"We are looking for investment grade returns that also address climate change," says Michelle Cunningham, CalSTRS director of fixed income. "We challenge industry and government to provide the investment opportunities we need to both deliver secure pensions for our members and address the long-term systemic threat of climate change to investment values."
The Standard was developed by the Climate Bond Board, which consists of large pension funds such as the California State Teachers' Retirement System, (CalSTRS), investor groups such as the Ceres Investor Network on Climate Risk, governments like the California State Treasurers' Office, and nonprofits such as the Natural Resources Defense Council.
The Climate Bonds Initiative is also developing government policies which support rapid scaling of green investments, such as regulatory mechanisms, tax policies and green banks. And it's developing models to make projects and assets attractive for bond financing, such as renewable energy, energy efficiency and forestry.
State Street's Green Bond
In October, State Street Global Advisors, one of the world's largest fixed income managers, began offering its High Quality Green Bond strategy, which allows institutional investors to hold separate accounts that invest in fixed income green bonds.
The move followed that of Nikko Asset Management of Japan, which raised $640 million for its Nikko AM World Bank Green Fund, the first fund dedicated to investing in green bonds issued by the World Bank.
In the last three years, the green bond market has begun to open, led by multinational development banks and other supranational organizations, like the World Bank and the European Investment Bank. They now issue low-risk triple A-rated bonds, yielding double the rates of U.S. Treasury bonds.
So far, the largest issuers of green bonds are the World Bank at $3.3 billion, the European Investment Bank at $1.8 billion, and the Asian Development Bank with $897 million. About $12 billion has been issued to date.
The US issued its first green bond in 2007, but most of the funds in the The Qualified Energy Conservation Bond program remain unspent. Of the $3.2 billion available, only $550 million has been spent, leaving $2.7 billion for efficiency, green building and clean energy projects. A move is underway to make these funds available.
Given the volatility of financial markets, bonds are a lower-risk option, but until now there have been few investment-grade green bond choices, and most of those were small and lacked liquidity, keeping institutional investors away.
State Street's strategy offers investors a way to scale green fixed income investing, which will likely drive better pricing and facilitate greater liquidity due to aggregate buying power.
The company hopes to create a fund that can accommodate smaller investors or those investors that prefer a commingled structure.
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Climate Bonds Initiative
Green Bond Bankers in Japan, Sweden Beat U.S. to $7 Billion
