonds increased by 84 billion dollars in 2019 to a total of more than 254 billion dollars, according to Kidney more investment is ‹badly needed›.
‹We know that greenhouse gas emissions must halve over the next 10 years, but last year emissions increased by 0.9 percent. So there’s still a lot of work to be done here,› he says.
But Kidney is hopeful. ‹The good news is that for a number of important sectors, such as energy, transport and real estate, we know what we have to do to create a market in which institutional parties can invest.›
‘Positive role’ for Luxembourg
‘Luxembourg has played a positive role in promoting green finance’, Kidney believes. The Luxembourg Stock Exchange (LUXSE) listed the world’s first green bond in 2007 and today lists around 50% of the world’s green bonds in terms of volumes. According to the Climate Bonds Initiative’s 2019 Green Bond Market Summary, LUXSE listed $19.8bn (€18bn) worth of deals last year.
Luxembourg for Finance announced last month the Grand Duchy wants to be the leading global centre for sustainable finance by 2025. ‘Previous promotion of Luxembourg for several years as the leading green and sustainable finance hub of Europe has already had a ripple effect in European markets, and influenced other financial centres,’ says Kidney. ‘Continuing this push helps market familiarity and growth and encourages other institutions. It will also become increasingly important as the EU Green Taxonomy gathers pace.
Negative yields
The ‹enormous amount of assets› that is currently invested in negative-yielding bonds could be used to invest in green projects as institutional investors could use some extra return, believes Kidney. ‹It fits into their portfolios in terms of risk.›
Development banks and governments can remove an important part of the (initial) risk and make it possible for pension investors, for example, to invest as well. Kidney cites Germany and China as examples. Due to the enormous demand for solar energy from these governments, the market has reached such a scale that the cost price of solar energy is still falling by 20% per year. As a result, solar energy as an energy source continues to gain in importance.
Carbon Tracker Initiative
According to Kingsmill Bond of the Carbon Tracker Initiative, a think tank that investigates the impact of climate change on financial markets, this has far-reaching consequences. He argues that the continuing fall in the cost of renewable energy is the first turning point in a technological revolution in which demand for fossil fuels has peaked, at least in the developed world.
As an example, Bond cites the demand for fossil fuels for electricity, which peaked in 2007, he says. ‹Overcapacity and falling prices led to an 80 percent drop in share prices in the following decade. In addition, European electricity companies were lagging behind with stranded assets, which fell in value by 150 billion dollars›.
According to him, the amount of potential «stranded assets» is much larger than is predicted by traditional energy suppliers and is taken into account by investors. The fossil fuel sector, for example, has the largest infrastructure in the world, with an estimated value of fixed assets of at least 20,000 billion dollars. Much of this can be expected to become worthless over the next few decades.