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How to save the world: 1 measure it

10 October 2018
Richard Kemmish

Green covered bonds are good as far as they go, but the ones that exist at the moment don't disclose enough information on which to make rational decisions and generate meaningful liquidity.


The number of green bonds is increasing rapidly. But I would never buy one – the yield on most of them is far too low for me. With the market dominated by sovereigns, covered bond issuers and supranationals like the World Bank I can’t see that they are going to get attractive from a yield point of view any time soon.

Which of course is not the point, they are about reducing the emission of greenhouse gases not about what (mainly) matters to me – getting a good yield on my investment.

Which is where I have a problem with the current state of the market – how much benefit are these bonds producing? I scan the write ups of the green bond deals, I see the credit rating, the yield, sometimes even the use of proceeds. But I very rarely get to discover how much carbon dioxide is expected to be reduced by the bond. One hundred tons per year? One thousand? One million? I look in vain for an answer. Admittedly I only scan the write ups in GlobalCapital, I’m superficial like that. But surely this is as important a metric of the bond as its credit rating or its yield?

If we had reliable – independent third party verified - values for actual savings, and if these values were included in the deal announcement on IIIA, were published in an easy to understand central database, and if these values could then be back tested, then we could start to make more rational investment decisions. More rational investment decisions equals cheaper funding for green projects.
Am I prepared to forego 10 basis points in order to save a small amount of carbon emissions? No. Am I prepared to forego 10 basis points in order to save a large amount of carbon emissions? Yes. The question is ‘what is large?’.

This would also allow investors to cross over between capital markets and alternative ways to achieve the same objectives – charitable donations for example. It might be rational for me to buy KfW’s regular bond 10 basis points wider than their green bond and use that 10 basis points to fund a not-for-profit project to capture emissions.
If we have this information we can leave it to market forces to decide what is necessary. I may have a different benefit/cost trade off to you – that’s how markets work. Rather than optimising the balance of risk and return in a capital asset pricing model, I could optimise yield and saved carbon emissions in an analogous model. Shouldn’t be too difficult for an economist to construct such a model, maybe make it available on-line to help green investors with portfolio optimisation?

This could then produce some of that elusive secondary market liquidity in the green market. If I own a bond that is saving 1,000 tons of carbon dioxide per basis point and another bond appears that would offer 2,000 tons of carbon dioxide per basis point of investment, then I, rationally, should switch. The first bond gets sold to someone with a different emission/return curve.

Just saying.

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