Can green bonds be used to battle climate change?

This article was originally published in Icelandic in Vidskiptabladid, the business weekly in Iceland.

Iceland is estimated to experience less impact from climate change as opposed to many other countries. Indirect impacts from adverse weather effects elsewhere on the planet, especially when affecting Iceland’s trading partners can, however, have a considerable impact on Iceland and Icelandic society.

Adverse weather impacts in Europe have become more frequent recently. As well as having impacts on harvests they can have a negative impact on the world’s financial systems, e.g. on productivity and return. This is because ecosystems, on which financial systems rely, have adapted to an environment which is now changing at a rapid speed.

Looking at temperature anomalies in June 2018 (see picture), it is apparent what geographical areas were impacted the most during this summer’s heat wave. This heatwave, for example, caused failed crops forcing Norwegian farmers to purchase 30 thousand hey bales from Icelandic farmers. The financial cost of the heatwave has yet to be estimated, but it can be said with fair certainty that it will be considerable.

The heatwave that Russia experienced in 2010 caused a loss of 17% of their wheat harvest (13.3 m hectares), productivity decreased by 63.5 m tonnes, and the financial impact was estimated around 1.3 billion USD. General prices of food increased by 0.9% because of this.

In 2013 another heatwave ran across Europe from June to mid-Agust. It caused major crop failure and the financial impact due to a loss in productivity was estimated at 17 billion USD. The estimated cost of drought in Texas in 2011 was around 7.6 billion USD due to failed crops.

More examples can be found on the financial impact due to climate change. In March 2014 General Mills announced its investors that poor weather conditions had negatively impacted its financial results by 3-4% and that 62 days of production had been lost. These kinds of announcements from listed companies have become more regular recently.

IPCC (The Intergovernmental Panel on Climate Change) calculated the cost (e.g. because of failed crops due to droughts) and the potential benefits (e.g. increased harvest due to more precipitation) of climate change. IPCC estimated the annual cost of climate change on states, on average, to be around 2% of GDP. In the case of Iceland, this translates to ISK 51 billion or around USD 460 m, based on 2017 figures.

Picture. Temperature anomaly in June 2018. GISTEMP Team, 2018: GISS Surface Temperature Analysis (GISTEMP). NASA Goddard Institute for Space Studies á

Most Icelandic companies operate in tight global supply chains. For Iceland, indirect impacts of climate change can, therefore, be considerable. Indirect impacts can, for example, be seen in a loss in sales to countries that are adversely impacted by climate change.

Looking at other risk factors, ocean acidification on the Icelandic fishing industry and how shrinking glaciers and other natural phenomena will impact tourism is uncertain. Increased precipitation is however estimated to have positive impacts on the Icelandic energy reserves. It is important that these factors be estimated when calculating scenarios.

One way to account for these risk factors is to see if organizations’ business models integrate climate change risks and estimate its potential costs on its operations. Another way is to consider financial products that are designed to finance companies or projects that mitigate or adapt to climate change impacts.

Financial markets’ influence on positive changes

As an indication of increased awareness of financial markets of climate change risks is the developments of the green bond markets. Issuance of green bonds is intended and conditioned to finance pre-defined projects and operations that have environmental benefits.

Barclays, ACTIAM, and Zurich invested in green bonds for around USD 4 billion in 2015, as an indication of the increased investor interests. Issuances and investments in green bonds have only increased since then.

As of the publishing of this article, the total global value of issued green bonds in 2018 has reached approximately USD 90 billion. In 2017 the total global issuance was USD 161 billion. Sovereign states, including Poland, Belgium, France, Indonesia, and Lithuania have also issued green bonds to finance environmentally friendly projects. Their total issuance has been USD 14 billion to date.

Issuance of green and sustainable bonds for underlying green and sustainable projects in Iceland could, therefore, be a good way to both increase investment options as well as being vehicles to finance interesting projects. This financing option can both support issuers’ and investors’ risk management, e.g. by fulfiling pension funds’ policies on ethical and responsible investments.

Several questions remain about the practical approach to green and sustainable bonds which we will try to answer in our next article.

Dr. Reynir Smári Atlason, co-founder of Circular Solutions

Bjarni Herrera Thorisson, CEO of Circular Solutions