Session

Using Innovative Financing to Fund Climate Resilience

The Intergovernmental Panel on Climate Change projects that we are on a path to a global mean temperature rise in the range of 1.5°C to 4.5°C by the end of the century. Much of this increase is already materializing, and the expectations of businesses to “manage the unavoidable” are increasing. Extreme weather events will have impacts throughout the business value chain, from access to raw materials to logistics and stability of operations. This thought-provoking one-hour session will highlight innovative financing vehicles, such as climate bonds, that companies are using to fund climate resiliency. The session will also have a “game show” format that will test participants’ knowledge on the science of climate change and allow them to make a small contribution to preserving our valuable ecosystems, all in real time.

Speakers

  • Sean Kidney, CEO, Climate Bonds Initiative
  • Trevor d’Olier-Lees, Director, Corporate Ratings, Standard & Poor’s
  • John Hodges, Director, Financial Services, BSR (Moderator)

Highlights

  • The climate bond market has grown tremendously in recent years. There is now a need to get government and local communities to advance the policies, planning, and initiatives that will attract climate bond investments.

  • To promote deal flow, the climate bond market needs to engage more informed corporations that can generate projects and know how to raise money.

  • Climate investments, particularly in clean energy and building infrastructure, present great opportunities for companies to sell the products, services, and technologies needed to create a climate-smart world.

  • Climate bond standards provide a promising way for investors to understand the very complex climate assets that their in-house experts cannot effectively evaluate.

Memorable Quotes

“The big problem today is that there is actually a lot of institutional money sitting there. It’s not that [investors] don’t have money to spend. The challenge for them is identifying opportunities that are attractive.” —Trevor d’Olier-Lees, Standard & Poor’s

“If ever there was a time to rebuild the world’s economy, it is right now. This world is awash with capital.” —Sean Kidney, Climate Bonds Initiative

“You’d be crazy to invest in a water utility that hasn’t factored in changing rainfall due to climate change.” —Sean Kidney, Climate Bonds Initiative

Overview

This session provided thought-provoking discussion about the innovative financing avenues available to help build climate resilience globally. Moderated by BSR’s John Hodges, expert panelists Sean Kidney of Climate Bonds Initiative and Trevor d’Olier-Lees from Standard & Poor’s helped attendees navigate complex issues in the world of climate change investment. The session covered three topics: finance and climate resilience, climate bonds, and the role of nonfinancial corporates.

Finance and Climate Resilience
To describe the intersection of finance and climate resilience, panelist Sean Kidney stressed the importance of understanding the climate science and realities that countries will face from climate-related weather events, such as drought, flooding, and rising sea levels. Because the investment community understands the business risks posed by climate change impacts, it is paying closer attention to the latest climate science findings, such as the recently published Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5).

The panelists then tackled the question of what investments are needed. D’Olier-Lees highlighted the importance of investing in buildings and energy efficiency upgrades. Kidney pointed out the need to retool economies to make them flood- and heatproof. He explained that companies face fantastic investment opportunities, particularly in places where governments need to update aging infrastructure. Beyond the business community’s proactive search for opportunities, Kidney called attention to the need for governments to step up to the plate and establish the regulatory climate needed to help reduce long-term risks. These steps would bring pension and insurance funds into the conversation.

Climate Bonds
Climate bonds are a subset of green bonds that provide investment directly to mitigation and adaptation projects. The green bond market totals approximately US$36 billion, and it is only a small subset of the larger climate-themed bond universe, which adds up to approximately US$503 billion. Hodges highlighted the fact that this is a small portion of the US$80 trillion in total global assets under management. D’Olier-Lees explained that the climate bond markets would have a larger share of the total available investment assets if climate investment opportunities were clearly presented to funders in a language they understand and with assurances that the investments meet their requirements and interests.

The concept of creating standards for the climate bond market has recently been debated. Specifically, there are valid concerns that creating standards would slow down the climate bond market. According to d’Olier-Lees, the definitions within standards can be quite contentious. Therefore, it is important that they are well-researched and transparent to discourage perverse incentives and ensure that climate investments are effective.

Kidney sees standards as providing a great opportunity to help investors understand very complex assets. He highlighted that the challenges and opportunities presented by creating standards for climate bonds are not unique to that sector; in other words, they occur in other markets. The key value that standards would bring to climate bonds is allowing investors to get an apples-to-apples comparison of investment opportunities, which d’Olier-Lees highlighted, is the direction the market needs to go.

The Role of Nonfinancial Corporates
Nonfinancial corporates should view the climate bond market as a promising opportunity, not only for investment, but also to sell the products, services, and technologies needed to create a climate-smart world. The energy sector is an important part of climate investment discussions, as well as both property and transportation bonds.

Corporations should also see the climate bond market as an opportunity to promote climate-safe projects that carry a much lower investment risk and less uncertainty. With this in mind, potential investors should engage experts, such as those from the Climate Bonds Initiative, to gain a better understanding of what climate bond products are available and which ones might best suit their investment priorities. Green bond benefits include diversifying investors, deepening investor engagement (also known as stickiness), cultivating reputational benefits, and supporting longer tenure. Through the Climate Bonds Initiative, Kidney hopes to achieve price parity with other bonds in the market, and perhaps eventually secure a price premium.

During the Q&A, a participant asked about the most significant obstacle to growing the climate bond market. The panelists pointed out that this market has grown tremendously in recent years, and they said that the focus is on getting governments and local communities to put in place the policies, planning, and initiatives necessary to advance projects that will attract climate bonds. In addition, the market needs more informed corporations that can actively support and participate in climate investment opportunities.

Date

November 4, 2014