Investors join the battle against climate change

investment viewpoints

investors join the battle against climate change

Carolina Minio-Paluello, PhD - Global Head of Solutions, Limited Partner, LOIM

Carolina Minio-Paluello, PhD

Global Head of Solutions, Limited Partner, LOIM

Climate change is one of the greatest challenges of our time. Investors are playing an increasingly pivotal role in combating this unprecedented threat as the transition to a greener, low-carbon economy is also one of the biggest potential drivers of investment returns in history.

Click here to download the Climate Bond Impact Executive Summary Report.

The 2017 LO Funds Global Climate Bond Impact Report  details how investors have supported efforts to mitigate climate change and promote resilience to its effects. Rising levels of greenhouse gases (GHG) have been linked to the extraordinarily high number of storms and floods across the Indian subcontinent, China, the Caribbean and the US in late 2017. Natural disasters are expected to become more frequent and severe as a result of global warming, highlighting the importance of developing solutions to rising GHG levels.

Lombard Odier Investment Managers partnered with Affirmative Investment Management (AIM) – the first asset manager dedicated to fixed income impact strategies – in order to connect investors with projects specifically engineered to address this growing threat. The hunt for yield is a consistent theme in the current environment and this partnership offers investors the opportunity to finance positive climate and social action as well as target yields in excess of the broad investment grade market.

The investible universe grows bigger by the day as governments worldwide are starting to wake up to the need to tackle climate change head-on and are investing significantly in response efforts. The United Nations Environment Programme (UNEP) reports that US$22.5bn was spent on adaptation efforts by developing countries in 2014 alone while it is estimated that an additional US$700 billion of annual investment is needed to meet the Paris Accord commitments to limit climate change to two degrees Celsius above pre-industrial levels.1

Responses to climate change broadly fall into two areas: mitigation and adaptation. Approximately 87% of projects supported by the LO Funds - Global Climate Bond fund are mitigation-oriented, meaning they are focused on the reduction and/or avoidance of GHGs emitted into the atmosphere. On average, 8% of the portfolio was in adaptation-focused activities in 2017, which are defined as those developed to respond to the effects of climate change and extreme events. The remaining 5% is given over to social activities, some of which support greater climate resilience.

New threats require new solutions and this focus on global warming has fueled the popularity of impact bonds. These fixed income instruments with positive social and environmental externalities represent a huge growth market. By the end of 2017, the impact bond market had grown 173% on an annualised basis since 2007 when the first labelled climate bonds were issued by the European Investment Bank (EIB) and, in 2008, the first use-of-proceeds green bond, which has become a model for the market, was issued by the World Bank (IBRD).

The Global Climate Bond fund - which invests in impact bonds - supports a broad range of projects designed to boost sustainability including low carbon transport, infrastructure, and global health initiatives. Investments in low carbon transport, for example, not only work to bring down GHG emissions, but promote mobility, inclusion and economic development.

It is energy which forms the primary focus of the fund, however. Over 67% of greenhouse gas emissions stem from energy use and production, according to the International Energy Agency (IEA). The IEA estimates that the global share of renewable energy – including solar, wind and hydro – will need to increase substantially by no later than 2040 in order to offset this. Europe is currently a leader in terms of renewable technology, but China is making huge strides and has been a keen driver of wind energy growth. Renewable energy is fast becoming a competitive industry.

Through the fund, investors have supported a number of energy initiatives including the construction of a new electricity transformer in Kristinestad, Finland. This project is expected to be critical in reducing energy leakages and connecting new renewable energy to the grid. Elsewhere, the fund has also supported the creation of a wind farm in Tafila, Jordan. The project has an economic lifespan of 15 years and is expected to make a significant contribution to Jordan’s energy supply and security. The fund has contributed to over 1,000 projects.

Climate change may already be taking its toll on the planet but there are encouraging signs that key global players are stepping up their efforts to develop and support effective solutions. 
Investors are increasingly interested in the opportunity to both make a material difference to the environment and grow their investments in a sustainable fashion. In response to this growing demand, we have established a diversified bond portfolio that seeks to create a positive impact, while aiming to provide both a higher yield and lower turnover than a typical investment-grade portfolio.

Click here to download the Climate Bond Impact Executive Summary Report.

 

1 Source: World Economic Forum, COP 21. 

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