Climate Bonds: More Than Hot Air
The CFA Institute Fixed-Income Management Conference is an annual event focused on global debt markets, fixed-income sectors, security selection, and portfolio construction. The Fixed-Income Management 2019 Conference will bring together researchers, analysts, portfolio managers, and top strategists in Boston, Massachusetts, on 17–18 October.
Climate and environmental investment topics are appearing with more frequency on CFA Institute conference agendas, matching the increased focus they are receiving from the investment profession. Investing and politics often intersect, and discussion in this area gets complex, emotional, and ideological. The feedback from our audience reflects that.
At our 2008 CFA Institute Annual Conference in Vancouver, Columbia University professor Jeffrey Sachs was detailing US contributions to global carbon emissions when my Blackberry buzzed. An attendee’s email asked, “What happened, Hugo Chavez wasn’t available?”
We get it from both sides. In September, we heard from environmentally conscious readers objecting to a blog post stating that “Many people have acknowledged climate change as a fact, although there remains some debate as to its cause.”
Respected and successful investors, including Jeremy Grantham, have become more outspoken on environmental and resources issues, but the arrows still come. After a panel discussion on sustainable investing at the 2014 CFA Institute Annual Conference in Seattle, one delegate wrote “The CFA Institute should NOT be promoting the global warming scam!” Another implored, “PLEASE, no more left wing wackos.”
In fairness to disgruntled audience members, I’ve seen a lot of climate-related sessions and speakers in the last 10 years that make the mistake of presenting forecast as fact. We encourage speakers to focus on investment implications and practical takeaways, but their sessions can take on the characteristics of a passionate sales pitch. An audience of CFA charterholders, who have seen too many sell-side presentations in their careers, can be reluctant to trust assertions without rigorous verification.
With that in mind, I was only mildly surprised to receive an email from Sean Kidney, CEO of the Climate Bonds Initiative (CBI). He was scheduled to speak at our CFA Institute Fixed-Income Management 2014 Conference and wanted to know if he should worry about hecklers. (Of course, our answer was a definitive “no.” Ours is a professional and respectful audience — and we take audience questions on cards, which prevents editorializing from the floor.)
At the conference, Kidney explained that the CBI sets standards under which a bond might be considered climate-themed. As Jason Voss, CFA, previously noted, a climate bond now must meet strenuous criteria for how its proceeds are ultimately invested to receive the “climate bond” label. With these new requirements, the CBI had identified a universe of US$502 billion in climate bonds as of March, 2014, up substantially from US$346 billion the prior year.
The climate bond universe consists of around 1,900 bonds from approximately 280 issuers, distributed across seven climate themes:
This universe, constituting a global market of government and corporate issuers in multiple currencies, seems — at least, in part — a response to growing interest in environmental, social, and governance (ESG) investing across all asset classes. Institutional investors that represent more than US$24 trillion in assets have signed the Global Investor Statement on Climate Change, declaring that they will integrate climate change and climate policy risks and opportunities into their investment decisions.
“Deals are routinely oversubscribed,” said Kidney. “There’s a big demand for these types of investments.” And these investors don’t appear to be backing climate bonds solely in support of a cause.
“No one takes a haircut on sentiment,” Kidney explained — a commitment to a less carbon-intensive economy does not replace fiduciary duty. The standards of investment practice related to investment terms, credit analysis, and the appropriateness of the instrument still apply in the case of climate bonds.
Cynics might dismiss climate bonds as a marketing gimmick playing on climate change fears, but the CBI’s goal is to provide investors with a rigorous, independent review for projects claiming to address climate change mitigation and adaptation. Kidney explained how these projects may become more important in the years ahead.
An attentive audience heard some of the frightening and increasingly accepted environmental forecasts that Kidney cited as reasons to develop climate bond markets faster. Rising sea levels could put billions of dollars of infrastructure at risk. Global food security is threatened by soil degradation. The Earth’s atmospheric system may already be locked into rising global temperatures. Even the less extreme scenarios will be expensive.
Kidney referred to an International Energy Agency (IEA) report that said holding temperature increases to 2 degrees Celsius, which avoids catastrophic global warming, will require a cumulative US$53 trillion investment in energy supply and energy efficiency between now and 2035 to reduce carbon emissions sufficiently to meet model targets. Additional trillions will be needed to adapt — even to the slower increase in temperature — and the climate bonds market is one of the vehicles that can allocate capital to those purposes.
Kidney’s presentation went over better than other climate-related sessions we’ve held in the past. Whether you agree with climate forecasts or not — or, perhaps of more relevance, whether or not you believe human investment and action can reduce the probability that the more dire forecasts will come to pass — fund flows into these investment vehicles are a compelling data point. The climate bond market’s growth reflects a shift in the way governments, owners of capital, and other market actors are allocating investments.
Nothing suggests that the interest in environmental issues is going to diminish soon. Rather, the fact that the managers of US$45 trillion have become signatories to the United Nations-supported Principles for Responsible Investing suggests that environmentally conscious investing will only grow in the foreseeable future. This is relevant to all capital markets participants, whether they invest using these criteria or not.
I’m pleased to say that Kidney was not heckled, and a question at the end of his presentation asked how he would respond to those remaining skeptical of climate change fears. He replied that, not being a scientist, he must rely on the expertise of others. In his opinion, we should not dismiss the consensus of “every national science academy on Earth” just because we don’t like what they tell us.
“If you’re building a bridge,” he added, “you don’t ignore your engineers.”
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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