Investment Insight: COP26 and Green Bonds

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  • 04 mins 59 secs

Learning: Unstructured

Mark Lyon, Head of Internal Management, Border to Coast Pensions Partnership , gives an investment perspective insight on the COP26 Climate Conference, what investment opportunities can be found in green bonds and if investors need to be wary of liquidity in the market.
Channel: Insights

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It may contain errors and omissions.

mhm oh In 2015 a cop 21 in Paris the world agreed to work to limit the rising global temperatures In Glasgow Cop 26. The world came back together to try to secure two main objectives, Firstly, the setting of emissions targets for 2030 by each country, including phasing out coal production and Italian deforestation And secondly, helping create conditions to enable investors to make the multi trillion pounds of investment required to limit temperature rises to 1.5° over the long term. Yeah, cop 26 the UK has become the world's first net zero Line Financial Center. It confirmed that developed nations would meet the $100 million Climate finance target by 2023. However, this is three years later than originally planned. It also committed £100 million to the task force on access to climate violence to support developing countries access to cash they need. Prior to cop 26 the UK government announced a green industrial revolution and launched its first green bonds raising £16 billion. There was significant demand for these bonds with demand outstripping supply by a factor of 10-1. And further green bond issuance is expected in the years to come right. A green bond or green guilty officially by the UK government is a bond where the proceeds are ring fenced for green projects such as renewable energy flood defenses or carbon capture and storage. Mm Some critics argue that much of the money raised goes towards existing projects rather than new development. It is important to look closely at the issuer to ensure it's not just jumping on a bandwagon but intends to use the proceeds for relevant and suitable developments. Investors should consider how issues can demonstrate how they will measure and transparently report the positive environmental effect. Although it is currently voluntary, the majority of green bond issuers align their bonds to certain green bond principles. We are among many that believe an internationally recognized set of principles should be encouraged to enhance investor confidence. Around $1.5 trillion 400 billion issued in 2021 alone, With Europe being the largest source last year, accounting for around 40% of all issuance. This is expected to continue with the eU scheduled to issue €250 billion of green bonds over the next five years. As part of its Covid recovery program. The market opportunity for green bonds will continue to grow amid increased demand from investors looking to support their wider es jeune objectives as well as their commitments to Net zero issues are also wanting to demonstrate their commitment to green financing in order to meet their own client objectives. Footsie, the index provider has recently launched a global Green Impact bond index which only includes bonds that are either certified or aligned with the Climate bonds standard developed by the Climate bonds initiative. This includes over 700 issues with the total value of $660 billion. And this is expected to grow significantly over the next few years. Around half of the index is comprised of sovereigns with the rest a mix of investment grade and high yield Corporates. Mm hmm. It's a relatively new area of the market and liquidity may not be as strong as in more traditional bond markets. This will certainly be the case in the UK. While the government builds the L curve with further issues across different maturities, green bonds typically trade at a premium the so called green iem to their equivalent non green bonds. This is possibly driven by the excess demand for green bonds at the current time. This poses the question as to whether investors are willing to sacrifice returns in order to support green projects. It may be difficult for pension trustee to reconcile their green credentials when the non green option offers a high return. The success of green bonds in the U. K. Will be determined by deep and liquid market risk and returns that are comparable with conventional bonds, suitable measurement and reporting standards and investor confidence that their decisions having a positive environmental impact. Mhm. Yeah.

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