Sean Kidney, CEO Climate Bonds Initiative (4.03.13)
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Transcript of Sean Kidney, CEO Climate Bonds Initiative (4.03.13)
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EDINBURGH BUSINESS SCHOOL
Climate Bonds Sean Kidney, CEO, Climate Bonds Initiative
Investor-focused NGOMobilizing debt capital markets50 member international Advisory panel
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We need around $1tn p.a.
Bonds markets are untapped
Total clean energy investment 2011 $260bn
Bond market
$78 trillion
vs Equities $53 trillion
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Funding the North’s army in the US Civil War
A history of bond financing
Building the sewers of London
Creating the US and Italian highways network
Housing mortgages: unemployment solution
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Organisation-guaranteed
Sovereign / national
+ State
+ Muni
IFI (pooled backing)
Corporate
Asset-backed
Dual recourse / Covered / Pfanbriefe = pools
Securitization / portfolio bonds = pools
Project bonds
Social return bonds
Bond typology
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Bonds are ideal for renewables
Illustration courtesy Jason Langley AXA IM
High capital cost, stable returns, minimal running cost over 20-30 years
Scary end-of-life exposure
Running cost risks
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Big buyers: institutional investors$80tn assets under management
$30tn Pension funds – 19 out of 20 are public sector
$27tn Insurance
$3tn Sovereign wealth
$20tn Mutuals & Foundations
Local pension funds
50-60% bonds
Green/brown
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Investors want Scale
Project bonds
Bank or corporate bonds
Aggregation$500m-$1bnWind and solar farms
Re-financing by banks and utilities
Bond
stru
ctur
es
Equity Bank loans
Bond re-financing by banks &utilities
First 2-5 years 15-25 years
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We need to bundle
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Better understanding risk - hard work
Macro economy risks of climate change – Stern, Mercer
High-carbon risks: over-valuations, stranded assets
Better understanding opportunity - necessary
Massive and rapid shift to low-carbon
Economic sustainability
Changing the settings of the system to maximize outcomes – main game
Universal Owner: alignment of fund outcomes with economic outcomes
Oil & Gas, Housing, Defense
Germany 1990s
Industry planning – Jean Monnet
Shifting institutional capital
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Regulatory
Policy certainty – e.g. energy efficiency directives
Bond regulation: covered bonds, securitization
Enhancement
Junior equity
Wrappers
Partial and full guarantees
Deal development
Collaborations
Public sector risk sharing
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Projects to shift the systemMaking it easy for investors
Definitions for investors: Climate Bond Standard
$174bn universe - HSBC report & Bloomberg listing
Climate Bonds Index
Policy agenda
Public Finance Mechanisms
Green Securitization policy agenda / RECBs
Regional bundling: loan securitization with development bank support
EBRD & EE in EE platform
IFC and ESCO cash flows in Mexico platform
Southern Africa renewables platform
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Issues
Regulatory frameworks: ABS, covered bonds
Standardisation
Qualifying environmental criteria
Loan / credit characteristics
Multi-jurisdiction harmonizatio
Credit support
Energy contracts / offtake agreements
Junior equity, subordinated debt
Loan flow and loan book analysis
Platforms (conduit entities)
Green Securitisation project
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Collaborations between Governments and investors
Eastern Europe EE
Latin America or Southern African renewables
Indian green buildings
Iberian renewables
Credit support
Loan volumes
Issues
Standardisation
Conduit entities / platforms
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Mitigation+adaptation+sequestration
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Standards coalition To grow a $300 billion climate bond market
$11tn Climate Bond Standards Board – Making it easy for investors
Industry Advisory Group
Technical Working GroupsDefinitions
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Objectives1. Assure investors that investments are for climate change
solutions• Institutional investors aware macro risks, but hard to
quantify• If offered two investments with same risk/reward profiles,
one “brown”, one “green”, they will choose green
3. A simple preferencing tool • The easier it is to use the faster the market will grow• Authoritative: a coalition of asset owners & NGOs
2. Standardize across a large pool = increase liquidity• Energy, transport, water, etc
An environmental, not a financial standard. Investors still have to do their own credit analysis
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How Certification works
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New investors
Reputation enhancement
Exposing the market to underlying assets, in preparation for ABS post-Basel III
Need for improved capital ratios will further squeeze business lending
Re-financing allows focus on project development lending
….. Lower rates and a $300bn p.a. market
Benefits for issuers
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Greening new markets
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http://www.climatebonds.net