Can a green investment strategy save our climate?

“We have only a few years left to decarbonize the economy.” Such was the sobering declaration from Manuel Adamini, professional speaker and moderator for climate change (finance), who recently spoke at a VP Securities’ Market Advisory Group (MAG) meeting.

Yet, according to Manuel Adamini, all is not lost. “We know what we have to do,” he states. “Deploy and finance green investments at massive scale and speed.” So just what is this green investment market? How much is it worth? And what do investors and financial institutions alike have to do in order to, quite literally, save the world?

Green investments in the Nordics: an overview

In 2018, Sweden ranked as #6 green bond market in the world, with EUR 10.2 billion issued. Norway ranked #16 and Denmark #17, with EUR 2.7 billion and EUR 2.3 billion in bonds issued, respectively.

Source: The Green Bond Market in the Nordics, 2018

“People will need power. Come boom or bust.”

Manuel Adamini often quotes this Warren Buffett statement as a way of acknowledging an unassailable truth. “In theory, I would love to see us [humanity] do a whole bunch of things differently on this planet, including how we manage progress and economic well-being,” he states. “Realistically, I think it’s almost impossible. So, if we can’t curb our thirst for power, what can we do? We can make energy use and production more efficient. We have to switch to electricity in the power infrastructure, and away from oil and gas, and then produce this electricity from renewable energy sources.” The power market is so important, as it can help electrify many other parts of the economy. This is, according to Manuel, the key priority in decarbonizing the economy quickly.

Can it be done?

According to recent reports, there is currently 35 trillion dollars invested in negative or ultra-low yielding debt instruments. And as Manuel Adamini points out, “That type of non-yield won’t pay our pensions.” So there is a tremendous amount of capital out there, hungry for yield. The key lies in finding the right, and in this case green, investment opportunities. “The industry recently celebrated having deployed 2.5 trillion dollars in renewable energy investment over the past decade. However, we need to invest that amount annually in order to sufficiently offset the current climate crisis.”

There are basically two sides to this equation. One, that issuers create more green investment opportunities. And two, that investors actively pursue a green investment strategy. How are the Nordic regions doing in this regard?

The issuer perspective: Going from black to green

According to Andreas Ligaard, Senior Product Manager, Bonds & Funds, at VP, issuers are definitely waking up to green investment potential. “Issuers have a number of options at their disposal now to promote a green investment strategy. They can issue green bonds that enable investments in sustainable energy production, such as wind or solar power; or they can issue bonds focused on sustainable buildings, such as making houses greener and more energy efficient,” comments Andreas Ligaard. “Green investment is in reality the next phase in an international trend of responsible investment, one that began by refraining from investing in things like tobacco, weapons production and fossil fuels, and is now taking the more active step of choosing sustainable areas to invest in, such as green technology.” As an example in this trend, Nykredit issued a green bond in Swedish krona through VP earlier this year. “Sweden is definitely leading the pack in terms of green investment, and Finland has made significant gains in this area as well,” Andreas Ligaard states. “Denmark is a bit behind its Nordic neighbours, but the interest is definitely increasing.”

The investor perspective: Pension funds stepping up

The idea of investors choosing to use their influence for the good of the climate is a trend VP’s own Flemming Merring, Head of Issuer Services, has also noticed at Annual General Meetings across Denmark. “I’ve noticed a grassroots movement of sorts at these meetings,” he comments. “Especially amongst the Danish pension companies. They are discussing the extent to which they should limit their investments to green or climate-friendly energy companies, and out phase fossil fuel and oil companies and other CO2 ‘sinners’ from their investment portfolios.”

One concrete example is MP Pension, who have approximately 115 billion kroner in assets under management. They pursue a policy of active ownership in the companies they invest in, where they use their influence as investors to impact how the companies they invest in are run. In other words, they are investing in the climate. “If you go back five years ago, this wasn’t the case,” Flemming Merring observes. “But we’re seeing it more and more. And clearly, if you’re an individual shareholder and you show up at a meeting demanding that the company do something about their CO2 emissions, you won’t have that big of an impact. But when large international investors or pension funds begin to show up and make these demands, it makes it much more difficult for companies to ignore.”

Will it be enough?

Manuel Adamini is hopeful. “Humanity has a history of out-performing themselves. And already in 2012, we saw more renewable investments than non-renewable ones.” He also references previous times in human history when governments have demonstrated an ability to create major societal transitions at amazing speeds, by tapping the financial markets. “From France and Germany to Great Britain and the United States, governments have a history of using bonds to finance big societal projects, albeit almost exclusively for the purposes of war. However, the lesson we can draw is that mobilisation can occur at amazing speeds, while including both retail and institutional capital markets.”

The major difference here is that we not only need amazing speed, but an unprecedented scale. “We have to make sure that every infrastructure investment we make from now on will have to be climate-resilient to withstand higher temperatures and more severe weather, and mitigate further climate change. If we get that right, there’s a chance,” asserts Manuel Adamini. And the opportunity cost of waiting is significant. “If we had started decarbonizing back in the early 1970s, when the oil majors first learned about the potentially catastrophic effects of fossil fuels on the climate, we would only have had to reduce emissions by 1-2% a year. It is now three to five times as much. The later you start, the harder it becomes. That is the cost of waiting.”

Flemming Merring

Senior Product Manager, Issuance Products

+45 4358 8968
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- Flemming Merring , Senior Product Manager, Issuance Products