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Nick Robins Provides Insight on the Climate Bonds Initiative

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We spoke recently with HSBC’s Nick Robins to learn more about his participation as a member of the advisory panel to the Climate Bonds Initiative. In 2007 Robins launched HSBC’s Climate Change Center for Excellence, which analyzes the long-term commercial consequences of climate change for the HSBC Group and its clients.

The Climate Bonds Initiative is a not-for-profit collaboration among investors, policymakers, academics, and environmental NGOs seeking to support the development of a transparent global market for bonds issued to raise funding for climate-change mitigation and adaptation projects. This is the first in a series of articles about this rapidly evolving, critical initiative. Next month we will talk with Sean Kidney, Chair and co-founder of the Initiative, about standard setting and product development.

[FPP:] How is the market for climate-themed assets evolving?

[Robins:] Most of the market activity related to climate themes over the past 10 years has been centered on listed equities. We have also seen increasing activity in private equity for clean tech and increasing interest in infrastructure funds and property assets. In the last two years, there has also been an increasing focus on the fixed income arena, but primarily from a risk point of view—how could the ratings of fixed income bonds be affected by carbon risk or how could a utility’s bonds be impacted by water risk. The Climate Bonds Initiative is about a more proactive, more positive approach to how climate change will impact fixed income investing, looking at the opportunities it presents on the capital sourcing side.

[FPP:] What is the potential for growth for the climate bonds sector?

[Robins:] We estimate that $10 trillion will need to be invested from 2009 through 2020 in low-carbon energy—in terms of renewables and nuclear on the supply side, and more efficient buildings, industries, and transport on the demand side. The bulk of this investment will be made by private individuals and institutions, and $6 trillion of this will need to come in the form of debt. Clearly, bank lending is one source. But a key question is how can debt capital markets be mobilized to provide a slice of this capital in ways that meet investors risk/return requirements. That is our interest in this area.

[FPP:] What is the distinction between “green” bonds and this emerging definition of climate bonds?

[Robins:] Our focus is looking at bonds that can contribute to what we term the “climate economy,” which comprises both investments in emission-reduction and in measures to improve adaptation to the impacts of a changing climate. We want to look beyond badged “green bonds”—such as those issued by international financial institutions like the ADB or the World Bank—to look at the bond issuance aligned with low-carbon and resilience. This will be much bigger. In general, I think we have misperceived climate change as a separate issue—just about carbon—whereas it's part of a much wider industrial transformation linked to water stress, energy security, and food security. So if you want to talk about the climate economy, you have to address energy, transport, housing, infrastructure, agriculture, and water. You can’t really separate them. To take an example from the equity markets there has been a lot of focus on pure play renewable and energy stocks. But conglomerates such as GE and Siemens are also deriving an increasing share of revenues from the green economy. As an investor, you need to look at both. Turning back to bonds, you will see increasing issuance of bonds with capital ring-fenced for climate activities, particularly from sovereigns and international financial institutions, as well as issuance from pure play companies. But what we also need to grapple with is the bond issuance from conglomerates.

[FPP:] Why are fixed income assets expected to be an increasing portion of the climate-themed market?

[Robins:] We have this massive capital-raising exercise ahead of us. A lot of that will be equity, a lot bank lending, but more will have to come from the bond markets. The financial crisis and new regulations (such as Basel III) are likely to put downward pressure on bank lending for long-dated project finance. This means that utilities that want to raise capital for renewable or energy efficiency, for example, will have to look to debt capital markets.

[FPP:] Why do you feel market conditions are ripe for climate bonds?

[Robins:] We are at the cusp of market creation for climate bonds. The climate imperative comes at a time when a lot of big asset owners are looking to diversify their asset allocation away from equities. So this new theme in bonds could help institutional investors meet both their sustainability objectives as well as their asset allocation objectives. It is an embryonic market but a fast moving one with great potential.

–Susan Arterian Chang

Susan Arterian Chang is a contributing writer to The Finance Professionals’ Post and is also director of Capital Institute’s The Field Guide To Investing in a Resilient Economy project.

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