NIB Nordic Investment Bank

Interview

CICERO: Climate change pushes up financial risk


Kristina Alnes, Senior Advisor, at CICERO Center for International Climate Research speaking in the Nordic pavilion at COP23. Photo: Joel Sheakoski

“Physical impacts originally anticipated over a much longer time are being observed across the globe today. This translates into financial risk and the leading financiers understand that”, says Kristina Alnes, Senior Advisor, at CICERO Center for International Climate Research.

“A good example of this being taken seriously is the Nordic Investment Bank that has environmental experts working for them”, Alnes says.

CICERO Center for International Climate Research, an independent climate research foundation in Norway, has developed second opinions for over 70 labelled green bonds and was the leading global provider of Second Opinions in 2016, according to the Climate Bonds Initiative.

The total amount of outstanding bonds labelled as “green” grew to USD 100 billion, as of 17 November 2017, according to the non-profit Climate Bonds Initiative. This global market is being driven by investors’ confidence that green bond proceeds actually can support a low-carbon future. For now, there is no lack of green bond investors whereas the limiting factor is on the issuer side.

The financial industry is getting more attention in the fight against climate change, why is that?

“Our scientists have focused on speaking to policy makers for many years. However, even with the Paris agreement a significant gap exists between what policy makers are willing or able to do and what science tells us is necessary to avoid dangerous climate change. In a way one could say that we began working with bankers because we no longer trust that politicians alone will be able to solve this problem.”

“CICERO has been working on green bonds for ten years now. In the last decade, green bonds have become a vibrant global market. We are seeing exciting new entrants and innovations. CICERO recently provided a second opinion for the Industrial and Commercial Bank of China, the largest financial institution in the world. We also provided a second opinion for the first green sukuk, an Islamic finance instrument, in Malaysia this summer“.

What are the differences in making second opinions to ICBC compared to Nordic issuers?

“We follow the same methodology regardless of the issuer. It is a little different if the issuer has a broader framework. The broader the framework, the more important it becomes to have a solid structure and good governance around it.”

How do you see the future market for sustainability ratings?

“We think the approach of really looking at climate risk and how well an investment is aligned with a low-carbon future should be a feature of any financial decision. The key questions are what is it that makes a bond green? Can it be green to invest in energy efficiency in a refinery? Is it green to invest in renewable energy if the electricity sector is already 100 percent renewable? There is a dialogue going on in the green bond market going on about this, and transparency is important.”

What is the role of CICERO in this?

“We see our role as providing transparency to the market. Shading climate risk versus defining green or not green. Similar to how credit rating agencies approach financial risks. We allocate a shade to the bonds; dark, medium or light green. The shading depends on how well the investments stand out in a 2050 perspective, how exposed the investment is to climate risk. We want to facilitate longer term thinking by investors guided by climate science.”

“In the long term, this thinking should be integrated into financial ratings. There are already examples that sustainability analysis and ratings are being added to financial analysis. In the future, ratings might shade the entire bond market to give investors better information on the composition of portfolios.”

Is the world more sustainable, in terms of the UN sustainable developments goals, with the growing green bond market or would the projects have been financed anyway?

“Green bonds fund projects that promote some of the SDGs, however, at this point in time the green bond market is about capacity building, not additionality. The goal is that all investors consider and understand climate risk when they make investment decisions. We see learning from green bonds being used by financial institutions, and bankers turned environmentalists as a powerful tool for change.”

NIB Environmental Bonds
NIB also issues Environmental Bonds (NEB) to attract investors who particularly want to help finance a more sustainable future. The use of the proceeds is governed by NIB’s Environmental Bond Framework. CICERO’s second opinion is that NIB's environmental bond framework provides “a clear and robust framework for climate-friendly investments.”

 

 

Nov 2017

  • AR2016

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