Email
There are two reasons why Zurich Insurance Group, one of the largest public companies in the world, is investing $2bn in green bonds. The first is the environmental benefit of investing in projects that will reduce carbon pollution and limit global warming, whether it’s a wind farm in Texas or energy efficiency upgrades to refrigerators and air conditioners in Mexico’s poorest neighbourhoods. The second reason – and most critical to investors – is that green bonds are profitable.
“If opportunities exist that provide market returns as well as tangible measurable environmental impacts, then I think that is a great investment opportunity,” said Cecilia Reyes, group chief investment officer at Zurich, speaking earlier this year in New York. “The question to ask is not why invest in green bonds, but why not invest in green bonds.”
It’s now clearer than ever that green bonds, which provide capital for clean energy projects with a promised return on investment, make good business sense. Investors are buying up green bonds at a blistering pace. More than $20bn in green bonds have been issued in 2014 and the Climate Bond Initiative, an investor-focused nonprofit group, expects the market will hit $40bn by year’s end. That’s a 20-fold jump from the $2bn of green bonds issued in 2012.
It’s a green win all around. Zurich doubled its investment in green bonds just this summer, and Unilever and Toyota issued their first ever corporate green bonds, worth more than $2bn, this spring. Even investment maven Warren Buffet is joining the party. Last year, a subsidiary of his insurance firm, Berkshire Hathaway, issued $1bn of green bonds to build and operate solar farms in California.
Investors cite similar reasons for buying green bonds: the ability to earn attractive returns (typically 4% to 5%) with minimal risk; and a growing array of clean energy projects, abetted by lower renewable energy costs, that are environmentally and financially attractive.
Why are green bonds such an important tool in tackling climate change?
Limiting climate change will require trillions of dollars of additional investment in solar, wind and other clean energy projects, and bonds are a critical lifeblood for financing these projects.
In fact, total global investments in clean energy must be doubled, to $500bn a year by 2020 and quadrupled to at least $1tn annually by 2030. Only by reaching this goal do we have a solid chance of limiting global temperature increases to 2C. At current investment levels, emissions and global temperatures are on a path to increase by up to 4C or 5C – a potentially catastrophic scenario for the global environment and economy.
When policymakers and analysts discuss how to finance this massive low-carbon shift, fixed-income bonds are always at the top of their list.
The idea of bonds may make your eyes glaze over, but their buying power is enormous. The global bond market is worth some $80tn and accounts for anywhere from 25% to 75% of institutional investors’ portfolios. All of those dams, highways and water treatments plants that we rely on every day were financed and built with bonds. Clean energy projects also rely on bonds, but right now they account for a tiny share of the bond market.
But tapping the bond market at the levels that are needed will require some changes.
Better standardisation of what constitutes a climate bond or a green bond is a critical step for sellers and buyers that will grow the market. By reassuring potential buyers about what they are purchasing, better standardisation will minimise the due diligence burden on investors and reduce transaction costs for the sellers.
Another key step is stronger government climate policies – market signals – that result in a strong price on carbon pollution, thus making low-carbon technologies more financially attractive.
There’s a steadily growing number of companies and investors calling for stronger climate policies, many of them members of Ceres’ Businesses for Innovative Climate & Energy Policy (BICEP) and Investor Network on Climate Risk (INCR). Many of these businesses and investors will be advocating for such policies at this month’s Climate Summit in New York, a key stepping stone to international climate negotiations in 2015 in Paris.
Ultimately, it’s about all financial institutions entering the game with a broad universe of clean energy investment products. Until policy and market conditions allow that to happen, investors may have limited options for scaling clean energy investments to levels approaching the Clean Trillion. The green bonds market, however, is not hinging on an uncertain future. It is already growing exponentially, offering significant opportunities that investors can seize today.
Mindy Lubber is president of Ceres, a nonprofit organization mobilizing business and investor leadership on climate change and other global sustainability threats
Read more stories like this:
- UN Climate Summit must show climate change action is in everyone’s interests
- World on track to be 4C warmer by 2100 because of missed carbon targets
- Advertisement Feature: 3 structural changes needed for a sustainable financial sector
The finance hub is funded by EY. All content is editorially independent except for pieces labelled advertisement feature. Find out more here.
Join the community of sustainability professionals and experts. Become a GSB member to get more stories like this direct to your inbox
;