A conversation with climate bond pioneer Sean Kidney on the central role that green bonds can play in the war for Ukraine.
Russia’s tanks and missiles are shredding Ukraine’s environment. Ukrainian social life is being shattered by an unprovoked invasion indiscriminately targeting civilians with cluster bombs, flame throwers and lung-imploding vacuum bombs. Vladamir Putin’s goal is to decapitate Ukraine’s democratically elected system of governance.
While environmental, social and governance factors (ESG) have always been critical drivers of conflict, in Ukraine, we are experiencing the first war through an emerging global awareness of the importance of investing in solving the world’s escalating ESG problems. Remember, it’s only been a decade since the ESG framework has emerged as a powerful new guiding force for civilized behavior.
With so much going on, Climate & Capital sat down this week with climate bond champion Sean Kidney to better understand how ESG and capital markets can be a powerful force for good to help alleviate the atrocious circumstances in Ukraine. Kidney is the founder of the London-based Climate Bond Initiative (CBI), which almost single-handedly pioneered the need to mobilize the $100 trillion debt market to battle climate and other global ESG issues. CBI has developed a climate bond framework that is considered the global gold standard. Its green bond “seal of approval” is eagerly sought by global bond issuers. This is important because last year alone, institutions issued more than half a trillion dollars of debt they were selling to support green social, sustainable, transition, catastrophe projects. Expect that number to grow to $5 trillion by 2025. Kidney’s framework and certification program are models for countries and multilateral institutions developing their green bond frameworks. Not bad for a former Australian PR man.
For centuries, bonds have financed wars. Think of the American “Liberty Bonds” issued during World War II. But too often, rebuilding from the ravages of war fell to the role of governments who had to tax and spend to rebuild because it was hard to quantify the ESG returns of peacebuilding. It is one of the many ironic twists of capital markets.
Social bonds will meet the growing need for capital to support Ukraine and Europe’s enveloping humanitarian crisis in the short term.
That needs to change, says Kidney. Social bonds will meet the growing need for capital to support Ukraine and Europe’s enveloping humanitarian crisis in the short term. The bonds he proposes for Ukraine are what are known as “social bonds” and would, he says, “extend the existing liquid social bond markets.” That precedent was set recently in Europe, whose leaders, notably Germany, had been reluctant to issue any form of regional bond. That changed in 2020-21 when the EU issued more than $100 billion worth of Euro-denominated “social bonds” to pay for income maintenance (unemployment insurance) for tens of millions of Europeans out of work because of the COVID pandemic.
Kidney thinks the EU should extend the power of social bonds and use the same approach in Ukraine to aid 1.2 million refugees. Bonds have meaningful advantages over other sources of funding. Unlike government deficit spending, bonds are investments paid back over time, reducing the pressure on governments for short-term, inflation-inducing and deeply unpopular “tax and spend” policies. Funding costs are low because, in this case, the EU bonds take advantage of the EU’s pristine AAA credit rating, something not available to individual countries like Ukraine or Poland. Finally, bonds spread the risk to investors around the world.
Perhaps the biggest reason to issue freedom social bonds is that bonds tap into one of the West’s most potent weapons -— its deep and robust capital markets. With ESG issues escalating worldwide, bonds for goodwill increasingly play a critical role far beyond aiding Ukraine. The past three years have been a dramatic wake-up call to new and old threats to humanity. That will only accelerate, “We can expect climate crisis after climate crisis,” said Kidney, making ESG-related bonds a key to solving world problems and core to any investor’s long-term portfolio.