Towards a green economy

Appropriate Mitigation Actions (NAMAs) and REDD+ (see Box 2).

Also, the different regional schemes must ensure consistency and comparability on how emissions and offsets are measured, verified and reported, and must avoid the growth of an opaque carbon derivatives market that might have harmful systemic consequences.

Under Phases I and II of the EU ETS, emissions allowances were distributed free, partly to avoid carbon leakage from industrial production relocating offshore. However, this led to windfall profits for some firms, and has been subject to gaming by heavy industry to ensure that the emissions caps were not too challenging. The consequence has been a rather low carbon price and a muted effect on emission levels themselves compared to what is deemed to be required.

However, the European system is evolving. In 2010, the European Commission worked to adopt decisions governing critical aspects of Phase III of the EU ETS for the period 2013 to 2020. These include the introduction and operation of an auctioning system for emission permits in mainstream sectors, as well as the amount and distribution of free allowances to sectors exposed to carbon leakage, i.e. competition from countries without emissions limits. There is also the prospect of revising the European emission reduction objective upwards from -20 per cent to -30 per cent by 2020, in line with the EU’s objective of avoiding dangerous climate change, which is considered to be a temperature increase of 2°C (CDC Climate Research 2010).

Green bond markets As discussed earlier in this chapter, the green bond market is growing rapidly. An increasing number of multilateral development banks are issuing these products, which are also being issued at the municipal level. There is also collaboration with the corporate sector. For example, in April 2010 the European Investment Bank (rated Moody’s: Aaa/S&P: AAA) and Daiwa Securities Group announced a € 300 million issuance of Climate Awareness Bonds to finance the bank’s future lending projects in the fields of renewable energy and energy efficiency.

Clearly, policy frameworks need to be flexible enough to support the differing ideas emerging and the scale required. If green bonds are to reach the scale required to finance a transition to a green economy, then they run the risk of endangering the AAA ratings of the multilateral development banks that issue them. These institutions can only raise so much additional debt before it could affect their credit rating, which is preciously guarded by their treasury departments. This is also true of developed countries, especially in light of recent very high deficits and consequent heavy borrowings during the financial crisis.

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Bond issues in the hundreds of millions and even low billions are within a scale that should not present fundamental problems. However, consideration of the tens or hundreds of billions of bond issues needed in the green scale-up are a different matter. This issue needs to be addressed by policy makers and regulators. To some extent, it will be mitigated by improvements in the global economy and as governments and financial institutions worldwide repair their balance sheets.

Local institutions may also need human capital support in moving to the needed scale. Given the risk taken on by bond issuers and the need to get low-cost capital flowing, the question is who is best placed to make quick and good decisions to put capital to work in green investments that earn adequate returns. To help close the “green gap”, much lower cost-of-capital debt ultimately needs to be available to the sponsors and developers of green projects. This likely means it needs to be channelled through local financial institutions in the developing countries where these projects exist. This needs to occur efficiently and with as little as possible lost in carrying costs charged by these intermediaries. Some argue for asset-backed and rated bonds to be issued directly by major project developers. This alternative may develop over time.

Listing rules and corporate ESG performance As the central marketplaces between buyers and sellers of equity securities and other assets, exchanges can – and often do – play a key role in promoting enhanced corporate ESG disclosure and performance (World Federation of Exchanges 2009).

Globally, exchanges provide approximately 50 different sustainability indices, ranging from the generalist FTSE4Good Index to the specialised Deutsche Börse’s DAXglobal® Alternative Energy index. Exchanges such as BM&FBovespa in Brazil, the Johannesburg Stock Exchange, and Bursa Malaysia also help to drive the availability of ESG information through corporate awareness raising, and integrated corporate governance guidelines.

In several markets, such as South Africa,

Malaysia and China, exchanges have worked with regulators to incorporate ESG disclosure requirements into listing rules and company law.

Exchanges that have taken such initiatives have so far had mixed results in terms of positive reinforcement from investors. In addition, companies often highlight the fact that mainstream investment analysts need to pay closer attention to ESG issues (UNEP FI and WBCSD 2010). Nevertheless, at a global level the quantity and quality of ESG disclosure by listed companies is highly variable and has significant gaps. There is growing pressure from some investors under the framework of the PRI to strengthen regulation on ESG disclosure. One