Sean Kidney, CEO at Climate Bonds Initiative, shares the inside story of sustainable finance and the extraordinary growth of capital allocated to climate solutions. Our discussion covers investor expectations, climate risk, regulatory action, and more.
Anna-Marie Slot:
Welcome to the first episode in our 30 for Net Zero 30 podcast series, where we'll be speaking with 30 climate action champions across the globe about real steps to take now in order to reach 2030 goals. Today, I'm excited to be joined by Sean Kidney, chief executive officer at Climate Bonds Initiative, one of the key people behind the EU taxonomy and currently rather busy advising on green definition work in taxonomies globally, including in places like China, Latin America, and the EU, obviously. Sean is a fantastic proponent of green finance and an energy source on his own, so it's too bad that we can't just plug into you, but thank you for joining us today.
Sean Kidney:
Thanks, Anna-Marie, that was a very generous introduction. It's
a joy and a privilege to be speaking to you again on this topic
that you and I have been nattering about for some time now, which
is the growth of sustainable finance and the growth of capital
allocated to climate solutions, which is of course my area of
focus, and the organization I work with, Common Bonds Initiative,
advises everyone from sovereign bond issuers to governments to
corporations, and perhaps most importantly investors, major
investors around the world. We've got something like 34
trillion represented on our standards board, for example, about how
to take this agenda forward. It's a lot of fun.
Anna-Marie Slot:
And what's the biggest shift that you've been seeing? As
you mentioned, we've been talking about this for a while, but I
feel like there's been a huge shift over the last two years, 18
months. What are you seeing?
Sean Kidney:
Well, I think the biggest shift that's palpable already is the
investor enthusiasm for the transparency and visibility of the use
of proceeds bond. I mean, we've seen green bonds grow like a
rocket, currently about a trillion dollars outstanding. We've
seen this year the growth of social bonds and sustainability bonds,
and even pandemic bonds using the same principle, the daughters of
green bonds, if you like, which is around transparency of the
allocation of proceeds, and then reporting on the allocation of
those proceeds on an annual basis. This has been very interesting.
I've had major investors come up to me now and say that when it
comes down to sovereign bonds for emerging markets, they've now
got a strong bias for use of proceeds formats because they really
like the increased visibility and transparency around it. And I
think that's a critical part of it.
Sean Kidney:
And of course, that is linked to the whole enthusiasm for doing
something on climate. One of the things the green bonds market has
done has shown that you can get a return and support the planet at
the same time. It's a proof now. That's the whole point of
this market. To the extent that green bonds now buy issuers that
are taking action on climate change are generally seen as lower
risk than other kinds of bonds, lower risk of policy action
affecting the cash flows of those bonds. And you see that
differential occurring in pricing benefits. So in US dollars and
euros, you now see definitive pricing benefit for the green format,
the bond, even when it's a standard treasury bond. So that
enthusiasm on the part of investors tied to the understanding that
they can actually have a profitable investment when it comes to the
green format.
Sean Kidney:
And remember that bond investors are primarily defensive, that is,
they don't want to lose their money. Larry Fink famously said
he made money by not giving people yield, but we're making sure
they never lost their money. So green bonds have some very
interesting characteristics, which is fuelling this enthusiasm. In
downturns they hold their value. They even maintained liquidity
levels in March when other bonds were frozen. And if you look at
the price performance of green bonds of the time, there's
definitely an attractive story to be told there, which means a lot
of investors are coming in which are not even interested in the
green aspects. They're interested in the capital retention
aspects of it. And that's been interesting. That is very much
the development of the last 18 months.
Anna-Marie Slot:
So the greenium, I love that phrase, the greenium, which is a far
cry from what we were talking about back in 2014, which was so
expensive to issue, so it's good to see that evolving in the
market as well as that investor stickiness and integrity.
You're super involved in working with regulators and driving
the frameworks around building the green finance market. What do
you think is one specific action that needs to be taken over the
next two to three years? And more importantly, who do you think
needs to take that to really embed this shift?
Sean Kidney:
The key reason why this market is working is because of a growing
appreciation of risk. A big chunk of that is negative risk. The
risk of it being impacted by climate impacts, by policy changes and
whatever. And that's fuelling the central bank conversation.
Mark Carney's tragedy of the horizon speech and so on. So we
now have this whole idea that we need to be looking at a risk
premium on investments that are likely to be affected by policy
changes, and against that, or rather attached to that is
there's a risk benefit in looking at investments that are less
likely to be effected by policy changes. The work we're doing
in taxonomy in Europe and in many other countries on the green
definitions is fundamentally important because it identifies a pool
of investments that are less likely to be impacted by policy,
because they are future-proof when it comes to the climate agenda,
if you like. And that's becoming real now.
Sean Kidney:
If I was to ask for a change, I would say an appreciation of
economies at a government level of that risk. We're beginning
to get it, but not enough. Investors get it. Banks get it. Central
banks get it. But governments are still not looking at the
extraordinary risks they face going forward. We've got a tingle
of an idea as a result of this last year. The pandemic can be seen
as a climate incident in the sense that pandemics as a result of
pathogens jumping between species and as a result of the degraded
environments, which is what this pandemic is about, have been
predicted by the Intergovernmental Panel on Climate Change, the
IPCC, for 30 years now. They've been saying we will face a 21st
century of pandemics, which is consistent with past climate changes
that we've seen.
Sean Kidney:
And Pavan Sukhdev, the current chair of the WWF, talks about this
is the fifth pandemic of the 21st century and the one that got
away. We managed to keep a lead on pandemics like MERS and SARS
that didn't get away. We're going to get more of this.
We're going to get many more climate shocks. When of course you
begin to appreciate the extent to which these kinds of shocks will
have a negative impact in the economy, it really increases your
interest in heading off those kinds of shocks. Well, we're
still in that process at the moment. In Europe and the US and Latin
America and India, we are in the middle of dealing of the fire,
trying to put out the fire. But as we come out of this crisis, we
need to be excruciatingly aware of how to reduce the likelihood of
shocks going forward. `And frankly, that's addressing
climate.
Sean Kidney:
If we can hold to the IPCCs 2030 targets of 55% carbon emissions by
2030, or [inaudible 00:07:31], which is what the EU has now
adopted, but that's got to be a global average, then we can
substantially reduce, not head off entirely, but substantially
reduce the risks of all sorts of climate related shocks, including
pandemics going forward. If we don't make that target, we
consign ourselves to a world of extraordinary volatility. Weather
volatility, and every other kind of volatility you can imagine. So
if you're looking forward as a leader of a country,
understanding the extent of this risk... At the moment we're
effectively getting into airplanes that have a 50% chance of a
major crash post 2030. That's the extent of the risk involved
in the IPCC forecasts.
Sean Kidney:
If we can substantially dramatically reduce those risks, we can
maintain livelihoods, sustainability of incomes, and development
pathways. If we don't address those, we give those away. To
answer your question, if I want someone to do something now, I
want, at a government level, an appreciation of the extraordinary
economic, social, and ecosystem risks that we're taking now,
and therefore, as a result of that, a heightened urgency to do
something about it and mitigate those risks, which is what
investors are now doing. They're already in that place.
Anna-Marie Slot:
You'd like the politicians and the government to be long-term
and focused. It's an interesting ask. It's an interesting
ask. So other than your tireless work across the globe on taxonomy
and trying to explain to people why doing something today is better
than doing something tomorrow, do you have on your own any personal
commitments since January? Resolution time. Do you have any
personal commitments to net zero?
Sean Kidney:
Well, let me say that we are making progress on that. Note that the
major government target change from 2019 has been that all the
major economies of the world, and soon to be the US, so I'm
sort of counting that in according to Biden administration
announcements, or incoming administration announcements, were
committed to 2050 net zero targets. We've seen Europe,
we've seen the UK, of course, Japan, Korea. China's
committed to 2060 net carbon neutrality. And so on. This is an
extraordinary change in the space of 12 months. Now, there are
direct implications for that, because the trajectory of achieving
that change is very, very clear, as laid out by the IEA, the IPCC,
and many other bodies. It requires dramatic cuts by 2030.
Sean Kidney:
Most of these countries are still figuring out how to do it, but
the point is, they are now saying these are serious targets. They
were not saying that at the end of 2019. So this change is
beginning to happen. And now we've got to look at the whole
issue of how we transition our economies to being low carbon and
climate resilient. And I say climate resilient because there's
an adaptation and resilience agenda as well. But with prime
minister Suga's announcement in Japan, and his maiden speech to
the parliament, so Diet, was fantastic, committing Japan to 2050
net zero carbon, and all the other countries that had come behind
them, and of course behind Europe in all this. Let's not
dismiss that.
Sean Kidney:
What we now have is a clear message to corporations, investors, and
central banks for that matter, that this is happening. No one is
sure about how it's going to happen. I can tell you if it's
the taxonomy, it's lower risk of being affected by that change,
but it is going to happen. Every major investor I speak to in the
world now believes this is a certainty. It's only a matter of
when, not if. So that is a big change. We are winning on that
front. In terms of my own role. Look, you've heard what I'm
trying to do. My goal is, by the end of this year, to have the
leaders of Europe, China, and the US with, I guess, the leaders of
Japan and the UK standing beside them, but the three biggest
economic blocks, saying very clearly, we are fully committed
together to 2050 targets, and then by implication 2030 targets. And
the rest of the world, frankly, will freak, because that has
implications in every sector of the economy. And that's
what's going to happen by the way. Everyone has to start
looking at what they're doing.
Sean Kidney:
So I think that's something we will achieve this year, and I
think it is something that is incredibly important to the change
and more important, the rapidity of the change we have to make to
our global economy going forward. My simple target will be to
massively increase green bond issuance. That's just a numerical
milestone. We're about at trillion dollars outstanding now. I
want to get to a trillion dollars a year issuance as quickly as
possible. It's probably going to take me two years, take us two
years now, rather than one year, but we're going to get there
fast. Remember the European commission alone has committed to
issuing $250 billion of green bonds in the next 18 to 24 months,
let alone all the other people that are now coming to the party
here. So it's going to be a crazy, wild, and fun ride.
Anna-Marie Slot:
That it is. And I think also in the green finance space, broadening
out who is doing those issuances is going to be key to that
growth.
Sean Kidney:
And we're going to see a lot of new actors and new industries
coming in, including high carbon companies, oil and gas companies
issuing green bonds. Total issues one a couple of months ago. We
welcomed that. Thrilled at that. To finance SunPower solar in the
US. We're going to see a lot more of this. I didn't answer
a specific question, which is what individually I'm going to
do, because I'm going to tell you, we have been caught up in
the blame game of individual activity, which is a red herring. Most
of what we have to do are systemic changes to our economies.
It's energy systems, it's transport systems, it's urban
development planning. These are the areas of the most important
changes, which means our world changes around us and we change
within it.
Sean Kidney:
So individual action is important from a moral perspective, sure.
My fund is invested ethically, for example, my pension fund and so
on, and I try and minimize my footprint. But look, don't kid
yourself. It's not about individual shopping decisions.
It's about making sure that your government and your investors
act with alacrity at scale. That's what we have to do. So
let's keep an eye on the prize here. Let's not try and
befuddle ourselves with blaming other people for individual
actions. The system will change around us. In 10 years' time,
no one will have to think about clean energy, because all energy
will be clean. No one would have to think about the transport
mechanisms, because all transport will be electric or hydrogen.
This is the change we need to make.
Anna-Marie Slot:
It's an interesting point, the personal versus the collective,
because you can't get away from the personal, because then you
get into a place where you do get to the blame game and people are
saying, "Well, it wasn't my responsibility to do
that." So you do have the personal as an intrinsic part of any
kind of collective action, I do think.
Sean Kidney:
Let's be clear. It's the role of the systems that we
operate in. As you know, the bulk of the world emissions for last
hundred years have come from about a dozen companies. It's not
necessarily from individuals doing things. It's those companies
maintaining their existing assets and sweating their equity, if you
like, rather than leading the change. Let's look at the
systemic issues is what we got to do. Don't get me wrong.
There'll be us individuals who will push for the change, but I
don't want people to be fooled by an American individualism, if
I may call it that. This idea that it just takes individual action
to change the world. That is bullshit. What it takes is systemic
change on the part of large institutions and governments.
That's what we need now.
Sean Kidney:
It's like a war situation. We need to have our large
institutions reorganize the means of production quickly, rapidly
within 10 years. So buying a different kind of food at the
supermarket is useful in terms of your own sense of understanding
what you're doing, but is not actually achieving change. Making
sure that the leaders in government or in other institutions are
acting of alacrity is what counts here. So let's all become
activists for climate. Let's all be conscious of the risks to
our lives, our societies, our children of not acting, which are
really severe. Unbelievably severe. And act accordingly with the
systems we have got that have given us so much wealth and so much
stuff, if you like, everything from cars to health systems to
education systems, and let's make sure we shift those onto a
sustainable footing. And then we can have a world that we can all
participate in. A shared and inclusive economy.
Sean Kidney:
And by the way, while we're at it, let's have a really
close look at that word inclusive. We've learned something
really hard in the pandemic, which is that if people don't have
access to healthcare, don't have access to income support, when
they're ill and trying to make a living, then they will find
themselves continuing to work despite being ill. And the pandemic
will rage as result. To make sure that we all have a chance to
survive in the next pandemic, and it will come, I can assure you.
We need to make sure healthcare for all exists. We need to make
sure that income support for all is available in a crisis. We need
to make sure the businesses can be supported through these crises
of transition. These become necessary minimal steps for the
purposes of creating a sustainable society. That's the area we
need to focus. Apologies for my rant.
Anna-Marie Slot:
No, that's fine. So I think the takeaways from this
conversation for people, as they're setting their resolutions
for the year, are to sit down and look at your strategy, to start
using the taxonomy and other tools that are out there to accurately
assess risk and risks that have previously been ignored or treated
as a non-event. So as you said, systemic risk, risk to climate,
risk from pandemics, those kinds of shocks to the economic system.
So sit down with your strategy and with the mind that these things
can change. And that underlying framework that you build your
strategy within is in fact, something that could shift.
Sean Kidney:
Look, we've done something interesting in 2020. We have learned
that volatility happens. We kind of forgot in 2008. And the story
that the scientists are telling us is that the volatility is now
the new norm, and we have to continue to plan for that volatility.
It is clear what the trajectory of change is. There is now no doubt
that governments will and are acting on climate. I mean, the reason
why solar is so cheap in the US, in India, in the UAE now, it's
cheaper than gas and cheaper than coal, is because of state action
by Germany in 2001, bringing the feed-in tariff, and then state
action by China with massive procurement of solar and wind in the
last 15 years. That has driven on the price. So that's an
example of state action.
Sean Kidney:
Well, we're beginning to see the same thing happen related to
vehicles, especially in China, which is dramatically driving down
the price of all the parts, batteries, and so on. And electric
vehicles in a couple of years, time will be cheaper on a capex
basis than ordinary cars, and they're already cheaper on an
opex basis. So you've got these changes that are coming
through, and we've got to stay ahead of them. There is no doubt
that they're going to happen, it's only a question of
picking specific winners within the pool of change and making sure
that you are biasing towards the future, away from the past. And
that's the interesting thing for all of us, including work, by
the way.
Sean Kidney:
I've got daughters looking at jobs, I'm saying to them,
"These are the kinds of areas of work that are going to go
into grow, and these are the kinds of areas of work that aren't
going to grow." It affects us on all levels. Change is
a-coming, and it will be change, that if we're on the right
side of the wave, will have incredible opportunity for all sorts of
folks. The simple litmus test to look at a sandpit to play on is
the taxonomy, which is way more than clean energy. It's way
more than transport and property. It's also industrial changes,
what the future of the steel industry is like, what the future of
shipping is like and aviation. It's across the board. Start
looking and start looking for business opportunities in those
areas. I can tell you that's what investors are doing.
Anna-Marie Slot:
Excellent, Sean. So keep your head up, keep looking for change,
looking for opportunities from the structural changes that are
happening. I think that's a fantastic takeaway for our
listeners and I really appreciate your time today and your insights
and wish you all the best to achieve getting those major economies
to the table by the end of this year. I'm looking forward.
I'm going to hold you to that.
Sean Kidney:
Thanks Anna-Marie. And thank you for the work you're doing at
Ashurst in terms of promoting and pushing this agenda and alerting
your clients of the opportunities here. It's really fantastic.
Thanks for the opportunity to speak today.
Anna-Marie Slot:
Thank you for listening to this podcast. We hope you found it
worthwhile. To learn more about the issues we've just covered,
please visit ashurst.com/podcasts. This 30 for Net Zero 30 episode
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