Insurance and Climate Change column

Green Bonds Booming Despite Washington’s Animus, Report Shows

By | January 11, 2018

In spite of the U.S. withdrawal from the global climate change accord hammered out in Paris a year earlier, green bond issuance around the world reached $155.5 billion in 2017, a new report shows.

That figure surpassed the initial, and somewhat optimistic, $150 billion estimate from green bond tracker Climate Bonds Initiative before the start of the year.

Climate Bonds Initiative put out a report this month that shows green bonds issuance last year met or exceeded market expectations that were laid out in 2016 on several fronts, including issuance from sovereign and sub-sovereigns, policy developments supporting green finance and green bond oversubscription.

The takeaway from one of the authors of the report is that green bond activity surged globally as well as in the U.S. in the face of a sweeping change in direction on climate matters from the Trump administration.

“Despite what’s happening in Washington, D.C., big chunks of the U.S. economy are getting on with changing their economies to make them more sustainable,” said Sean Kidney, CEO of the Climate Bonds Initiative.

Examples of recent green bonds investments from government entities is too numerous to mention.

Source: Climate Bonds Initiative

Over the past year or two: Washington D.C. the city has issued a 100-year green bond to rebuild its infrastructure to deal with rapidly changing climate; in the San Francisco the public utilities corporation has issued a series of water adaptation bonds and BART issued green bonds with an expected $388 million of proceeds for investments in climate-friendly mass transportation for the Bay Area; the New York Metro and New York state’s housing authorities have issued green bonds; and large green bonds have been issued by Puget Sound and in Massachusetts for a variety of sustainable projects.

Again, this all goes to Kidney’s point.

Frankly, no one gives a rodent’s gluteus maximus that Donald Trump is steering the nation away from incentives like issuing green bonds or battling climate change.

Those are his words. However, his phraseology was instead what some would consider NSFW. You get the picture.

“He can sit and fiddle while Rome burns like Emperor Nero did 2,000 years ago,” he added of Trump. “All other countries are going forward. They’re going green at an unbelievable speed.”

Visit Insurance Journal’s Research and Trends section to access the full report. The report is also available on our Carrier Management sister site.

Three countries – the U.S., China and France – accounted for 56 percent of 2017’s green bond issuance, according to the Climate Bonds report.

However, an increasing number of green bond issuers were from smaller countries in 2017, the report shows.

Green bond issuers in 2017 came from 37 countries with 10 new entrants, including Nigeria, Fiji, Malaysia, Argentina, UAE, Lithuania and Switzerland, the report shows.

Fiji issued a $50 million green bond to support climate change mitigation and adaption, while Nigeria becoming the first African nation to issue a sovereign green bond $30 million.

“Everyone likes the theme,” Kidney said. “It’s not just a niche investment market…this has become a global phenomenon. Everyone likes to think that their money can earn and income as well as help the planet.”

Investments in renewable energy continue to be the most common use of green bond proceeds, while allocations to low carbon buildings and energy efficiency rose 2.4 times and accounted for 29 percent of 2017 use of proceeds, according to the report.

“With a multitude of rail and urban metro deals, allocations to low carbon transport almost doubled in volume,” the report states. “The trend to finance an increasingly diverse range of projects continues.”

Within the U.S., Fannie Mae alone issued $24.9 billion of green mortgage back securities, which made the U.S. the No. 1 country for green bonds.

The Fannie Mae bonds were mainly for certified low carbon buildings or secured financing for energy and water efficiency improvements of at least 20 percent in apartment buildings/multifamily housing, the report shows.

The market is also opening up to new issuers and financial instruments, according to the report.

Three asset managers are now using green bonds to fund investments: Canadian Manulife Financial for renewables and other low carbon assets, QBE Insurance for a green bond fund and Investa for two Australian commercial property funds.

Insurers and reinsurers have been a part of the green bond movement from the beginning.

“Insurance companies have been the drivers of this market on the asset management side,” Kidney said.

Aviva, Swiss Re, Munich Re, and Zurich are among the largest of drivers, he added.

Zurich has committed to investing $1 billion into green bonds that finance projects aimed at mitigating climate change and helping communities adapt to the consequences of global warming. Aside from its green bond investments, the insurer is into building sustainably. The company opened a $400 million sustainable corporate campus in a Chicago suburb in late 2016.

“They’ve been a big pusher,” Kidney said of Zurich, then added, “It’s all across the insurance industry.”

He didn’t hesitate to offer his reasoning for that last statement.

“The insurance industry is full of actuaries and actuaries deal in facts,” he said, explaining that actuaries tend to embrace data and science rather than the rhetoric that he believes is the empirical tool of choice for climate deniers.

It was announced earlier this week that Willis Towers Watson has become the latest addition to the Climate Bonds Partners Program. This means global professional services firm and Climate Bonds plan to work together incorporate green debt sources in Willis’ investment processes and mitigate climate risks connected to its assets.

“We are delighted to be supporting the Climate Bonds Initiative,” John Collier, divisional director of Finex Global at Willis, said in a statement. “We look forward to working in partnership with the CBI and its network in expanding efforts aimed at promoting long term environmentally beneficial initiatives. Willis Towers Watson has developed a bespoke Financial Bond Indemnity product unique to this class, and we are proud to be working with the CBI to continue developing the green finance market.”

The green bond market grew 78 percent in 2017. And Climate Bond’s forecast for 2018 is between $250 and $300 billion, or 60 percent growth from 2017 figures.

Those seem like ambitious numbers, but Kidney thinks they are reasonable, because it’s not one corner of the market that’s exploded, it’s all over.

“This is little corners of markets all over the world, and major markets, taking off,” he said.

A giant player in the bond market is about to step up in create a need for more green bond issuance.

In Mid-2017, Japan’s Government Pension Investment Fund, which has $1.3 trillion in assets, announced its aim to increase its Environmental, Social And Governance – ESG – assets to around 10 percent of its Japanese equity holdings.

“They’re now looking for green bonds in which to invest,” Kidney said.

Socially conscious investing in Japan seems to be taking off. Two major Japanese life insurers, Meiji Yasuda Life and Nippon Life, this year unveiled plans to diversify their credit investments with a focus on socially responsible debt.

This, too, bolsters Kidney confidence in the 2018 outlook.

“This is a market of oversubscriptions,” Kidney said.

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