3 simple reasons why Climate Bond Standards are important

Opening speech at the launch of the Climate Bonds Standard by co-founder, Nick Silver

Let me deal with each word in turn: Climate, Bonds and Standards

1. Climate.

Everyone seems to have forgotten about climate change – it’s dropped right down or even off the agenda. We have been distracted by rather serious problems elsewhere.

But let's put things in perspective. I’m reading an interesting book at the moment about the history of finance; apparently there were banking crisis in England in 1836, 1839, 1847, 1857 and 1866. I’m sure these were very serious and caused much angst at the time but these they did not stop England being by far the richest + most powerful global economic power of the day.

There have also been climate crises in the past too.  For example 55.8 million years ago in thePaleocene-Eocene Thermal Maximum, a large increase in atmospheric CO2 caused the planet to warm up by 6C, leading to extinction of 50% of the species alive at the time.

Now I don’t doubt the seriousness of the financial crisis but financial crises happen at least a few times a century, and mostly, people eventually get on with their lives and forget about them.

In the meantime GHG emissions have been inexorably rising leading us towards an event that happens only every few million years and is inevitably catastrophic.

2. Why bonds?

If we had the will, we probably have the technological capacity to decarbonize our economies without too much difficulty. The main challenge is that all of our capital is locked into a fossil fuel intensive economy – the question is “how do we transfer this into a low carbon economy?”

Bonds are at least part of the solution. They have a long history of being used to finance the transformation of economies when we have had to – mainly, in the past, for the purpose of war.

But bonds are particularly suited to renewable energy and energy efficiency projects: these typically require high initial capital but then have no variable costs and receive an inflation linked income from the energy they produce or save. This is perfectly matched to the profile of a bond. Bonds are also currently greatly in demand from investors; in the developed world we have ageing societies and hence mature pension funds who need inflation-linked fixed income investments to match the payments of their pension liabilities.

Prior to the financial crisis we were in the Age of Equities; we have now entered the Age of Bonds.

However, at the moment the bond market has been flooded by low yielding government bonds - investors have a strong need for higher yielding inflation-linked alternatives.

3. Why standards?

I have noted the high capital, low running cost nature of renewables. This means that the cost of capital is crucial to the competitiveness of renewable energy. The aim of the standard is to ultimate reduce that cost of capital.

How? Firstly there are many investors who would like to invest in sustainable products. These are small compared to the investment universe, but large in absolute terms, but they do require assurance as to the environmental integrity of their investments, which a certification provides.

Secondly, large institutional investors need liquidity – this requires a large universe of standardized products. One day I would like to see “greens” as a standard bond class that forms part of the asset portfolio of all mainstream investors.

Finally, governments and multi-lateral institutions have earmarked large pools of capital for investment into climate friendly projects. I strongly believe that the best use of those funds could and should be to de-risk certified climate bonds, for example by providing insurance, guarantees or first loss provision. That way they can massively leverage private-sector investment rather than frittered away on a few individual projects.

On that none too subtle suggestion — governments using public funds to de-risk climate bonds — I am now delighted and honored that we have the pleasure of being addressed by one politician who definitely hasn’t forgotten about climate change; Greg Barker, UK Minister of State at the Department of Energy & Climate Change.