Financing industry gears up to bankroll a more sustainable future

Emmanuel Macron, Valdis Dombrovskis and Michael Bloomberg

A version of this article first appeared on The Fifth Estate website on 27 March.

Efforts to close the urban green investment gap need to be urgently scaled up to provide access to technical support and financing for low-carbon infrastructure for thousands of cities, the European Union’s High Level Conference on Sustainable Finance has heard.

The conference saw a first-of-its-kind call made by a powerhouse of individuals and bodies: French president Emmanuel Macron; the Global Covenant of Mayors; Michael Bloomberg, philanthropic financier, former NYC mayor and UN climate change special envoy; European Commission vice-president for the Energy Union Maroš Šef?ovi?, the presidents of the European Investment Bank; the European Bank for Reconstruction and Development and the World Bank Group.

The aim is to raise awareness among local authorities, civil society organisations, businesses, private investors and philanthropies about the investment needs for climate action in urban areas and the available financing solutions; and to provide dedicated advisory services and foster the financing of urban climate action projects.

European Commission vice-president for financial stability Valdis Dombrovskis said: “There are two reasons why we should climate-proof our investments, and foster a broader view of risks: first, the impact of climate change can threaten financial stability and lead to major economic losses through floods, land erosion or draughts. And second, because of the risk of stranded assets. If we wake up too late to the reality of global warming, many of today’s investments could end up being redundant.”

Three months ago, at the One Planet Summit hosted by President Macron, Global Urbis was launched, which is a global initiative to provide cities with financing and technical assistance to mobilise private capital. Urbis is a dedicated advisory platform for investment support to cities. The call for interest will be piloted at the Global Climate Action Summit in San Francisco in September this year.

The European Commission’s Sustainable Finance Action Plan, meanwhile, will make it easier to meet the estimated €180 billion (AU$289b) a year price tag for achieving the EU’s climate goals – an investment requirement that rises to €270b (AU$434b) if energy, transport, water and waste sector are also included. The plan comes hot on the heels of a call from top European financiers to the EU to get radical on financing green projects.

The EU’s climate and energy targets are by 2030 to reach a minimum 40 per cent cut in greenhouse gas emissions compared to 1990, at least 30 per cent (pending finalisation) energy savings compared with business-as-usual, and at least a 27 per cent share of renewables in final energy consumption.

Meeting the challenge

With over €100 trillion (AU$161t) in assets, the financial sector must be part of the solution. There is huge potential for green investments. However, the EU has recognised that engaging private finance requires systemic changes to its own financial eco-system.

Following the engagement of a high-level expert group, the plans announced are for far-reaching reform to its system, reform that Mr Dombrovskis said at the launch “could set the global benchmark for sustainable finance… to support a sustainable future for generations to come”.

The Commission will also establish a new single investment fund to provide financial support for sustainable investment for all EU policies.

The action plan will address five key challenges to the provision of sustainable finance:

• there is no common definition of sustainable investment, and so a universal classification for sustainable activities will be developed
• to avoid a risk of “greenwashing” by banks of existing or other investment products, standard labels between financial products will be established to give investors certainty
• to stop banks and insurers giving insufficient consideration to climate and environmental risks there will be a study to discover if capital requirements should reflect exposure to climate change and such risks
• to reduce the likelihood that investors might disregard sustainability factors or underestimate their impact, the duties of institutions will be clarified to make sure they consider environmental, social and governance (ESG) issues in their investment decision processes and are more transparent towards their clients
• to address the fact that too little information is often provided to shareholders on corporate sustainability-related activities there will be efforts to encourage non-financial information disclosure in company reports.

In total, these amount to the provision of more reliable information for investors, sustainability and risk management.

Furthermore, to combat short-termism in investment decisions, the Commission is inviting the European Financial Supervisory Authorities to collect evidence of undue short-term pressures in capital markets on corporations and consider whether steps need to be taken to combat these.

Green bonds and ecolabels

Most of this work will take about a year and so by the third quarter of 2019 the European Commission is expected to adopt acts on the content of the prospectus for issuing green bonds and produce an EU ecolabel for financial products based on the previous highly successful EU organic label and the EU product eco label.

It will also provide benchmarks for institutional investors and asset managers that are harmonised across the EU and a list of measures to be taken to require greater disclosure of non-financial information in company reports and to incorporate sustainability in prudential requirements.

An EU sustainable taxonomy would mean a uniform and harmonised classification system for green investment. This is seen as essential to determine which activities can be regarded as sustainable across the EU and to strengthen banks against economic shocks, improve risk management and ultimately ensure financial stability.

It would provide appropriate signals to economic players on which activities are considered sustainable.

This will all help to create certainty for investors who want to invest with sustainability objectives in mind.

The European Investment Advisory Hub – the EU’s gateway to investment support – is providing technical assistance to the development of projects. This helps to build capacity for projects that are often technologically, economically and legally complex. It also has a role co-operating with local partners such as promotional banks across member states to provide more match-making and increase local accessibility.

David Thorpe’s two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference. He’s also the author of Energy Management in Building and Sustainable Home Refurbishment.

India Declares Appetite for Green Bonds to Fund New Infrastructure

The Indian financial regulator has thrown its weight behind the use of Green Bonds to finance green infrastructure to service the country's smart cities programme, energy needs, and its commitments under the Paris climate change agreement.

India's Securities and Exchange Board of India (SEBI) has published final guidelines on the issuance of green bonds, one month after proposing the first-ever rules of issuance and listing of green bonds at stock exchanges.

It has decided that they will be governed under India's SEBI (Issue and Listing of Debt Securities) Regulations, 2008, yet has not given a blanket definition of green bonds, instead opting to specify a definition “from time to time”.

It will be optional for issuers or purchases of the bonds whether they choose to have independent third party certification, which would certainly increase confidence that the measures to be financed were genuinely green. However, it will be compulsory to disclose how the proceeds are to be used and which projects are to be financed, in annual reports or disclosures to stock exchanges.

SEBI's rules:



The guidelines explicitly link the green bonds market with the clean energy goals stated in India's Intended Nationally Determined Contribution (INDC) to meeting global carbon emission reductions.

Green Bonds were first issued in 2007 by the European Investment Bank as “Climate Awareness Bonds”. In February 2015, Yes Bank came out with India’s first Green Bond issuance, which was oversubscribed by almost twice its amount, and the proceeds were utilised for funding solar, wind and biomass projects.

This was followed by wind energy developer CLP India, EXIM Bank of India and IDBI Bank issuing Green Bonds in 2015. Last year, globally, green bonds issuance topped $40 billion.

SEBI’s Green Disclosure Norms attempt to design a separate set of standards to demarcate the issuance of Green Bonds from regular corporate bonds which are in line with the Green Bond Principles.

There are four types of green bonds:

	Type	Use of proceeds	Debt re-course
1.	Green “Use of proceeds” Bonds	Earmarked for green projects	Standard/full re-course to issuer. Therefore, same credit ratings will apply as to issuers of other bonds
2.	Green “Use of proceeds” Revenue Bonds	Earmarked for green projects	Revenue streams from issuers though fees, taxes, etc. are the collateral for the debt
3.	Green Project Bond	Ring-fenced for specific underlying green projects	Re-course is only to the project’s assets and balance sheet
4.	Green Securitised Bond	Either:– earmarked for green projects; or go directly into the underlying green projects	Re-course is to a group of projects that have been grouped together.

There are pros and cons of labelling bonds as 'green'. It definitely helps in improving the issuer's credentials as a sustainable and responsible organisation, and green bonds tend to attract a larger number of investors compared to regular bonds.

However, the issuance and ongoing costs could be far greater than those associated with normal bonds, such as for tracking, monitoring and reporting, as well as initial investment under due diligence to define the green criteria.

They may also attract penalties if they breach their green pledges, so some issuers may decide that it's more straightforward to fund renewable energy projects with regular corporate bonds.

The big advantage seen by the Indian regulator is that they are playing an increasingly important role in attracting capital for the development of infrastructure projects in India, in other words much-needed inward investment.

In Paris at COP21, India proposed introducing Tax Free Infrastructure Bonds for R50 billion to fund renewable energy projects during this financial year. It therefore considers that the time is ripe for the Indian government to introduce appropriate amendments to its tax legislation to incorporate such tax exemptions for green bonds.

The Green Disclosure Norms set the tone for regulated green investments in India and open a channel for a new wave of global investors who only have environmental mandates.

The advantages of green bonds for the construction and energy efficiency industries were highlighted at a special forum instigated by Fifth Estate in London in advance of the Paris climate change talks. Key players in these markets were brought together to brainstorm the subject. The conclusions are highlighted in a special Fifth Estate report I put together that you can download here.

David Thorpe is the author of:

• The ‘One Planet’ Life: A Blueprint for Low Impact Development
• Solar Technology: The Earthscan Expert Guide to Using Solar Energy for Heating, Cooling and Electricity 
• Energy Management in Buildings: The Earthscan Expert Guide
• Sustainable Home Refurbishment: The Earthscan Expert Guide to Retrofitting Homes for Efficiency
• Energy Management in Industry: The Earthscan Expert Guide

Free ebook on using Green Bonds to make buildings more energy efficient

2015 saw between US$40 and $50 billion of Green Bonds invested in sustainable infrastructure. This sum is expected to triple next year, a very encouraging trend. Who's lending? Who's investing? You can read a free briefing on the topic here: http://www.thefifthestate.com.au/business/finance/ebook-green-bonds-and-property/79531

This comes from my recent work with Australian green business publisher The Fifth Estate, convening a salon in the City of London about the power of using Green Bonds to make the built environment more energy efficient. Attending were Sean Kidney of the Climate Bonds Initiative, Tatiana Bosteels, from Hermes Investment, Catherine Bremner of ANZ Bank, Adam MacDonald of Lloyds Bank, Julie Hirigoyen of the UK Green Building Council and several more. All are featured in the ebook. Enjoy! 

Ecotricity launches ‘Ecobonds’ as Government faces FITs legal challenge

Ecotricity, the UK's largest renewable energy company, is launching a second issue of its popular 'Ecobonds', worth £10 million.

The move comes as Friends of the Earth issue a challenge to the Government to revise its plan to change the Feed-in Tariffs (FITs) given to owners of solar photovoltaic installations.

Ecotricity's 'Ecobond Two' will enable any UK-based individuals, companies, trusts, charities and other legal entities to invest directly in building new sources of green energy in the UK, starting with a minimum of just £500 of investment.

Its first Ecobonds, issued thirteen months ago, were heavily oversubscribed, exceeding a £10 million target by 50%, and becoming the UK's largest ever private bond issue.

They funded the construction of the UK's first 1MW Solar Park at Fen Farm in Lincolnshire, a third wind turbine to power Ford's Dagenham Diesel Centre, and a wind turbine at the G24i plant in Cardiff that makes solar panels.

Director Dale Vince expects 'Ecobond Two' to be just as popular. "Our ecobonds give people the opportunity to share in the financial benefits of green energy without the needing to stick anything on their roof," he said.

"And crucially we cut out the middlemen, the banks, and pay people the same rate of interest on ecobonds that banks would charge us if we borrowed the money from them."

The capital raised will contribute towards installing 19 wind turbines, already with planning approval, and a further 78 for which it is seeking planning approval.

"This might prove an attractive option for people who want to be green and also get an attractive rate of return, but can't - or don't want to - put solar panels on their roof, especially in light of [last] week's Feed-in Tariff (FiT) rates fiasco," said Vince.
Feed-in-Tariffs

Friends of the Earth has written to Climate Change Minister Greg Barker saying that unless the Government agrees to amend its proposals by 4pm on Friday 11 November, it will apply for a judicial review of its proposal to impose lower feed-in tariff payments on installations completed after 12 December.

It has taken legal advice that says this cut-off point, two weeks before the Government's consultation ends, is unlawful and will lead to unfinished or planned projects being abandoned.

Friends of the Earth's Policy and Campaigns Director Craig Bennett said: "The Government is breaking the law with its plans to fast-track a solar industry kill-off - as well as jeopardising thousands of jobs and countless clean energy projects across the country.

"Significant time and money has been invested planning solar schemes for homes, schools and libraries - giving them just six weeks to install is completely unacceptable, and schemes have already been scrapped.

"With soaring fossil fuel bills and mounting anger about the Big Six energy firms, the Government should be encouraging people and communities to generate their own clean electricity."

High rate of return

This is precisely the aim of Ecotricity's Ecobond Two. This will provide a fixed rate of return of 6.5% for four years for existing or new Ecotricity customers. Non-customers will receive a return of 6%.

Although lower than last year's 7.5% rate, this would be above the 4.5% - 5% rate available through Feed-in-Tariffs (FITs) for solar PV installations under the revised levels likely to be introduced after December 12.

Profits at Ecotricity have dipped in the last financial year, due to increased overheads and its acquisition of 71% of local club Forest Green Rovers FC for £695,000, according to its latest accounts for the year ended 30 April 2011.

Pre-tax profit fell to £1.7m, compared with £3.8m in 2010, although turnover grew by more than 19.8% to £44.2m.

It is a 'not for dividend' company with no outside shareholders to answer to.

Its plans include building over 1,000MW of renewable electricity generation capacity and supplying over 500,000 customers in the next ten years.

Its current base is 53 wind turbines at 17 wind parks, and 55,000 clients, up 30% on the previous year.

A spokesperson added: "Since the start of May 2011, on the generation side of the business, we've opened the UK's first large-scale solar farm in Lincolnshire and installed another wind turbine to power one of the biggest manufacturers of diesel-engines.

"In addition we now have 19 windmills ready to go with with planning permission and another 78 going through planning at various sites around the country."
Investment gap

Dale Vince recently criticised the 'Big Six' energy companies, saying, "There is a big problem in the energy market, but it's not only about how much money the big six energy companies are making - it's about what they are doing with that money."

He observed that out of the £125 they each make per customer per year, only £5 is spent on building new green energy sources.

"The reason for the lack of investment is not just weak regulation but because four of the Big Six energy companies are foreign owned and their interests are not aligned with the interest of the British public," he said.

"These multinationals take bill money from customers here in Britain and spend it in Germany or France or pay out dividends to shareholders."

He said that, by contrast, Ecotricity "invests more per capita in building new sources of green energy than any other UK electricity company".

It is the only energy supplier supported by Oxfam and the Soil Association.

Ecotricity is one of a new breed of renewable energy companies that also include Good Energy, Ebico and Ovo Energy.

Ecobond Two will be issued by Ecotricity Bonds plc, a wholly-owned subsidiary of the Ecotricity Group Limited (Ecotricity), which has guaranteed the payment obligations of Ecotricity Bonds plc for Ecobond Two.

Green bonds

The popularity of these green bonds can be seen in relation to the refusal by the Treasury to let the Green Investment Bank issue state-guaranteed green bonds to pay for the development of clean energy infrastructure.

Such a move was advocated by the cross-party Environmental Audit Committee last March.

Such bonds are already issued by institutions like the World Bank, and the idea was originally proposed in June 2010 by the former chairman of Merrill Lynch in Europe Bob Wigley, leader of the Green Investment Bank Commission.

Bu the Government has rejected the idea of letting ordinary people buy such bonds as a way of raising the much-needed finance to build low carbon Britain.

Its reasons include the fact that the National Association of Pension Funds, whose members would be major customers, said they would expect to be bribed with a higher yield because the market in the bonds would be "illiquid compared to the broader sovereign market".

Additionally, some way would need to be found to ensure that the bonds did not count as UK state debt for accounting purposes.

The Treasury was also worried that green bonds could crowd out its own funding programme.

But if Ecotricity's new bonds proved to be as popular as the first issue, this would show that there is a strong public appetite, whetted by FITs, for investment in renewable energy.
Green football

Interestingly, Ecotricity intends to make its acquisition Forest Green Rovers the UK's first green football club.

Dale Vince has become chairman of the Blue Square Premier side since purchasing the club and has started greening it by ordering its grounds to be made solar powered and the creation of an organic grass pitch.

He has also stopped players eating red meat and banned the selling of all red meat products at the grounds.