Asset owners have shown such an appetite for green bonds that the market has hit a shortage in supply.
To close the demand gap, asset owners will benefit from collaborating with sovereign issuers to create the right investment products, according to Sean Kidney, CEO of the Climate Bonds Initiative, an international organisation working to mobilise global capital for climate action.
“The relationship between investor needs and government needs might be perceived as well developed, but it is surprisingly clumsy. It needs some work,” Kidney told the audience at AsianInvestor’s Insurance Investment Briefing in Singapore on September 27.
A green bond is a type of fixed-income instrument specifically earmarked to raise money for climate and environmental projects that address climate change.
Kidney is part of Monetary Authority of Singapore’s (MAS) Sustainable Finance Advisory Panel. The panel works on further things MAS and the Singaporean government can do to create products for insurers and other asset owners’ portfolios.
“It will take a lot of work, and it will need asset owners to be in the office of governments telling them how to do it,” Kidney said.
There is currently a shortage of green bonds worldwide — not only for the investors, but also for the issuers working to figure out how to create more green bonds.
Kidney estimated that there are about 100 regular issuers of bonds, and around half of them now have green bond programs.
“That is fantastic, but they are all capped because they cannot find enough things in their budget that they can allocate the proceeds to. But we want them to have that extra pressure from the ministry of treasury, rather than just the ministry of climate, to be able to do more,” Kidney said.
He pointed out that this development is already in the works, but the issue is a lack of investable opportunities being presented to investors. However, governments are beginning to realise that they can actually address the problem.
“There is a planning issue, and other issues such as blended finance and risk mitigation,” Kidney said. “A lot of this stuff is relatively new, with a short track record that rating agencies can give you a credit rating on, so it requires a bit of risk adjustment, which is not just credit support but also regulation.”
SIMPLE AND EFFECTIVE
Green bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.
“Because it is simple and it has worked, asset owners and insurers in particular have been key to growing that market, thereby proving to governments and corporations that there is demand if you package properly,” Kidney said.
The green bond market has gone from $2 billion to $3 trillion outstanding over the last 10 to 12 years, Kidney pointed out.
“That development has been driven by asset owners who are looking into how they can shift their portfolios without sacrificing returns,” Kidney said.