Sean Kidney, CEO of the Climate Bonds Initiative, has spent the last decade pioneering sustainable finance, and helped to devise the standards that the market relies on today. Here, he discusses how the market fared in its first economic crisis, and why the job of developing its governance is far from over.
As someone who has championed sustainable finance over the last decade, were you encouraged at the market’s resilience last year – the first time it has met with an economic crisis?
If you look at the numbers, we saw a similar level of green bond issuance in 2020 to 2019, which is good going when you consider that they almost disappeared at the end of Q1 because of the economic turbulence.
The crisis was certainly a test of the market’s resilience, and it passed with flying colors. In the last year, green bonds performed better than conventional bonds in secondary markets, in terms of trading volumes. I've had investors tell me that in March, when they couldn’t trade conventional bonds, they could continue to trade green bonds – they remained liquid when the rest of the market froze. That is gold dust in terms of value. And whenever we have seen a downturn in the market, as we saw this year, green bonds tend to hold their value in the secondary markets.
On top of that, we also saw the same use of proceeds ideas appearing in the form of sustainable bonds, social bonds, pandemic bonds and climate transition bonds – all of which grew rapidly. So, I think the real story here is that capital with purpose is here to stay, and people want to extend the concept that has been proven with green bonds.
Why do you think sustainable finance instruments have been able to maintain – or even increase – their attractiveness, amidst the economic turbulence?
The fundamental reason is because the use of proceeds rules embedded in these instruments are indicators that the issuers are committed to changes that make them less risky going forward.
This has been a key principle underpinning the market since its inception, but you’re now seeing more investors recognizing that an acceleration of sustainability policymaking is underway.
You won’t find a major investor in the world who doesn’t believe that governments will act on climate change and other issues within the UN’s Sustainable Development goals (SDGs). It’s hard to predict the pace of change that will occur in different markets, but they know that the kinds of investments represented by the green and the social bond market are effectively lower risk, because these are areas that won’t be subject to policy action and transition risk.
The clue to this is Europe, where we’ve seen that when a company issues a green bond, it gets a stock price bounce, and it stays up. Investors see a correlation between a company issuing green bonds and taking action to address its forward risk profile, which leads to equity movements, as well as bond price movements.
It's important to note, however, that in the green bond market, the efficacy of that argument relies on robust boundary setting. If we had a wishy-washy green bond market, we never would have seen this effect. There is confidence that the investments are having a material effect on mitigating issuers’ climate risk exposure. That’s why the transparency and reporting that issuers must provide is so important to investors, because they can see how the money’s being used, and it’s a useful risk predictor. That’s going to be a key issue in the social bond market going forward.
As you say, we saw rapid growth in the social bond market in 2020 too, but standard-setting isn’t as mature there yet – is that a concern?
We’ve seen a wave of new social bond issuances from sovereigns and corporates, targeting issues such as affordable housing, fair pay and pandemic relief.
I’ve looked at some of these and there are lots of claims being made about the outcomes being targeted, but there’s a lack of taxonomy and robust measurement around them so it’s hard to assess them properly.
We urgently need some guidelines in this area because we’re going to see an explosion of new issuances in 2021, as governments look to refinance their debt and companies focus on the recovery. There will be a lot of issuers turning to thematic finance because it’s cheaper. So, what we and others are hurriedly doing, is looking at how we can add some rigor to this market – that means it's a next 12-month job, not a next 36-month job.