Sean Kidney, CEO Climate Bonds Initiative (4.03.13)


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Climate bonds: Mobilizing debt capital markets for climate change solutions' presented by Sean Kidney at the University of Edinburgh Business School

Sean Kidney is co-founder and CEO of the Climate Bonds Initiative. His background is in stakeholder communications, social change strategy and issues marketing. Sean is also a director of the Network for Sustainable Financial Markets, an international, non-partisan network of finance sector professionals, academics and others who see the need for fundamental changes to improve financial market integrity, stability and efficiency. He is also a member of Mercer’s Sustainability Opportunities Fund Advisory Panel, and was previously a marketing advisor to a number of the largest Australian pension funds and a social marketer and publisher.

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  • Renewable energy is ideal for bondsIt’s all capital costs and zip running cost, with no scary lumps at the end, as with nuclear energy, or volatile input costs, such as with gas
  • In the short term, the coming year, we will see:1. Big enough green and climate bond issuance to have to be included in market indices. This will get institutional investors taking more notice.2. The launch of a number of Green Fixed Interest Investment Funds3. The setting of a Green Investment Bank in the Uk4. The setting up of securitized “aggregation” funds in the energy efficiency and renewable energy spaces5. Values labeling starting in the UK, to support the government’s commitment to facilitate “Green ISAs”
  • Sean Kidney, CEO Climate Bonds Initiative (4.03.13)

    1. 1. EDINBURGH BUSINESS SCHOOLClimate BondsSean Kidney, CEO, Climate Bonds InitiativeInvestor-focused NGOMobilizing debt capital markets50 member international Advisory panel
    2. 2. Bonds markets are untapped Bond market $78 trillion We need around $1tn p.a. vs Equities $53 trillionTotal clean energyinvestment 2011$260bn
    3. 3. A history of bond financing Building the sewers of LondonFunding the North’s army inthe US Civil Creating the US and War Italianhighways network Housing mortgages: unemployment solution
    4. 4. Bond typology 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
    5. 5. Bonds are ideal for renewables High capital cost, stable returns, minimal running cost over 20-30 years Scary end-of-life exposure Running cost risks Illustration courtesy Jason Langley AXA IM
    6. 6. Big buyers: institutional investors $80tn assets under management $30tn Pension funds – 19 out of 20 are public sector $27tn Insurance $3tn Sovereign wealth $20tnMutuals& Foundations Local pension funds 50-60% bonds Green/brown
    7. 7. Investors want Scale ProjectBond structures bonds Aggregation $500m-$1bn Wind and solar farms Re-financing by banks and utilities Bank or corporate bonds First 2-5 years 15-25 years Bank Bond re-financing Equity loans by banks &utilities
    8. 8. We need to bundle
    9. 9. Shifting institutional capital 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
    10. 10. Public sector risk sharing Regulatory Policy certainty – e.g. energy efficiency directives Bond regulation: covered bonds, securitization Enhancement Junior equity Wrappers Partial and full guarantees Deal development Collaborations
    11. 11. Projects to shift the system Making 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
    12. 12. Green Securitisation project 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)
    13. 13. Conduit entities / platforms 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
    14. 14. Mitigation+adaptation+sequestration Bio-energy Wind Solar EE buildings Transport: rail aviation Transport: Transport: Water electric Green NAMAs Broadband Mass transit infrastructure vehicles Sustainable EE Industrial Power grid Geothermal Hydro energy Agriculture Low-carbon Transport: Transport: Sustainable urban Energy Storage shipping aviation fisheries development Flood Methane Climate Marine energy protection management programs
    15. 15. Standards coalition Industry Advisory GroupTo grow a $300 billion climate bond market$11tn Climate Bond Standards Board– Making it easy for investors Technical Working Groups Definitions
    16. 16. Objectives 1. 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 2. Standardize across a large pool = increase liquidity • Energy, transport, water, etc 3. A simple preferencing tool • The easier it is to use the faster the market will grow • Authoritative: a coalition of asset owners & NGOs An environmental, not a financial standard. Investors still have to do their own credit analysis
    17. 17. How Certification works
    18. 18. 18Benefits for issuers 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
    19. 19. Greening new markets
    20. 20.