Green bonds soar past analysts’ lofty expectations

The city of Venice has often sparked howls from environmental activists because climate change is causing it to sink. Now green warriors will have another reason to watch it: this weekend Venice is hosting important G20 finance minister talks that will not only discuss crucial issues such as developing market debt and vaccinations — but how to promote a green transition around the world, and who will pay for this.

I will be moderating a conversation with the finance ministers of Argentina, Indonesia and heads of multilateral groups such as the European Bank for Reconstruction and Development, the Asian Infrastructure Investment Bank and International Energy Agency. So if anyone in the Moral Money audience has a question to lob at these luminaries, let us know at moralmoneyreply@ft.com.

The debate could be fraught. This week’s newsletter shows how “green” activity is growing in the private sector — say, with rising issuance of green bonds, investment in sustainable products and more regulatory calls for green reporting. But what is missing is proper global public sector co-ordination. As Moral Money went to press, the EU fleshed out plans around cross-border carbon taxes. But US president Joe Biden seems hostile towards this and the Chinese policy on climate change is patchy, at best. (There is rising criticism of the role of China’s AIIB, say, in coal finance.) Little wonder that some emerging market countries feel distrustful and aggrieved. Read on. — Gillian Tett

Green bond issuance exceeds high expectations

At the outset of 2021 we told you analysts were expecting a bonanza for sustainable, social and green bonds. It is safe to say they were right by a wide margin.

In fact, after just six months, more ESG-related bonds were issued than in all of 2020. And while the sector still represents a minuscule slice of the bond market overall, it is quickly gaining ground. More than 17 per cent of all the bonds issued in June were labelled as being some flavour of social, sustainable or green, according to new research from Bank of America.

The trajectory of social bonds is particularly interesting. These instruments exploded in popularity last year as companies and investors looked for ways to direct money toward pandemic-relief projects. These numbers suggest it was not a one-time phenomenon.

The fact that green bonds have simultaneously bounced back from a lull last year also shows there is room for both to thrive. The overall growth has been so striking that BoA has boosted its full-year forecast for green and social bond issuance from $750bn to $900bn.

Sustainability-linked bonds, where the borrowers are free to use the money they received however they like and are rewarded for meeting environmental, social or governance goals, have also notched some staggering numbers.

So far this year about $40bn of these bonds have come to market compared with just $9bn in 2020. BoA expects that total to reach $100bn by the end of the year. There is a long way to go before they catch up to the rest of the market — but some analysts think that day may come soon, as reported.

Sustainability-linked bonds are attractive to some ESG investors because they look at sustainability more holistically — rather than on a project by project basis.

‘Businesses recognise that it isn’t just simply about building wind farms,’ Joshua Kendall, ESG analyst at Insight Investment, told Moral Money last year. ‘It’s about ensuring that their overall strategy is more sustainability aligned.’

(Billy Nauman)

Can dirty nappies be converted into sustainable plastics?

Baby nappies stink in more ways than one. Disposable nappies are one of the least-biodegradable household products that end up in landfills. But, an Israeli start-up says it is building a production facility that will be able transform all kinds of landfill waste (including nappies) into durable thermoplastic that might be transformed into ordinary, household plastic products.

In a factory in Bergen op Zoom, a town in south-west Netherlands, Tel Aviv-based UBQ Materials has been gradually testing its recycling process. UBQ is working with McDonald’s restaurants in Brazil to make trays from recycled garbage.

“Most of Europe is drowning in waste,” Albert Douer, UBQ’s chair, told Moral Money. “What we do is we mix your heterogeneous waste and make it into a very homogeneous thermoplastic. We take your entire garbage bag, including dirty diapers,” he said, noting this does not include metals and minerals.

Companies stand to benefit because UBQ’s plastic can be funnelled into an existing plastic manufacturing process so that they don’t need to make special accommodations for the recycled materials, Douer said. 

But scaling UBQ’s waste process will take a while. The Dutch plant is not going to be finished until the end of 2022, Douer said. Creating a green version of plastic can be problematic — just ask Lego about its years-long effort. And Loop Industries, a Canadian plastics recycler, faced criticism from a short seller last year alleging that its process was a fiction. 

But with booming interest from investors and governments in “circular economy” solutions, UBQ serves as another example of the hope that the world’s waste problem can gradually be reversed. (Patrick Temple-West)

Net-zero investor group hits ‘tipping point’

Since its launch last December, the Net Zero Asset Managers initiative has been on a tear. The group, which brings together investment companies promising to decarbonise their portfolios, has grown from $9tn in assets to more than $40tn in just over six months.

As Attracta Mooney reports, this is big news for the sustainable investing industry. With nearly half of the world’s assets under management behind them, members of the alliance are confident they will be able to push companies to speed up their transition to low carbon operations.

Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, called it a “fundamental tipping point”.

However, it is not clear how exactly they will achieve this goal. One theory is that investment managers will be able to engage with companies and pressure them into cleaning up their act (like Engine No 1 is seeking to do at ExxonMobil).

But not everyone is convinced. Lara Cuvelier, sustainable investment campaigner at Reclaim Finance, said many of the recent pledges from asset managers “seem more zero action than net-zero emissions,” noting that only two of the nearly 30 asset managers it has analysed have robust policies around issues such as the phasing out of coal. (Billy Nauman)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

In recent years, fashionistas in the US and Europe have felt increasingly uneasy about the “Made in China” labels on their cotton clothes, as the problem of forced labour in Xinjiang — the region that produces 85 per cent of China’s cotton — gains more attention.

Now, it is green consumers’ turn to be nervous about whether their favourite products are tainted by human rights violations in the region. Since Xinjiang produces nearly half of the world’s polysilicon, a crucial raw material to manufacture solar panels, it may not be easy to find guilt-free solar panels in the marketplace.

The Biden administration, a champion of renewable energy, has acknowledged the issue. In June, the White House ordered a ban on imports from a silicon producer in the region, as part of wider efforts to crack down on Beijing’s repression of Muslim minorities.

But steps to unbundle Xinjiang silicon from the solar panel supply chain come with a cost. 

The price of solar silicon increased more than fourfold over the past year,according to Nikkei. As a result of the pandemic, other materials such as glass and aluminium have also become more expensive, pushing the price of solar panels significantly higher. There is a rising concern that the high cost of solar panels can slow the US’ and other nation’s efforts to green their countries.

There is no easy fix for the issue in the short term. But, in the long term, what if the US helps to develop a solar supply chain outside China, alongside its efforts to build capacity domestically? It would unleash great opportunities for ESG investors and public-private partnerships globally.

Chart of the day

According to the International Energy Agency, the world may need to burn biomass to provide as much as 20 per cent of its energy by 2050, to keep global warming below 1.5C. But, as Emiko Terazono reports, the issue is highly controversial, with many environmentalists warning that bioenergy should not be counted as green.

Grit in the oyster

The salad days of ESG investing may soon come to an end, a new report from the Edhec Business School has found.

‘We are going to the zone where the positive impact of the ESG buzz on prices is coming to the end of its cycle,’ said Abraham Lioui, professor of finance. ‘Soon we will be at the stage where the relationship between ESG and performance will be negative as it [logically] should be.’

Smart read

While the world is anxiously awaiting a global framework for ESG reporting, there is no reason companies should not start explaining their net-zero commitments in their “numbers, footnotes and other wonky disclosure” rather than just the “glossy-picture pages” of their marketing materials, writes Helen Thomas.

Recommended reading

• Who killed Liontrust’s ESG IPO? (Investors’ Chronicle)

• BlackRock brings systematic ESG multi-strategy to Europe (Ignites Europe)

• Solar industry’s ties to China’s Xinjiang region raise spectre of forced labour (Washington Post)

• EU carbon border tax will raise nearly €10bn annually (FT)

• Australian coal region emits 1.6m tonnes of methane a year, study finds (FT)

• EU launches green bond framework to help it meet climate goals (Reuters)