UN Investor summit: in search of the clean trillion

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21 January 2014 10:14 AM

I spent Wednesday sitting in the hallowed halls of the United Nations in New York for the biennual 2014 UN Investor Summit on Climate Risk Summit, hosted by the UN Foundation and Ceres Investor Network on Climate Risk (a Climate Bond Standards Board member).

This is the preeminent forum for global investors to discuss the implications of climate change for capital markets – investors representing $22 trillion of assets under management were in the room.

Green Bonds and Climate Bonds were a big theme of the day, proposed by speakers from UNFCCC head Christiana Figueres to Zurich Insurance Chief Investment Officer Cecilia Reyes. Ex-US Treasurer Robert Rubin also spoke, as did a clutch of bankers, a posse of pension fund managers and a billionaire climate activist (Tom Steyer).

A key part of the day was the launch of the Investing in the Clean Trillion: Closing The Clean Energy Investment Gap report, looking at how to increase annual global investment in clean energy to at least $1 trillion by 2030— roughly a four-fold jump from current investment levels. It’s an ambitious plan – but eminently achievable – plan.

Co-author (and Climate Bonds Senior Fellow) Mark Fulton noted that the paper makes climate bonds a core push, including them with 3 out 0f 10 recommendations.

As Bloomberg reported: “Bonds, bonds, bonds and asset-backed securities. Not all investors want to put solar on their roofs or can afford to build a field of panels. Banks need to create simple investment vehicles that help both retail investors and billion-dollar institutional investors access those markets.” Absolutely correct!

The 10 recommendations are:

On mobilizing investor action:

1. Develop capacity to boost clean energy investments and consider setting a goal such as 5 percent portfolio-wide clean energy investments.

2. Elevate scrutiny of fossil fuel companies’ potential carbon asset risk exposure.

3. Engage portfolio companies on the business case for energy efficiency and renewable energy sourcing, as well as on financing vehicles to support such efforts.

4. Support efforts to standardize and quantify clean energy investment data and products to improve market transparency.

Standardizing definitions of key investment terms, such as what constitutes a “climate bond,” will minimize the due diligence burden on investors and reduce transaction costs of investing in newer clean energy-related investment products. By reassuring potential buyers about what they are purchasing, standardization will also increase the liquidity of climate bonds and other products. Ultimately, better data on clean energy investment will foster easier, more precise benchmarking evaluation of potential deals.

On promoting green banking and debt capital markets:

5. Encourage “green banking” to maximize private capital flows into clean energy.

Expanded issuance of climate bonds by multilateral banks will broaden the universe of highly-rated fixed-income products attached to clean energy, thereby making it easier for investors to increase allocations to clean energy within existing liquidity/creditworthiness constraints. Investment-grade credit ratings for project bonds, such as S&P’s recent approval of SolarCity bonds, will enable investors to capture the relatively higher yield of these instruments, especially relative to sovereign debt. The $2.5 trillion covered bond market offers attractive products for pension funds and insurers—extra yield relative to sovereign debt, but with less risk than unsecured bank debt or asset-backed securities—and expanding this market into clean energy will increase such opportunities.

6. Support issuances of asset-backed securities to expand debt financing for clean energy projects.

Asset-backed securities (ABS) for energy efficiency and renewable energy projects offer long-term, low-volatility yields that match well with the liabilities of insurers and pension funds. To reach a scale that is attractive to these investors, however, this market must overcome growing pains that are common to any new capital markets product. Key steps for achieving scale include:

1) minimize the due diligence burden on buyers of clean energy issues by standardizing terms for power purchase agreements;

2) make future cash flows from such issues more stable;

3) enable more accurate rating and pricing of such issues by providing more detailed historical data; and

4) limit downside risk for buyers of early clean energy ABS issues through credit enhancement by public or private banks.

7. Support development bank finance and technical assistance for emerging economies.

On reforming climate, energy and financial policies:

8. Support regulatory reforms to electric utility business models to accelerate deployment of clean energy sources and technologies.

9. Support government policies that result in a strong price on carbon pollution from fossil fuels and phase out fossil fuel subsidies.

10. Support policies to de-risk deployment of clean energy sources and technologies.

You may recognize some of these proposals!

It’s worth a read. You can download the report here.