Climate change: why Sweden’s central bank dumped Australian bonds



Sweden’s central bank ways it will no longer invest in assets from governments with large climate footprints, even if the yields were high.
Shutterstock

John Hawkins, University of Canberra

What’s happening?

Suddenly, at the level of central banks, Australia is regarded as an investment risk.

On Wednesday Martin Flodén, the deputy governor of Sweden’s central bank, announced that because Australia and Canada were “not known for good climate work”.

As a result the bank had sold its holdings of bonds issued by the Canadian province of Alberta and by the Australian states of Queensland and Western Australia.


Martin Flodén, deputy governor Sveriges Riksbank Central Bank of Sweden

Central banks normally make the news when they change their “cash rate” and households pay less (or more) on their mortgages.

But central banks such as Australia’s Reserve Bank and the European Central Bank, the People’s Bank of China and the US Federal Reserve have broader responsibilities.

They can see climate change affecting their ability to manage their economies and deliver financial stability.

There’s more to central banks than rates

Reserve Bank deputy governor Guy Debelle. Extreme events not cyclical.
DAVID MOIR/AAP

As an example, the new managing director of the International Monetary Fund Kristalina Georgieva warned last month that the necessary transition away from fossil fuels would lead to significant amounts of “stranded assets”.

Those assets will be coal mines and oil fields that become worthless, endangering the banks that have lent to develop them. More frequent floods, storms and fires will pose risks for insurance companies. Climate change will make these and other shocks more frequent and more severe.

In a speech in March the deputy governor of Australia’s Reserve Bank Guy Debelle said we needed to stop thinking of extreme events as cyclical.

We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded (at least economically) as cyclical events that recur every so often. In contrast, climate change is a trend change. The impact of a trend is ongoing, whereas a cycle is temporary.

And he said the changes that will be imposed on us and the changes we will need might be abrupt.

The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt. The trend changes aren’t likely to be smooth. There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.

Australia’s central bank and others are going further then just responding to the impacts of climate change. They are doing their part to moderate it.

No more watching from the sidelines

Peter Zöllner of the Bank for International Settlements launched the Green Bond Fund.
BIS

Over thirty central banks (including Australia’s), and a number of financial supervisory agencies, have created a Network for Greening the Financial System.

Its purpose is to enhance the role of the financial system in mobilising finance to support the transitions that will be needed. The US Federal Reserve has not joined yet but is considering how to participate.

One of its credos is that central banks should lead by example in their own investments.

They hold and manage over A$17 trillion. That makes them enormously large investors and a huge influence on global markets.




Read more:
Central banks are waking up to climate change dangers. It’s about time


As part of their traditional focus on the liquidity, safety and returns from assets, they are taking into account climate change in deciding how to invest.

The are increasingly putting their money into “green bonds”, which are securities whose proceeds are used to finance projects that combat climate change or the depletion of biodiversity and natural resources.

Over A$300 billion worth of green bonds were issued in 2018, with the total stock now over A$1 trillion.

Central banks are investing, and setting standards

While large, that is still less than 1% of the stock of conventional securities. It means green bonds are less liquid and have higher buying and selling costs.

It also means smaller central banks lack the skills to deal with them.

These problems have been addressed by the Bank for International Settlements, a bank owned by 60 of the central banks.

In September it launched a green bond fund that will pool investments from 140 (mostly central bank) clients.

Its products will initially be denominated in US dollars but will later also be available in euros. It will be supported by an advisory committee of the world’s top central bankers.




Read more:
Business big hitters highlight the huge growth in climate risk management


It is alert to the risk of “greenwashing” and will only buy bonds that comply with the International Capital Market Association’s Green Bond Principles or the Climate Bond Initiative’s Climate Bond Standard.

Launching the fund in Basel, Switzerland, the bank’s head of banking Peter Zöllner said he was

confident that, by aggregating the investment power of central banks, we can influence the behaviour of market participants and have some impact on how green investment standards develop

It’s an important role. Traditionally focused on keeping the financial system safe, our central banks are increasingly turning to using their stewardship of the financial system to keep us, and our environment, safe.The Conversation

John Hawkins, Assistant professor, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

As big business goes green, green bonds ready for takeoff


Usman W. Chohan, UNSW Australia

The climate summit in Paris has shown that global big business is now also on board with the transition to a low-carbon economy.

However, the most promising instruments in finance for promoting green investing, particularly green bonds, have been around for almost a decade now, starting with the European Investment Bank (EIB) Climate Awareness Bond in 2007.

Why haven’t green bonds entered the mainstream of finance, and what is holding them back?

To be clear, the rise of green bonds has been dramatic: whereas issuances amounted to only US$4 billion in 2010, they were nearly ten times that amount by 2014, representing US$37 billion in new issuance volume. However, green bonds haven’t yet achieved a critical mass because their growth stems from a small base, given that global fixed income constitutes US$80 trillion in outstanding value.

An important factor constraining the wider proliferation of green bonds is the fact that their issuance is still relegated to a few large players. The largest emitters of green bonds remain the large multilateral development institutions which collectively accounted for almost half (44%) of new issuances in 2014, while the corporate sector accounted for another one-third of the total.

The World Bank alone has conducted 100 green bond transactions in 18 different currencies that cumulatively represent more than US$8.5 billion.

Having such a concentrated base of issuers is insufficient for a wider introduction of green financial instruments, and new institutional players, particularly private sector entrants, are required to enlarge the green bond market.

Looking back, an overarching reason for limited private sector participation in green bonds was that “green credentials” were less important in past corporate cultures. However, with the cultural shift taking place as seen at COP21, more entities are expected to “green-up” their business models.

It is important to note that, because green bonds are properly certified as climate-friendly financial instruments, they only represent a portion of a larger, more loosely defined “climate-aligned” bond market.

While not officially labelled as “green” bonds according to environmental rubrics this market accounts for more than US$600 billion.

The green bond market also suffers from a lack of project diversity. For the broader “climate-aligned bond market” that includes green bonds, the two largest segments are transport (nearly 70%) and energy (another 20%), but transport is almost entirely rail networks backed by state entities. Only 10% of the “climate-aligned” market covers the remaining construction, agriculture, waste management, and water categories.

It is heartening to see that developing countries have taken the lead in issuing “climate-aligned” securities (not necessarily certified as green bonds), with China alone accounting for 33% (US$164 billion) of the climate-aligned issuances. India (US$15 billion), Brazil (US$3 billion), and South Africa (US$1 billion) are also among the emerging markets engaging in the climate-aligned capital raising process.

In Australia, the scope for green bond issuances is extremely promising, but in the context of the overall Australian A$1.5 trillion bond market, green bonds still reflect a minute portion of the issuances, and the country has generally lagged behind in its adoption. This is partly due to regulatory uncertainty and political hostility. However, there’s actually a strong interest in green bonds in Australia, as the 2015 green bond issuance of A$600 million by ANZ bank and this South Australian A$200 million wind farm project evidently show.

In fact, most of the major Australian banks, including NAB, Westpac, and ANZ are dipping their toes in the space. To facilitate stronger growth in Australia, however, non-bank financial institutions will also need to be part of the equation, which is why it is encouraging that sectors such as the property market are turning to green bond vehicles for raising capital.

The outlook on market volume growth for green bonds is overwhelmingly positive. Some forecasts are suggesting the green bond market will treble again this year as it did in 2014, touching US$100 billion. Given the growth and engagement on the “greening” of finance, green finance could soon become mainstream.

The Conversation

Usman W. Chohan, Consultant, World Bank Institute (previous); Doctoral Candidate, Economics, Fiscal Policy Reform, UNSW Australia

This article was originally published on The Conversation. Read the original article.