Finance is a way of defining and shaping the future. Finance aligns money and investment with future outcomes, and so has the power to make material change more or less possible. Climate disruption is putting value at risk at all levels, across all societies. The total amount of green bonds issued to date surpassed $1 trillion this fall.
In Episode 8 of Earth Intelligence, we explore climate-smart finance and the Climate Resilience Principles, in dialogue with Isobel Edwards. Isobel is a green bond analyst at NN Investment Partners who was previously a research analyst at the Climate Bonds Initiative.
Building resilience entails not only adjusting to risk, but investing intelligently to materially reduce climate-related risk for everyone. The Climate Bonds Initiative notes the high-cost context, in which climate-smart finance is developing:
Losses due to weather-related events have increased nearly ten-fold over the last 40 years, from a ten-year global average of USD 12 billion in 1980 to USD 119 billion today. To combat spiralling losses from climate impacts, an estimated USD 200 billion globally will be required annually within twenty years.
Isobel describes some of the resilience-building assets that can shore up long-term value:
Upgrading and modifying existing infrastructure… adding spare capacity, meaning that if one piece of infrastructure is destroyed, there is spare capacity… relocation of at-risk infrastructure, multi-asset, multi-action adaptation projects, and use of climate-resilient crops… Those are types of assets which are going to be very useful in 10, 20, 30 years’ time.
In response, Joe notes that investing in climate resilience equates to “more real-world value, because it’s less likely to fail”.
The Climate Resilience Principles are a 6-part framework for designing bonds that limit these costs and build resilience:
- Boundaries and interdependencies for assessing climate risks and resilience impacts are clearly defined
- Physical climate risk assessment undertaken
- Risk reduction measures undertaken
- Climate resilience benefit assessment undertaken
- Mitigation trade-offs
- Ongoing monitoring and evaluation
By using these guidelines to create climate-aligned bonds, bond issuers not only get closer to Climate Bonds standards; they help to create a shared space for reliable innovation toward resilience-building climate-related finance.
Given this, Joe asks Isobel:
Are we moving from a world where the concept of climate resilience was more theoretical, more future-oriented, a moral idea, and investment was all about the bottom-line, to a world where you can’t really have one without the other?
Isobel notes that for a long time, the worlds of climate activism and finance were working against each other, but now they are converging, as new technologies show the clear investment value of a shift to low-carbon fuels. In fact, there was never strong evidence that even early climate-smart investments weren’t valuable investments. Innovations in climate-aligned finance are now recognizing the material value of resilience-building investments.
Asked where she would like to see the financial sector go in the future, Isobel explains:
Having Earth intelligence and environmental information at the core of investment decisions, part of the framework integrated into decision-making, when it comes to which assets to invest in and not, and which to move away from, in policy decisions, I think that is the world we want to see created.
This discussion is ultimately about whether we know what we are doing. Financial institutions, asset managers, and investors, have conventionally sought to be on top of the numbers, but have left Earth systems information out of the equation. Now, with greater transparency, expanded data flows, and better insight into the Earth systems value of specific investment choices, we are better able to understand the real-world value of those choices.
Bloomberg NEF reported in October:
In reaching their cumulative $1 trillion issuance milestone … green bonds have also pushed the wider sustainable debt market – which includes social bonds, sustainability-linked loans, green loans and others – over the $2 trillion mark.
The last few months have seen some major breakthroughs in the shift toward a sustainable financial future:
- The European Union announced a record new green bond issuance, as part of its COVID recovery effort.
- The Commodity Futures Trading Commission warned that climate disruption could cause the entire financial system to fail, and called for concrete actions to build resilience and prevent disaster.
- The Federal Reserve Bank of the United States called on financial institutions to track climate risk and announced its intention to join the Network for Greening the Financial Sector.
- The UK has announced its first sovereign green bond, as part of a wider recovery package for 2021.
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