2011 turned out to be a year which proved most economists and market forecasters wrong. The world economy was going to recover and the stock market would gain the most, while defensive assets like bonds and gold would suffer. Guess what, the recovery stalled, sovereign debt issues clouded the economic outlook, bonds and gold continued to benefit from safe haven status while stocks went nowhere at best, or lost, depending on geography and industry sector. The chart below shows gold edging other asset classes by gaining 10.14% for the year, despite retreating some 20% from the new all-time highs it set in September.

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by Rona Fried, Ph.D., Contributing Editor

Over the past two years, The Climate Bonds Initiative has been creating a new class of bonds that can finance a rapid transition globally to a low-carbon economy.

"Bonds have allowed us to finance the building of Europe's sewer systems, the growth of America's highway system, and the financing of two World Wars. We can now use Climate Bonds to finance the quick, global transition required to head off runaway climate change," explains James Cameron, Vice Chair of Climate Change Capital.

"Putting the emphasis on private financing allows a different perspective. In place of always talking about the ‘costs' of climate change, we can talk instead about investment opportunities," notes Nick Robins, HSBC Climate Change Centre of Excellence. "The transition to a low-carbon economy presents capital with what is likely to become the largest commercial opportunity of our time: investing in clean energy and low carbon infrastructure," he adds.

Most of the bonds will be bought by institutional investors, but there are plans to make them available to retail investors too.

The Climate Bonds Initiative, which was initiated by the International Network for Sustainable Financial Markets, an international think tank, now operates as part of the investor-led Carbon Disclosure Project.

According to the International Energy Authority, about a trillion dollars a year through 2050 must be pumped into low-carbon industries to avert catastrophic climate change and to fund adaptation. A large portion of that money will have to come from bond markets.

That may sound like a lot of money, but the mainstream bond market is quite large: more than $6 trillion in new bonds were issued in 2010 alone and funds under management reached $105 trillion.

Just 1% of those funds under management need to be redirected toward building a low carbon economy. In the past two years, the nascent green/climate bond market grew from $1 billion to $5 billion outstanding, with about $12 billion issued.

Growing this "green debt" market will provide institutional investors with opportunities to switch from carbon intensive to low-carbon investments both to mitigate climate change (renewable energy installations, new technologies that reduce greenhouse gas emissions, reforestation) and adapt to its consequences (watershed management, flood protection, disaster risk reduction).

New Carbon Bond Standard Released

How can investors and governments judge which bonds will help the most to mitigate climate change or help people adapt? Which ones should they prioritize? It's important to guide investors to the most vital investments - those bonds that make the most difference - and that's what the prototype Climate Bond Standard does.

How can investors and governments judge which bonds will help the most to mitigate climate change or help people adapt? Which ones should they prioritize?

It's important to guide investors to the most vital investments - those bonds that make the most difference - and that's what the prototype Climate Bond Standard does.

Released in late November, the Standard certifies Climate Bonds using strict criteria, starting with bonds that are currently on the market. It begins with eligible wind projects, and will expand to solar and other renewable energy projects over the coming months.

The Standard assures that funds raised using a Climate Bond are used in ways consistent with delivering a low-carbon economy, and can include projects or assets that directly contribute to:

• Developing low-carbon industries, technologies and practices that achieve the level of resource efficiency necessary to avoid global temperature rise over 2 degrees Centigrade
• Essential adaptation to the consequences of climate change.

For the next six months, certification will proceed using the prototype Standard, while incorporating any necessary changes to the Standard that arise. After that, the Standard will be final. To apply for certification, bond issuers will pay one-tenth of a basis point of the bond's value, and will also pay a licensed third party to verify the bond complies with the Standard.

"The transition to a low-carbon economy requires a wide range of energy and infrastructure investments," says Jack Ehnes, CalSTRS CEO. "We are concerned that the investments being made are the right ones. Climate Bonds Standards will provide a simple tool for investors to screen the opportunities that come before them."

"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 in March announced that it had raised $640 million for its Nikko AM World Bank Green Funds, 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 rates comparable with U.S. Treasury bonds.

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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Rona Fried, Ph.D. is CEO of SustainableBusiness.com, which published Progressive Investor for eight years before merging with The Green Investor in November 2010.

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The majority of market forecasts for 2011 were off the mark by significant margins, most erring in their optimism for the global economic recovery and a booming stock market. As a result, prognosticators are much more subdued this time around, generally anticipating slower growth in the U.S., despite recent leading indicators perking up, and most see a continuing recession for the Eurozone.

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The reason we maintain a portfolio of about two dozen stocks is to provide ample diversification amongst sectors, geographies and companies. The five Top Picks for 2012 listed below are not sufficient for diversification but they represent our best "starter stocks" for new subscribers establishing green positions, or for those of us who have been waiting on the sidelines. Well, wait no more, as these are five outstanding companies with superb positions in their respective fields and which, in our analysis, present the best equity appreciation opportunities in the coming year. They should be part of every green portfolio. For more detailed information for each of the stocks, read the complete recommendation in the newsletter issue of the date recommended. In no particular order, here are The Green Investor‘s Top Picks for 2012.

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