–The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program
–Building Robust Financial Markets and Institutions in EMDEs By The World Bank Group
Climate change poses the greatest threat to humanity. The effects of climate change can set back decades of progress in the developing world. Yes the scale of the issues on settling. Environmental shocks will become more extreme and more frequent. No single government or institution can solve this problem alone. We are the last generation that can alter the course of climate change and we require investment on a scale we had never seen before. At that time to make a sustainable portfolio was to exclude companies not to invest in green projects. And that strategy we didn’t believe in that strategy. We wanted to have inclusion of good companies and also investment in green projects.
There were growing discussion about climate change and global warming and things like that but it was very difficult for us to define something to invest in that had to do with that. At that time we had mostly Swedish government bonds and mortgage bonds we were looking for other alternative sources. The supply of interesting investment opportunities in the sustainable area was very limited. So we were looking for something more liquid something easy to understand something credible. Coming in and we had a situation where one a lot of people talk about global warming we also had a situation where government stepping in to pour money.
So the combination of investors being willing to contribute to a better society together with the lack of government supply basically made me sit down and draft the idea about what we’ve done to engage institutional investors in that time global warming. I went out to a number of investors first and those investors all was a great idea and with certainty that I have their support and then went to the World Bank and said this is something we have checked with them and they are interested. What happened was the combination of us coming up with our environmental strategy the intergovernmental panel on climate change with very strong volume that we have to change the way we live and mother nature took out the strophic disasters telling us it’s time to act.
That mobilize the bank to provide to invest the community a product they can use to vote green. We were approached by Scandinavian investors who came to us through their bank SCB they were looking for products and all asset classes but somehow addressed the challenges of climate change. And they had products and many of the other asset classes but not for fixing. SCB knew that the World Bank finances climate change mitigation and climate change adaptation projects but we finance that through fixed income products.
So for this Scandinavian investors it was perfect because they were looking for products that supported these types of projects but that didn’t have project risk or specific country risk. And that had the same financial characteristics as other products in the world. We had a very constructive dialogue and I think within a month the World Bank came back and said and I think special reports investors have agreed to those as great idea agreed to go ahead and develop a product which enabled in this is not only to invest but to invest inside the traditional normal mainstream benchmark for four years which was as I see it the big change to everything that in before but they didn’t have to have a sufficient view to work with this kind of investment. Enabling the process around this and the interaction with investors and to design which was very very simple enabled and allowed institutional investors to engage in a way that they are not engaged before.
We had never launched a product with a dedicated funding so this was new for finance and at the same time we had this climate strategy so it was a perfect time. The financial community and scientific community tend to operate in two different spheres and this was from my understanding the first connection between these two worlds. And so we had to learn how to communicate with each other using two different languages in financial vocabulary and research oriented vocabulary and try to understand what the other party needed.
And my colleague here Alson took the chance to write that first second opinion and it was the first time that we assisted anything like that. I think at that point we had no idea where it was going. So to be involved in the first green bond was a bit of a surprise of course and we thought well maybe this is a one of activity. So that it’s an interesting project where connecting with investors for the first time and the banks and we’re learning what they are interested in and we’re learning what we can communicate to them but I think what we didn’t know is how many times we replicated this and grow and evolve our methodology as the market evolved. When the World Bank issued the first green bond they set up a model for how green bonds should be done in in terms of best practice.
And that was a foundation for establishing the green bond principles. Several banks were involved in establishing these voluntary guidelines for the market. That later came to recommend independent reviews as well as set up some guidelines on transparency climate risk is not a financial risk. Transparency is important for investors in order for them to better understand the climate risk exposure to their investments and that was the second opinion gives them more transparency on this risk. Impact reporting has been very very important since the very beginning of the green bonds. But it’s been an interesting process.
The World Bank is very fortunate because they already collected and still collect a tremendous amount of data on all of their projects and as projects are measured through their implementation the performance against those performance indicators is updated. Now through that learning process I believe that the World Bank has definitely shaped impact reporting throughout the financial community. And that impact reporting is a real value added form of accountability that issuers give to their investors and that investors can then give to their clients to show that this is where your money has gone this is what it’s doing this is the progress we’re making. You had this positive investment in projects that really did something meaningful against climate change and you had an independent second opinion on the climate criteria also the impact reporting afterwards.
So really going to quite safe that was our money that we invest in this bond would do something meaningful in the battle against climate change. Before that we all worked in isolation and the environmental officers knew everything about environment the financial officers knew everything about finance for the interaction which allowed the financial officers to give the input to how environment should be done and the environmental officers they understood the financial characteristics. Probably is to get cheap enough of this and interaction with this product. Well what we see has happened in the market is that green bonds have catalyzed a change in investor behaviors.
They want to know where their money’s going but not only for labeled bonds they’re fine so not only for green bonds or for social bonds or sustainable bonds but they’re asking questions about everything they’re investing. And I think that’s gonna be the capital markets of the future. I believe that the types of lessons have been learned from the green bonds in terms of transparency and accountability knowing where your money is going. Our lessons are now being transferred to social bonds and now being transferred to wider thematic bonds. I truly hope that this expands but I hope that in the world economy in fact grows beyond the question of thematic bonds.
And that fact all fixed income investments are measured in these ways. Well my utopian future from climate change research perspective is all financial decisions are taking into account climate risk. Right now green bonds are less than one percent of the total bond transactions and we can see a lot of growth there in terms of different types of sectors different issue types in different regions. So I hope in the next few years that the bond market continues to scale up and that we can continue to provide increased transparency and a connection between the climate science and financial decisions.
