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Investors See Green in Financing Clean Energy Projects

Over half-a-trillion dollars in bonds have been issued for climate-related projects and China is emerging as a major locus of investment, according to a new analysis of green investment.

by Matt Smith
Mar 30 2015, 4:20pm

Photo by Richard Drew/AP

For Sean Kidney, it's a no-brainer.

"We have a world awash in capital, searching for a little bit of yield," Kidney, CEO of the London-based Climate Bonds Initiative (CBI), told VICE News. And that world has big needs — new technologies to reduce its dependence on carbon-belching fossil fuels.

"It's actually a very simple idea," Kidney said. "It's that you can get a good return to fund your pensions, or fund your insurance policies, or whatever, and do good in the process."

Kidney is a leading voice for "green bonds" — an attempt to align capitalism's drive for profit with the need to head off climate change, or at least adapt to it. His non-profit organization is trying to marshal the power of money against the threat by underwriting projects like wind and solar power farms, pollution cleanup or clean water systems.

Like ordinary bonds, green bonds are sold to investors who get paid back with interest over a set period of time. What makes them green are the environmentally friendly projects they're used to finance.

"No one's going to get a Goldman Sachs profit out of this, and you shouldn't," he said. "It's about building an infrastructure that allows a country to thrive, and that's what we're going to do."

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The first green bonds were issued in 2010 by the European Investment Bank, and the market has grown rapidly since then, said Benjamin Powell, who manages bond issues for the International Finance Corporation — an arm of the World Bank that lends to private companies in emerging markets.

Interest rates and maturities are "pretty much in line" with other bond issues, Powell told VICE News. "So really, what you're getting is this environmental return, or social return, that's essentially for free," he said.

Green bonds made up about 10 percent of a larger $503 billion in bonds floated for projects Kidney's CBI said were related to climate-change solutions. And much of the action is in China, where the country's leaders are turning their attention to cleaning up much of the mess left by its rapid industrialization.

Chinese institutions issued $164 billion in projects that had climate-related benefits — largely improvements to rail lines, the CBI reported. And with the country's bond market booming over the last decade, there's a high potential for growth, Kidney said.

"The market really did take off last year, and so the focus is, can those kinds of numbers be replicated in 2015?" he said. The first-quarter numbers are so far running behind the same period in 2014, "but still, we've got plenty of time to go."

Much of the action is in China, where the country's leaders are turning their attention to cleaning up much of the mess left by its rapid industrialization. Of the $503 billion in bonds issued for climate-related projects in 2014, Chinese institutions accounted for $164 billion of that total, a new report by Kidney's CBI concludes.

"The Chinese government has bought hook, line, and sinker into making their economy green," Kidney said. That includes not only efforts to reduce their carbon emissions from power and transportation, but to rein in the notorious smog that led Beijing's mayor to declare that the capital of the world's largest nation "is not a livable city."

"The leaders live in the same cities, you know," Kidney said. "They breathe the same air. They get it."

Chinese investment has helped drive down the price of solar energy worldwide. The country has already met its renewable energy targets for 2020, and it cut emissions slightly in 2014 — a major factor in last week's news that global carbon emissions remained flat while the world's economy grew 3 percent last year.

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A new report from CBI includes numerous recommendations for fostering that growth in China, including setting standards for what projects qualify for green bond financing and establishing a mechanism for policing those rules. Western institutions already have similar guidelines through the International Capital Marketing Association, which updated those guidelines on Friday.

"We're setting very high standards in terms of due diligence and project standards, making sure projects we finance meet specific criteria," Powell said.

"There's a lot of focus now on impact reporting — i.e, what are the greenhouse gases that would have been mitigated as part of the investment in these climate-friendly projects," he said.

And the money's not just going into projects in the developing world. Last year's biggest issue was $3.5 billion in bonds by the French utility GDF Suez, which is investing in energy efficiency and renewables, Kidney said. In a February report, the brokerage Charles Schwab estimated the amount of green bonds floated by state and local governments jumped from $100 million in 2013 to $2.5 billion in 2014, making up about 1.7 percent of the US debt market.

Kidney said Western countries have a long list of projects they should be tackling — conservation projects, hardening ports against sea-level rise, developing biofuels for aviation and building high-speed rail lines that can compete with airlines for short-haul passengers.

"It should be a crime to fly between Washington, DC and New York because of the amount of pollution involved," Kidney told VICE News. Faster trains can make it possible to shift passengers from planes to trains. "But the system has to be improved to allow us to change our behavior," he said.  

Follow Matt Smith on Twitter: @mattsmithatl