21 Oct 2019
21 Oct 2019
With the inexorable rise in demand for ESG investments, Lyxor ETF is bringing the latest thought leadership straight to investors. In this guest blog, Manuel Adamini, Head of Investor Engagement at the Climate Bonds Initiative, highlights why ethical investors need to act with urgency to take home the fight against climate change.
The Climate Bonds Initiative (CBI) has one mission: to mobilise the vast resources of the debt capital markets to help address climate change. Our mission is becoming more and more urgent, reflected in the growing publicity climate change receives around the world: the media has recently been covering Climate Week in New York, President Trump at the UN’s General Assembly for Climate Change, and the teenage climate activist Greta Thunberg.
The climate change urgency is anchored in a simple but powerful truth: the earth is already one degree warmer on average than its pre-industrial temperature – and this rise is just a precursor of what is to come.
The UN’s Paris Agreement, which brought together the world’s nations to agree climate change goals, made progress. But if all countries do what has so far been pledged – and only India is on track to do so – then the earth will still end up around 3 degrees warmer than its preindustrial level, with potentially disastrous consequences.
Why will the earth continue to warm? Because emissions are still growing – CO2 emissions increased by 2.7% in 2018, up from 1.6% in 20171 – and the global community still puts more money into fossil fuel exploration and subsidy than renewables investments. The world has invested $2.5trn into renewables over the past decade,2 yet we are reminded by the International Energy Agency that we should be investing that amount every year – and for wider sustainable goals, far more.
Put simply, Mother Earth is in danger. If it feels like we are hitting new temperature records every year, that’s because we are. Average temperatures are rising and adding stress onto already-stressed ecological systems. In 40 years, the number of mammals – not species, but the number of beasts on the earth – has fallen by around 50%. A recent study also found that there are three billion fewer birds in the US and Canada than in the 1970s, a 30% drop.3
What we need is a huge societal change. We have gone through major changes before – mostly during war. The new challenge that we face is scale. The answer cannot be merely national or even regional – it must be truly global. Are we capable of delivering change on that scale? I am hopeful we are.
There are over $50trn in infrastructure assets on the planet, built up mostly over the span of the industrial revolution. That figure is predicted to rise to $90trn by 2030,4 meaning we are on track to replicate the scale of the industrial revolution at the speed of the digital revolution, as Al Gore has put it - nearly doubling our footprint on the world in a fraction of the time. About $2.4trn in energy systems spending is needed every year through 2035 according to the IPCC’s landmark report to the UN.
We are already living in a world full of cash. Bloomberg estimates $14trn in negative-yielding debt (as at 30/09/2019), and there is around the same again in low-yielding bonds and cash. There’s a huge opportunity if we mobilise that money.
So how do we channel this vast human-created wealth to benefit the climate? The answer is climate relevant ESG investments. When we make ethical investments, we need to take great pains to ensure that we support projects which reflect and address the climate challenges we face.
The instrument to do so is the green bond. They come in various forms, but at their root they are securities which channel wealth into green projects. Once we are aware of the green bond, and when we understand the urgency and emergency – then we know what to do. We have the money, and we have the financial instruments to do it right. The climate situation may be dire, but the levers of control are still in our hands.
The green bond market is developing at a rapid pace. They were supported first by development banks, then by courageous non-financial corporates such as EDF, Engie and Toyota. The market has grown hugely since its inception, as banks and sovereign issuers became involved, adding leverage and liquidity. There are now around 12 sovereign issuers of green bonds, and we at the CBI even dare to hope for a green Bund in future.
So, we are progressing – but there is so much more to be done. There are climate relevant investments that haven’t been labelled as such. Labelling is important because it helps investors find investments and helps channel money to the right projects.
At the end of August 2019, there was between $600-650bn in labelled green bonds outstanding. There is another $1trn unlabelled but still climate relevant. All of this is a drop in the ocean compared to the size of the global bond market, and the vast quantity of ‘dead’ money out there. For all the hundreds of billions of dollars in green bonds, we are still at only 0.5-1% of global outstanding issuance.
We must make a choice very quickly. The clock is ticking. We must stop the talk, and start the walk. But that’s not good enough either. To successfully transition from a fossil fuel past to a renewable power future, we need to run, not walk. Will you run with us?
1The Global Carbon Project, December 2018
2UN Environment, September 2019
3Cornell Lab of Ornithology, https://news.cornell.edu/stories/2019/09/nearly-30-birds-us-canada-have-vanished-1970
4The New Climate Economy, 2018 Report of the Global Commission on the Economy and Climate
This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. The opinions expressed by Manuel Adamini are his own, and do not necessarily reflect the views of Lyxor International Asset Management or Societe Generale. Capital at risk. Please read our Risk Warning below.
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