Insurance and Climate Change column

Insurers Bonding with Climate Change Battle

By | September 18, 2014

Nearly one-in-five major investors in green bonds issued by one of the world’s largest players in that market is coming from the insurance industry.

If you haven’t heard much about green bonds and insurance investments up to now, you probably will in the coming week. It’s a good bet that green bonds will be an oft-discussed topic at the upcoming United Nations Climate Summit in New York on Tuesday as the financial world seems poised to embrace unprecedented awareness about climate change.

Several experts who spoke with this column are attending the meeting and plan on bringing up the topic.

The path for insurers into the green bonds market – experts view them as being highly attractive to an image-conscious insurance industry with its investments closely monitored and much to gain from funding resilience projects – was well paved in July by Zurich Insurance Group when it announced that it is doubling its investment in green bonds to $2 billion.

“We’ve seen the market growing,” said Heike Reichelt, head of investor relations and new products at green bond giant the World Bank.

According to Reichelt, 20 percent of the investors on the World Bank’s last two big green bonds were comprised of insurers.

For example, here’s the breakdown on the World Bank’s an AU $300 million ($269.50 million U.S.) Kangaroo Green Bond issued in April: Forty-two percent of the bonds were placed with asset managers, 35 percent with superannuation funds, 20 percent with insurance companies and 3 percent with banks.

While most of the bonds were placed with Australian investors, the U.S. and Japan made up a collective one-fifth of the total investors.

The coupon on the 5-year fixed rate bond is 3.50 percent, and the maturity date is 2019. The issuer price and re-offer price were 98.960 percent.

Eligible projects for the Kangaroo Green Bond include those that target the mitigation of climate change, such as investments in low-carbon and clean technology programs. Examples of this include: rehabilitation of power plants; solar and wind installations; building greater efficiency into transportation; construction of energy efficient buildings; and protection against flooding.

Since 2008, the World Bank has raised $6.7 billion in U.S. equivalent in green bonds through 69 transactions – this year alone the company issued $2.5 billion in green bonds. The entire green bond market surpassed $10 billion in new bonds in 2013, and as of this year the market was well beyond $20 billion, according to the World Bank.

To offer a comparison, until 2012 green bond issuances were well below $5 billion.

Climate Bonds Initiative, a research group, expects green bond issuance worldwide to reach $100 billion in 2015, with significant growth from new markets in Germany, as well as China, where the government has called for the growth of a corporate green bonds market.

However, it’s still a tiny fraction of the estimated $80 trillion bond market, so either there’s a lot of room to grow or we’re all making much ado about nothing.

A number of institutional investors have been developing strategies that explicitly address climate risks and opportunities in different asset classes, naturally pushing them and the companies they represent into green bonds.

Names that have invested in the World Bank’s green bonds include investment management firm BlackRock, the California State Teachers’ Retirement System, Ikea Group, TIAA-CREF and Austrailia-based insurer QBE Insurance Group.

Retirement funds and life insurers are among the big players, while municipalities have continued to push further into green bonds. Massachusetts earlier this week announced the state is selling $350 million in green bonds, and California has been an investor in the World Bank’s green bonds for more than five years.

There are those who believe insurers may eventually make up an even larger percentage of the growing green bond market. Ceres, a nonprofit group that advocates for sustainability leadership, is actively working with insurers to build interest among the industry for investing in green bonds.

Why would an insurer want to invest in green bonds? It’s a question Cynthia McHale, director of the Ceres insurance program, likes to pose then answer. She offered three reasons:

  1. Green bonds offer the same returns as other bonds and they are no more or less risky.
  2. They have a positive impact on society.
  3. Investing in green bonds puts insurers in a leadership role in society.

“We’re really seeing this year that this market is taking off,” McHale said, adding that “insurers buy them because green bonds fit within their investment criteria.”

In January, Ceres hosted a dinner for insurers and other market players with Zurich Chief Investment Officer Cecilia Reyes as guest speaker to talk about the carrier’s interest in green bonds.

Since then Ceres has held a series of webinars on the subject, and they’ve established a “Green Bond Working Group” with senior investment managers from various insurance companies.

“We’ve had just tremendously strong interest,” McHale said. “We know that the insurance community has become quite interested and active in the green bonds market.”

Early next year Ceres plans to put out a report on investor exceptions for green bonds outlining issues like transparency and what the expectations are for the proceeds from the bonds.

Perhaps the strongest testament to the green bond phenomenon is that they seem to be priced higher for smaller investors wishing to get a piece of the action.

“I have heard anecdotally in the secondary market because there are not enough green bonds for investors interested in them that the price is higher than for other bonds,” Reichelt said.

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