How Would You Like to Pay Sir? How about a Green Bond?

by | Apr 4, 2013 | Uncategorized

More good infrastructure reporting in The Economist and The Economist (again).

How will the infrastructure gap be paid for? The banks are retreating:

  • “Basel 3 rules are steering banks away from the long-term loans (often stretching beyond 20 years) required by backers of infrastructure projects.”
  • Infrastructure bank funding has fallen from 90% to 70% of the construction cost.

And so who else could pay for new infr1astructure?

  • “Long term investors such as insurers and pension funds are eager to plough money into infrastructure, as are endowments and sovereign-wealth funds.
  • These financial titans have over $50 trillion to invest.”

They suggest the $50 trillion pool of pension funds accounts for only 0.8% of their assets now. Elsewhere, the Economist recommends a ten-fold increase for pension funds investment in infrastructure.

Why should these people part with their money? Infrastructure meets their goals:

  • Financial instruments linked to infrastructure are hedged against inflation risk;
  • Offer stable returns;
  • Have low volatility;
  • Have small correlation with other asset classes;
  • And, while they are less liquid than other assets this is not a concern for the funds whose investment horizon is decades.
  • Also, the newspaper quotes Standard & Poor’s as saying that infrastructure projects have lower default risk.

They provide a raft of examples that things are changing. Green bonds is one hopeful avenue for (green) infrastructure funding:

  1. Natixis, a bank, put together the €300m ($417m) loan to three French prisons (nearly €100m will go onto the balance-sheet of Ageas, a Belgian insurer).
  2. On March 19th Unilever issued a £250m ($415m) green bond earmarked for reducing waste, water use and greenhouse-gas emissions.
  3. In February 2013 the International Finance Corporation raised a $1 billion green bond.
  4. In November French electricity/energy company, EDF, raised €1.4 billion ($1.9 billion) from a green bond issue.
  5. Toyota is raising $1.75 billion by a heavily oversubscribed green bond to help finance sales of car loans for hybrid and electric vehicles.

Whose buying? While early days these green bonds may fit into pension funds infrastructure investments. A couple of examples:

  • California state teachers’ pension fund and Sweden’s AP pension funds. Also Zurich insurance said it would invest $1 billion in green bonds. Zurich appointed BlackRock to run its portfolio.

So how important is this green bond market?

The value of green bonds recorded so far this year is about $6 billion
This is four times as much as in the same period in 2013.
Last year’s total was $11 billion.
The World Bank’s forecasts it will rise above $50 billion next year.
SEB’s forecast is that green bonds will account for 10-15% of the corporate-bond market by 2020.

If sustainable infrastructure can be sliced and packaged into pension-fund sized tranches, perhaps pension funds will help us fill the infrastructure gap.

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