Investors have rated CICERO as the best independent review provider in the Environmental Finance Green Bond Awards. This is the second international award for CICERO Climate Finance in a month’s time, rewarding a decade of work with green bonds. Time to look back at how it all began … and forward at the development of green investments.
“Ten years ago, Christopher Flensborg from the Swedish bank SEB knocked on my door and asked for my help,” remembers Knut Alfsen, senior researcher at CICERO.
“Flensborg asked me to review a framework set up by SEB and the World Bank for the issuance of the world’s first green bond.”
Green bonds were a new product, which earmarked revenues for green projects.
“We had a group of investors that had a desire to engage in global climate change. On the other hand, we saw a shortage of government bonds. So, together with the World Bank, we developed this new product in reply to the investors’ needs,” explains Christopher Flensborg, head of climate and sustainable finance at SEB bank, on the phone from Stockholm.
“Yet we had no clue about the environmental quality of the projects that were included in the World Bank’s green bond. Therefore, we needed a quality stamp from a neutral party, a climate scientist, in order to both enlighten and reassure the investors,” Flensborg adds.
In its review, CICERO asked Flensborg and the World Bank questions they had never heard:
“Knut asked for a lifecycle analysis of the investments. He wanted to know whether we locked in future emissions, or had considered the rebound effect of our investments.”
This led to interesting discussions with the World Bank and SEB, says Alfsen:
“The long-term climate effect of the investments were my main concern. Short-term emission reductions, like improving the efficiency of coal power plants, are not sufficient to drive the transition to a low-carbon society and can even contribute to higher emissions over time. Therefore, we advised the World Bank to avoid any investments in fossil fuels.”
The first green bond by the World Bank, issued in November 2008 with a “Second Opinion” from CICERO, raised SEK 2325 billion.
“As a climate researcher, I found it exciting to develop a bottom-up approach, in dialogue with the financial sector, how they could tackle climate change. While other researchers were working with politicians, we were the first to develop this kind of climate service for the financial sector,” says Alfsen.
According to Alfsen, drafting a second opinion on a green bond is a balancing act: “You have a chance to push investors in the right direction, without being too stringent in your environmental assessment; otherwise the issuer would rather go for a traditional bond.”
“As the market evolves, we have become stricter on what gets a green stamp. Issuers are getting more ambitious too: they want the best environmental ratings.”
Ten years on, the green bond market has grown exponentially. According to Climate Bonds’ estimates, there are $694 billion of green bonds outstanding, an increase of $96 billion on last year. Still, investors’ demand is outstripping supply of green bond issuances.
With over 60 second opinions published, CICERO is a global leader in independent reviews of green bond frameworks. They work with international, institutional lenders like the World Bank, with banks, municipalities and businesses.
In reply to investor’s demand for quantification of second opinions on green bonds, CICERO developed in 2015 its “Shades of Green” method, grading bonds “light green”, “medium green” and “dark green”.
“We wanted to recognize that some investors are doing more for the environment than others and reward those that are doing more than just a standard level of green,” says Christa Clapp, head of climate finance at CICERO.
“We look beyond immediate emission reductions and check whether an investment is supporting the low-carbon infrastructure that we need by mid-century, in line with the climate science. Our simple method with colour coding got a lot of traction among investors and policy makers,” Clapp adds.
Last month, the research institute received a Green Bond Pioneer Award by non-profit Climate Bonds Initiative for being the biggest second opinion provider globally in 2016. On 11 April, investors elected CICERO as Best External Review Provider in the Environmental Finance Green Bond Awards 2017, praising CICERO’s academic and scientific approach.
The small non-profit institute from Norway built partnerships with climate science institutes in other parts of the world, through the establishment of the Expert Network on Second Opinions.
“We realized we needed to improve our regional understanding and be able to work in other languages. For example, we cooperate with Xinhua University in China because we anticipated growth in emerging markets. There is still huge potential for growth in the G20-countries too,” explains Clapp.
“I find it exciting to see how interest in low-carbon climate-resilient investments is increasing across the world. The green bond market was initiated by the financial sector itself, as a reaction to the lack of political action,” Harald Francke Lund, Clapp’s colleague, adds.
Lund recently contributed to capacity building seminars on green bonds in China, Malaysia, Mexico and Brazil, organised by the German aid agency GIZ and the World Bank.
“These investors demonstrate that there are alternatives to a fossil-fuel based society. Hopefully, this will make it easier for politicians to step up and regulate investments in polluting technologies, for example through carbon pricing,” says Lund.
Last year also saw credit rating agencies entering the green bond market.
CICERO considers this as a positive development rather than a threat to its dominant position in the review market:
“My grand vision is that the green thinking would spread to the entire bond market. Currently, we are just labelling less than one tenth of a per cent, but are not saying anything about climate risk in the rest of the bond market,” says Clapp.
Adding: “But this requires that credit agencies do a much better job at incorporating climate risk in all their ratings and secondly, that they develop their climate expertise.”
Green Bond Pioneer Flensborg sees an important role for CICERO in the green bond market, ten years on: “CICERO has the environmental intelligence and credibility to support a dialogue and provide structure for all the new actors that are entering the green bond market.”