Green infrastructure – renewable energy generation, efficient buildings and low carbon transport to take just three examples – lies at the heart of the transition to sustainable economies. Not surprisingly, therefore, its financing has been a major area of concentration for those looking to scale up funding resources to meet the Paris NDCs, and the wider green revolution.
The Green Infrastructure Investment Coalition (GIIC), whose network of members includes investors managing over $60 trillion in assets, is co-organised by the Climate Bonds Initiative (CBI). We asked CBI’s Kajetan Czyz to give us his thoughts on how this nascent market shaped up in 2016.
Green bond issuance reached $81 billion during the year, a doubling from 2015. CBI’s estimate for issuance in 2016 is $130 billion, although this may be a conservative estimate if expected sovereign issuance picks up.
Among the initiatives promoted by the GIIC during 2016 were two “investment forums” bringing together green investment issuers (mainly green bonds), investors and regulators, both held in London. The first forum featured Indian issuers and the second Brazilian. Issuers ranged from corporations and cities to commercial and development banks. These countries were selected as they have the scale necessary to interest major investors but also governments sensitive to the policy issues which such convenings could help air and address.
“The first lesson from the forums,” says Czyz, “is that the opportunity for green infrastructure investment is real and it’s sizeable. There was a perception among investors that pipeline would be an issue, but in fact there are quite a number of blue-chip corporates building out large scale infrastructure looking for both equity and debt.”
Another immediate lesson, however, is that while issuers may have excellent domestic ratings, the sovereign ratings for their domiciles often don’t match up. “Political risk remains a major challenge,” Czyz notes, “so it was good to see policymakers at both events presenting a suite of measures that were clearly aimed at promoting long-term economic stability and demonstrating that to potential investors.”
“The market still needs to see clear definitions
From an investor point of view, Czyz sees the major concern as being the need for recognised standards. “The market still needs to see clear definitions of what constitutes green projects, because there is still ambiguity about that.” He says that the Climate Bonds Standard – though it doesn’t yet cover all sectors – is increasingly seen as a benchmark. The Standard links to the Green Bond Principles established by the International Capital Market Association but, critically, layers on clear definitions of what is green. It underpins the definitions recently adopted by the French government and is also used by around 20 organisations globally providing “second opinions” on green bonds. (These opinions confirm claims by issuers that are critical for investors, such as use of proceeds.)
An interesting feature of the market, Czyz notes, is that there is now a broadening of issuer types coming to market. “There is a marked increase in smaller issuers – especially renewables and energy efficiency companies as well as municipalities and more recently sovereigns issuing green bonds.” This is partly because the certification process has now been standardised and streamlined, and investor appetite is growing as the green bond market deepens.
Czyz says that the over-riding aim of the CBI and others promoting green finance is to get the cost of capital down for all issuers. “The up-front cost of green, efficient, long-lasting, well-designed and resilient infrastructure is typically higher despite being cheaper to run once built. This in turn means that if the cost of capital is high (as it is in emerging economies) the repayments might offset the fuel savings, making green infrastructure uncompetitive. The longer this situation persists the more we lock-in inefficient polluting assets which will need to be replaced or stranded in the future – an aspect rarely taken into account by financial analysts.”
This is something that governments and regulators really need to be involved in as markets get going, Czyz says. For example, small-scale distributed clean energy is now included in the Priority Sector Lending regime that requires banks in India to channel c. 40% of their lending to sectors seen as needing special support. A similar move could see institutional investors required to hold a certain proportion of green investments on their books – “interestingly,” Czyz notes, “we’re hearing that idea from investors themselves, but obviously it can’t happen till you have a clear definition of what constitutes such investments.” There are many measures which could be deployed by a government to give preferential treatment to green assets,. “Lower tax is one, allowing higher levels of international investment, or lightening restrictions on credit enhancement could also work.”
“Economic policies are still misaligned with Paris
Czyz sees two key drags on development and scaling up of the market. “The first is that in very many cases economic policies are still misaligned with the declared targets of the Paris Agreement, now of course in force.” This increases the chances of structural changes having to be made to policy in the future – an uncertainty that can easily by overcome by adopting low-carbon development policies early on.
“The second issue is the ‘all of the above’ tendency,” he says. This is the tendency of governments to see it as a safer policy to let unsustainable modes or practices continue alongside sustainable ones. “Planners and policymakers need to make more strategic choices,” he says. “For example in cities it makes no sense to allow private transport to grow alongside public transport. Their spatial needs are entirely different and conflicting, so there needs to be a clear prioritisation.”
That governments “get” the potential for green finance is not in doubt, though – the best proof of this particular pudding being that they are themselves starting to tap the market in some volume. “The use of proceeds for governments can be very wide-ranging and still conform to the standards,” Czyz says. “They can use them for funding subsidies to get markets going, to capitalise green finance institutions, and soon, even to roll out broadband infrastructure – all these things create an enabling environment for smart and efficient societies.”
Looking ahead to 2017, the GIIC plans a further investor forum on India – this time for domestic investors, expected in April – as well as a possible further event on Brazil. Meanwhile, alongside its ongoing programmes in the EU, the US and China, it is working with countries such as Kenya, Nigeria, Colombia and Mexico. “The horizon is widening.” Czyz says. “This is an asset class that increasingly uses tried and trusted technologies while at the same time having the potential to provide long-term and relatively stable returns, so we continue to see it as a key entry point for institutional investors, both domestic and international.”
Kajetan heads the Climate Aggregation Platform (CAP) and Green Infrastructure Investment Coalition (GIIC) work-streams. Both partnerships focus on overcoming barriers within the investment chain to deploying capital at scales consistent with the National Determined Contributions agreed through the UNFCCC process.
Kajetan has a background in financial risk modelling, index design, corporate and policy engagement and is an expert in the energy sector transition. He brings a decade of financial sector experience, ranging from work with stock exchanges (WSE), index providers (FTSE, S&P), banks (RBS, Triodos) and asset management firms (BMO Global Asset Management). Prior to joining CBI, he headed BMO’s work on climate change, including stakeholder engagement, low-carbon fund design and portfolio risk analysis. He co-authored the Global Investor Statement on Climate Change and represented the European investment industry at the Paris Climate Summit through the Institutional Investors Group on Climate Change (IIGCC) and its 120 members with €14 trillion in assets.
He holds a MSc in International Relations specialising in International Financial Markets at the University of Lodz, and a MSc in Carbon Management at Edinburgh University.