The environmental market is heating up

In the last month, both China and India have emphasised the critical role green investing can play in addressing environmental damage, carbon intensity and global warming; the global banking Financial Stability Board has expanded its climate-related financial disclosure task force; and a major investor group has published seven climate change policy priorities.

" The year 2016 is set to be the year of green finance."
R Gandhi, Reserve Bank of India

Elsewhere in BlueNotes you can read The Climate Change Institute’s independent audit of ANZ’s carbon intensity disclosures and ANZ’s priorities on the matter.

What these measures, disparate as they may be, demonstrate is a growing recognition in financial markets which goes beyond the reality of climate change to the particular financial opportunities and risks it poses.

New markets, such as those for “green bonds”, designed to finance less carbon intensive infrastructure, are maturing and major emitter nations including India and China are taking concrete steps.

Banks simply cannot afford to ignore their regulator or its disclosure task force, chaired by former New York mayor and financial market and media billionaire Michael Bloomberg.

“The Task Force, which was created in December, is developing voluntary, consistent climate-related financial disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders,” the FSB says. “More effective disclosures will help to reduce financial stability risks by avoiding an abrupt repricing of financial assets as the impact of climate change becomes clearer.”

Meanwhile, the Investor Group on Climate Change, which represents institutional investors, with total funds under management of over $A1 trillion, has just published seven climate change priorities for investors.

“Getting energy and carbon policy working together is vital for investors allocating capital across the sector. Increasing investment in renewable energy and managing out ageing coal fired generation assets have to be part of the same policy conversation and dealt with in an integrated manner,” Emma Herd, the group’s chief executive says.

The priorities are long term emission reduction targets; a durable policy framework grounded in broad bi-partisan support; a market-based carbon pricing mechanism; an integrated approach to energy sector transition; long term certainty and funding for clean energy public financing vehicles; a national adaptation action plan to reduce the cost of climate change; and, again, a disclosure framework for climate-related financial reporting.

So where will these markets operate? In Australia there has already been issuance of green bonds but both China and India, vastly larger potential markets, have made clear such measures are on the horizon.

Investors in the green bonds issued to date are global.

The deputy governor of the Reserve Bank of India, R Gandhi, recently gave a speech entitled "Delivering a Sustainable Financial System in India".

“Recognition is growing of the pressing challenge of financing sustainable development, and the opportunity it offers for channelling financial capital to productive, profitable and more broadly beneficial uses,” he said.

“The year 2016 is set to be the year of green finance. Across the world, we are seeing a growing number of countries aligning their financial systems with the sustainability imperative. We welcome this new green finance initiative.”

Green financing has different emphases in different markets. In Australia, for example, bond issues have been focussed on reducing carbon footprints.

In a recent BlueNotes article, ANZ’s Katherine Tapley and Catherine Bremner, outlined the global and Australian opportunities.

They noted green bond issuance reached $US42 billion in 2015 and forecast a doubling in 2016 while Moody’s Investors Service says the amount might reach $US70 billion – half from China.

“Most issuance has occurred in the US and Europe but increasingly markets in Asia are gaining momentum. Since mid-2015, $US5.5 billion has been issued in China and in India,” Tapley and Bremner wrote.

“In Australia, in just 18 months we have seen $A1.8 billion of local issuance across four transactions and a €300m issuance by a local corporate. We believe there is significant, multi-billion dollar opportunity for further growth across markets such as commercial property, transportation and renewable energy.”

The Financial Times’ Lex column recently ran through Chinese initiatives, noting “there is money in filth”.

The Chinese government has announced plans to improve the quality of arable land within five years after a 2014 survey estimated one-fifth of arable land was contaminated by heavy industry. To restore 90 per cent of that land to safely usable levels by 2020 will cost an estimated $US1 trillion.

“China’s Green Finance Task Force, a group backed by the People’s Bank of China, estimated last year that the cost of reaching the environmental targets could run as high as $US300 billion a year for the (next) five years. China’s government might only pay for about 15 per cent of the bill,” the FT said.

That is where green bonds come in. Green bonds are bonds where the proceeds are applied to existing or proposed environmentally friendly assets or expenditure which aim to address key areas of concern such as climate change, natural resource depletion, biodiversity conservation or pollution.

While to date banks – including ANZ – have been the main issuers of green bonds, the FT points to motor group Zhejiang Geely which in May issued $400m of green bonds yielding 2.75 per cent, backed by Bank of China.

“The proceeds will go towards financing development of an electric taxi cab that may reduce pollution in London’s busy streets,” the FT said. “Demand for the asset class has been strong. With similar yields to non-green bonds, funding cleaner living comes as an added bonus.”

That is the critical point: being nice to the planet is one thing but money makes environmentalism a lot more desirable in financial markets.

Green bonds are an emerging asset class, one with what looks like an assured future in a carbon constrained world facing challenges to feed, water, clothe and house a larger and wealthier population.

Layer on top of that regulatory and investor interest in the environmental risk embedded in asset values and finally government attention and all the elements of a new market are in place – an asset pool, government incentives, regulatory leaning and investor interest.

There’s money to be made – and it should be good for the planet.

Andrew Cornell is managing editor of BlueNotes.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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