We all know climate change could destroy our planet, making the kinds of choices that are the stock in trade of professional investors irrelevant.
Equities or bonds? More or less exposure to emerging markets? Who cares if we’re all dead?
However, in the absence of a meaningful deadline – the planet will expire on Day X – we tend to carry on as before. What is more, if, as investors, we don’t want to carry on just as we did before, it’s not always clear how we can do this.
It would be a gross exaggeration to say that this all changed last month. But a couple of significant milestones were passed.
First, MSCI launched a family of low-carbon indices. Developed at the request of the Fourth Swedish National Pension Fund (AP4), the Fonds de Réserve pour les Retraites (FRR) in France and Amundi, the MSCI Global Low Carbon Leaders Indexes consist of companies with significantly lower carbon exposure than the broad market and provide a way of meeting what Baer Pettit, global head of the MSCI index business, calls “clear demand from institutional investors who are increasingly aware of the investment risks associated with the transition to a low carbon economy”.
Amundi has licensed the indices to create index-tracking solutions. And both AP4 and FRR plan to allocate a substantial €1 billion to the strategies.
“We see a low carbon investment approach becoming more popular and mainstream,” said Mats Andersson, chief executive officer of AP4. “Combined with a carbon footprint disclosure, we are confident that this approach can offer an alternative source of return while working for the public good.”
Meanwhile, both HSBC and Bank of America Merrill Lynch were talking up green bonds as a way to finance a 2°C world – a world where global leaders agree to limit temperature rises to 2°C. HSBC says there is “a real possibility” that a universal climate agreement to limit temperature rises to 2°C above pre-industrial levels will be signed in Paris in December 2015. “A 2°C world would be prosperous and resilient and believe that the transition to a low-carbon world is already underway,” the bank said in a September 2014 report entitled Keeping it cool: financing a 2°C world.
The problem is how to finance the transition. The investors are there – there are now 1,260 signatories to the UN Principles for Responsible Investment initiative with $45 trillion (€ 34 trillion) of assets under management between them – but the investment vehicles are not.
Bank of America Merrill Lynch set out the scale of the shortfall in a September 2014 thematic investing report entitled Fixing the Future: Green Bonds Primer.
“Eighty-one per cent of asset owners view climate change as having material impact on their portfolios. However, currently only 0.1% of institutional assets are allocated to clean energy infrastructure projects.”
Green bonds can provide an answer that does not involve reinventing the wheel. According to HSBC, issuance has already reached $18.4 billion this year – a 67% increase on 2013. The bank cites examples of issues from supra-national institutions, corporates and municipalities.
More – much more – needs to be done. But BofA Merrill Lynch says that green bonds can go a long way towards closing the gap that HSBC highlights and cites Accenture research, which shows that “with standardisation and development of the market, and expansion of issuance, green bonds can potentially fulfil up to 84% of all private capital requirements”.
Let’s hope that green bonds can do this because the alternative ain’t pretty. “A 4°C world is so different from the current one that it comes with high uncertainty and new risks that threaten our ability to anticipate and plan for future adaptation needs,” says BofA Merrill Lynch.
Goodness me. Could be nearly as devastating as Scottish independence.
Fiona Rintoul is editorial director at Funds Europe
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