A dull shade of green

REDUCING the risks of climate change is not a technological problem. There are many ways to generate electricity, drive cars or grow crops without emitting much carbon dioxide—but they are expensive. According to the International Energy Agency, $13.5 trillion must be invested in low-carbon energy by 2035 to reduce emissions. That sort of money can be found only on capital markets. Yet investors’ appetite for green schemes is unproven.

Hence growing interest in one of the more promising efforts to encourage it: “green bonds”. These instruments look like any other fixed-income offering except that the proceeds are invested in environmentally friendly projects. Estimating the size of the market is hard: according to Climate Bonds Initiative (CBI), an NGO, between $10 billion and $30 billion of bonds related to renewable-energy projects have been issued. Bonds that are explicitly advertised as green, mostly issued by the World Bank and other multilateral lenders, are easier to count. Around $5 billion-worth have been issued; by one estimate, they could amount to $30 billion by 2015.

Some see an opportunity in this. On October 19th State Street Global Advisors (SSgA), a big asset-management firm, unveiled a green-bond investment strategy. In the absence of a green-bond index, the relevant portfolios will be bound by certain rules. They will be dominated by green bonds, rated AA or higher, and include those of at least three issuers, with none commanding a majority of the portfolio. According to Sean Kidney, CBI’s boss: “This is the first time one of the big beasts has dipped its toe into the water.”

Greenness aside, such bonds are indistinguishable from any other investment-grade “plain vanilla” security. They carry no extra costs: investors are not exposed to the risks in the World Bank projects that are funded by the bonds. Nor do they profit if those projects, which typically include renewable-energy initiatives and reforestation schemes, do well.

So why bother to invest at all? One answer is the indirect benefit that investors derive from addressing the economic risks of global warming. To encourage this, the World Bank briefs them on its green projects. A more obviously venal motive is that green investing is good for the image—unusually, the World Bank publishes the names of investors in its green offerings.

A funkier sort of green bond was once envisaged. When expectations of carbon markets were higher, plans were afoot for bonds offering a mixture of financial returns and carbon credits. The new conservatism reflects the winnowing of those expectations. It also represents a hardened appreciation that few institutional investors—even in do-gooding Scandinavia—will pay a premium for green. “They aren’t clamouring for green investment opportunities,” admits Chris McKnett, SSgA’s head of environmental, social and governance investing. “For this to work at scale there can be no haircuts involved in putting money into green, rather than brown or vanilla.”

The rise of dull green bonds should address a perception among some investors that climate-change investments must involve a catch. “There’s a bit of cynicism,” says Stuart Kinnersley of Nikko Asset Management, a big investor in World Bank green bonds: “There’s a general belief that you’re paying more for this extra bit of green, even though you’re not.”

But these instruments are only a stepping stone to the much greater capital flow that greening the world economy will require. For that to materialise, investors will have to conclude that low-carbon developments offer stable returns. Some signals have been discouraging: a bond issued by CRC Breeze Finance, a vehicle formed to raise cash for a fleet of wind farms, was downgraded to junk after their sails turned less than predicted. Others are more hopeful: tumbling costs of wind and solar energy suggest it may soon be competitive with little or no subsidy. Until that happens, don’t expect a green rush.