Sean Kidney wants public financial markets to drive climate action
When he established the Climate Bonds Initiative (CBI) in 2009, Sean Kidney was chasing an unknown market in an economy already mired in a global recession. On July 21, that gamble paid off handsomely. When the EU announced a stunning $858 billion bond issue to shore up Europe’s Covid-19 ravaged economies, the European Commission also stipulated that one-third of those bonds would be earmarked for climate action. “It’s exactly what we’re pushing for,” exults Kidney. “It’s a win. It’s a big win.”
The EU action demonstrates for the first time since its inception that despite striking wealth imbalances, the bloc’s disparate economies are willing to bet their collective economic future on addressing climate change. While the dislocation and tragedy of Covid-19 may be at front of mind, the deal highlights a strong public consensus across Europe that systemic change is necessary—right now—in order to save the planet from the looming cataclysm that is global warming.
Climate investing, the safe way
As Sean Kidney will be the first to tell you, climate bonds offer a powerful, underutilized lever in the fight to save the planet and humanity from climate catastrophe. His point: private equity alone will not change the status quo. Why? Because climate mitigation is above all a social cause, and no matter how profitable it may appear as an investment opportunity, it won’t precipitate the necessary action without political and regulatory heft. Climate bonds offer an opportunity for the public (including pension funds, municipalities, and some corporations) to vote in favor of an investment that not only offers a safe long term profit but includes climate action, such as sustainable infrastructure projects. Kidney describes them as a good way to circumvent the legislative process, particularly in a country like the U.S., where today’s divisiveness and lack of leadership virtually guarantee that even the most urgent policy proposals will stall if left to Congress.
Climate bonds work like any other investment bond, and they offer competitive returns.
Climate bonds work like any other investment bond, and they offer competitive returns. Like other bonds, they are designed to sustain steady profits over time, and government issuers use the proceeds to maintain and improve infrastructure. Even though climate bonds don’t offer the roller-coaster high of gambling on the stock market, part of their appeal is that they’re a steady, reliable asset class with the same price tag as regular, “vanilla” bonds.
Another part of the appeal for investors is being able to put capital in a specific project rather than a whole company. “Investors, they can invest now into things that really align with their values,” says Michael Bauer, a professor of financial economics at the University of Hamburg whose work looks at the effects of the financial market on climate change. “If they want to invest consistent with an environmental conscience and environmental values, now they have the instruments to actually be able to do that.”
Kidney’s call to action
Kidney started CBI because he recognized early on that climate bonds could be a far more powerful tool than their face value represents. During the latter part of the AIDS epidemic in the early 1990s, Kidney was a public relations consultant working mainly on social justice issues. The board members at one of his clients, an Australian pension fund, insisted that life insurance be made available for all its members, regardless of whether they had the virus—a pioneering move in the early days of the epidemic when care for AIDS patients could lead families to bankruptcy. “Even though rates would bump up a little to take on the risk of AIDS patients, it was still half the cost of life insurance from the insurance company,” recalls Kidney. “I thought: this is really cool.”
“If they want to invest consistent with environmental conscience and environmental values, now they have the instruments to actually be able to do that.”
In a roundabout way, that realization ultimately changed his life. Living in Sydney in 2002, a legal education publisher he owned went bankrupt; he went to New Zealand to take care of his ailing father; a month later, following his father’s death, Kidney himself suffered a stroke during his yearly bushwalk, or hike, back in Australia.
But the monumental events of that period, marked by loss and uncertainty, brought into focus Kidney’s purpose: To help save civilization from climate catastrophe.
While tending to his dying father, Kidney spent his free time (“There’s only so many walks I could do in the area,” he quips) reading dense scientific papers about climate change. It terrified him, but it lit a fire, too. “If I’m going to do something,” he recalls thinking, “I’d better do it right now.” Moreover, he told himself, “I’m sick of giving advice. It’s time for me to do it the way I think it needs to be done.”
He told himself, “I’m sick of giving advice. It’s time for me to do it the way I think it needs to be done.”
So he teamed up with Nick Silver, an actuary, and economist specializing in climate change policy and social development, to build the financial model for what would become the Climate Bonds Initiative. From his experience in Australia, he had a sense for how powerful the insurance industry could be in the UK and in Europe. It was clear he would have to network, earning the support of pension funds and convincing institutional investors and their clients of the dire importance of addressing global climate change.
Established in 2009 and capitalizing on the recent debut of the European Investment Bank’s Climate Awareness Bonds program and the World Bank’s new Green Bonds, CBI has become the leading global authority on climate bond issues. Its experts advise bond issuers and provide a broad, constant stream of monitoring data to investors and the public. Even more important, CBI initiated the Climate Bonds Standard in 2010 and the accompanying Certification scheme in 2011, to ensure transparency and set benchmarks for climate bond performance. In a relatively nascent market, CBI’s standards help ensure that the bond issues’ climate projects are in line with the Paris Agreement’s overall aim to restrict global temperature increase to under two degrees Celsius before the end of the 21st century.
Green bonds on the global market
If the last year is any indication, the Climate Bonds Initiative is an example of the extent to which savvy PR, creativity, and discipline can encourage companies and cultures alike to cooperate in a global effort. China recently announced that so-called “clean coal” projects would no longer be eligible for climate bonds, further aligning Chinese green bonds with CBI’s Climate Bond Taxonomy; State Street Global Advisors, and Hong Kong Exchanges and Clearing Limited both joined as climate bond partners, too. “We’re now having discussions with ASEAN countries about green bond issuance,” says Kidney. “It’s something that’s playing out around the world at the moment.”
To his point, as of December 2019, a cumulative total of just over $100 billion in CBI-certified green bonds and loans had been issued in 21 currencies across the globe. The bond market overall is worth $100 trillion; as of June, $863 billion in green bonds overall had been issued since the first was designated in 2007, with $821 billion currently at play in the market. That number is only set to grow once the European Commission begins issuing climate bonds as part of its Covid-19 relief package. As recently as 2012, only $3.5 billion worth of climate bonds had been issued.
“If we think 1% of green bonds issued every year will solve our problems, we might as well all go home.”
Yet while the green bond market is accelerating, it still makes up only about 1% of the total investment market (3.7% of the total bond market). Says Michael Boardman, group chief financial officer at clean energy company Sindicatum: “If we think 1% of green bonds issued every year will solve our problems, we might as well all go home.”
A slow revolution
Despite the recent milestones in green bond adoption, Kidney knows “it’s not enough,” he says. According to the Organization for Economic Co-operation and Development (OECD), the world will have to invest $6.9 trillion each year through 2030 to mitigate climate impacts and meet development goals. But Kidney’s enthusiasm for CBI’s market-based solution to climate change is infectious, and his commitment and expertise earned him a place on the European Commission’s working group to develop its green bond taxonomy.
“I haven’t got time for a revolution. It takes too long.”
Another major roadblock is the United States, Kidney acknowledges, despite its being the largest issuer of bonds, both green and otherwise. But institutional investors, and particularly the US government, are only just discovering the value—if not the virtue—of climate bonds. Kidney sees an opportunity in the Covid-19 pandemic, which has forced many major polluters to slow activity. The phrase “build it back better” clearly has resonance in Europe, as shown by the recent Covid-19 rescue bond package. The U.S. government under the Trump Administration has pulled out of the Paris Agreement and dismissed the climate threat. Although private investors have started moving away from fossil fuels, that’s not enough. What Kidney hopes for is “a change of government.” Even then, he says, “I haven’t got time for a revolution. It takes too long.”
Despite green finance’s massive victory in Europe, there’s a long road ahead and no time to waste. If societies and their governments everywhere don’t jumpstart the transition to a climate economy, he says, “We’re talking about unimaginable consequences across every aspect of the natural and the civilized world.