20 December 2017
Divestment, disclosure and engagement are among the big trends that will see environmental themes continue to muscle their way up the investment agenda, says Peter Cripps
1. Green bonds:sovereigns
2017 was another monumental year for the green bond market, with annual issuance breaking the $100 billion barrier for the first time. France issued a €7 billion sovereign bond, which it has already tapped twice, expanding it to nearly $10 billion, and Fiji became the first developing country to issue a sovereign green bond. As this article went to press Nigeria was gearing up for a $30 million issue, and Belgium said it plans to issue a bond to the tune of several billion euros in the first quarter of 2018. Other countries are expected to follow, with one investor telling a recent Environmental Finance conference that there are some 15 countries gearing up to issue. (See page 20) A wave of sovereign issuance would be important not only because it will help the market to grow, but because sovereigns often issue large bonds and are staple investments of many pension funds and insurers, so this would help boost liquidity and further ingratiate the market to mainstream investors.
2. Green bonds: pricing
There is mounting anecdotal evidence that investors are beginning to 'pay up' for green bonds, as dozens of green bond funds or investors with green bond mandates chase green paper.
If this trend becomes entrenched in 2018, it could clearly be a game changer for the market, by encouraging more issuers to come to market.
But one investor, who asked not to be named, warned buyers not to pay up for green bonds, arguing that doing so would undermine the sustainability of the market. Interestingly, the Dutch central bank in October issued a report on green finance in which it warned investors to be wary of green bubbles.
3. Green bonds: expanding
Another key development for the market is its interaction with the social bond market. Are we witnessing its evolution into a sustainability bond market, where both types of bonds are banded together, validated by the release of Sustainability Bond Guidelines by ICMA in June?This trend was exemplified by the World? Bank issuing the first ever bond linked to the Sustainable Development Goals (SDGs) in March, and a $1 billion SDG Bond from HSBC in November.
The EU's High Level Expert Group on Sustainable Finance (HLEG) issued its interim report in the summer.The Full Monty is expected early in 2018.
A speech by European Commission vice president Valdis Dombrovskis in December suggests that three of the recommendations are already under development:
• A consultation has been launched on integrating sustainability factors into investment mandates.
• A taxonomy on green and sustainable finance is being drawn up.
• The Commission is looking favourably on suggestions that capital charges for green investments could be lowered.
When the Financial Stability Board set up the Task Force on Climate-related Financial Disclosures (TCFD), it sent a clear message to investors and businesses that they need to think about the potential impacts of climate change. Its recommendations in the summer instantly shunted the issue of climate change into the boardroom, and helped start a new conversation about the impact of the environment on a company (rather than the impact of a company on the environment). Some companies are expected to start trying to report in line with the recommendations in 2018. It will be interesting to see how they respond and what scenarios they use (see page 10). The TCFD will prove to be a potent weapon in the armoury of shareholder engagement, and will give shareholders added legitimacy to lobby companies on their climate strategies.
6. Shareholder resolutions
2017 witnessed a monumental victory for shareholder climate engagement, when ExxonMobil finally bowed to pressure to report on climate risks. The oil major successfully fought off a resolution in 2016 but the following year investors returned and this time won a majority of the shareholder vote. In December, Exxon's board finally succumbed. Buoyed by this victory, shareholders will step up their efforts in 2018, aided by the formation of Climate Action 100+, a collaborative climate engagement initiative that has already signed up investors worth $26 trillion (see page 7). Investors such as BlackRock will continue to come under fire if they do not support more climate resolutions.
7. China moves
China is set to continue to green its economy, as it integrates its long-awaited national emissions trading scheme, which was set to be launched at the end of 2017, and its renewable energy certificate market, launched in the summer. It continues to nurture green industries such as renewables and electric vehicles, its central bank is providing cheap loans to commercial banks to be passed on to green projects, while regional governments are setting up green funds. China accounts for more than a quarter of global emissions and is widely seen as the most important country in the world when it comes to the environment. 2018 will be a key year, as it looks to turn ambitious policies into action on the ground – but when will it start to reduce its emissions?
8. Norway's oil fund
Norway's $1 trillion sovereign wealth fund could be set to divest from oil and gas in 2018. The Government Pension Fund Global (GPFG) was in November advised to remove gas and oil stocks from its benchmark index by Norges Bank, which handles the operational management of the fund and advises the Norwegian Ministry of Finance on investment strategy. The fund has sizeable positions in companies such as Royal Dutch Shell ($5.4 billion), Chevron ($2 billion) and ExxonMobil ($3 billion), as of the end of 2016. In 2015, it made headlines around the world when it committed to sell more than $8 billion of coal-related investments. Making a similar move for oil would be highly significant because, as the world's biggest sovereign wealth fund, it is highly influential. It would also be ironic, because much of its capital has come from the spoils of extracting oil from the North Sea. The Norwegian Parliament will discuss the issue early in 2018 with a decision probable by the end of the first quarter.
9. Divestment to continue
Norway's oil fund is not the only large institution to turn its back on fossil fuels. 2017 saw a spate of high-profile divestments, including Dutch bank ING "sharpening" its coal policy in order to phase out nearly all lending to the thermal sector by 2025. Some of the divestments went beyond coal, with Societe Generale and Natixis following BNP Paribas' example by saying it will stop lending to tar sands projects. It seems a fair bet that more investors will make a divestment stand next year, with coal as the dirtiest fuel, being the most obvious victim.
10. Insurers to the fore
There are increasing signs that the insurance sector is stepping up to the plate when it comes to climate risks. Insurers have a double exposure to climate change, as underwriters and investors, and are coming under increasing pressure to show they are alive to the risks it presents. Axa, Allianz and Scor are among those to have made high profile coal divestment pledges, while Axa has become the first to stop underwriting coal. Environmental Finance has learned that several more announcements are planned for next year.
11. Banks under the microscope
Two years after the Bank of England launched its landmark report on how the insurance sector is dealing with climate risk, it has now turned its gaze to the banking sector. It sent a survey to every bank with an office in the UK (which is most of them) which is understood to have created shockwaves that reverberated in head offices around the world. The survey was a wake-up call for the banking sector to consider how they are dealing with climate risks and opportunities. The BoE's findings are due to be published in 2018.
12. Green mortgages
Green buildings have a key role to play in the transition to a low-carbon economy – and can provide lucrative returns at the same time. One promising initiative set to gain traction in 2018 is the Energy Efficiency Mortgages Action Plan, overseen by the European Mortgage Federation and Covered Bond Council. This initiative is developing an energy- efficient mortgage product (soon to be piloted with banks), and data gathering, processing and disclosure capabilities in respect of these loans. This pilot has the potential to provide data suggesting that mortgages for energy- efficient properties could be less risky than normal mortgages, and could ultimately lead to cheaper mortgages for energy- efficient homes. This would justify the amendments to capital charges for green mortgages and green covered bonds being considered by the EU (see above).