An agenda for change, by Nick Silver, Managing Director, Climate Bonds Initiative

Jay Owen Green Prosperity

To avoid dangerous climate change will require the equivalent of another industrial revolution. This can only be achieved if finance into the green economy is increased by an order of magnitude. This may be possible as many low carbon technologies are competitive with fossil fuel if the cost of finance is low enough.

Below are 10 tweaks based on the premise that if financing the green economy becomes attractive for actors within the financial system, in particular banks, investment banks and the shadow banking system, then these actors will aggressively promote investment into this sector.

If the capital requirement for green economy assets is made lower than for other sectors, lending by banks into this sector becomes more profitable than other sectors.

All of the “tweaks” sit within the existing institutional framework of capital markets and so only require relatively minor changes in legislation in a few jurisdictions.

  1. Green mortgages and loans: These are mortgages against real estate with very high energy efficiency specifications, or loans into low carbon economy. The tweak is to reduce the risk-weighting of green mortgage backed securities either through Basel III or through credit risk definition defined by the European Parliament. This is supported by evidence that these are indeed less risky than conventional mortgages[1].
  2. Green securitisation: These are securities backed by green economy assets. Facilitate the growth of this market through favourable legislation and providing first loss provision or mezzanine finance for qualifying investments.
  3. Covered bonds: These are an existing instrument issued by a bank with an underlying portfolio of assets, with low capital requirements for the issuing banks. The tweak is to allow clean energy lending to be an allowed category within the existing covered bonds market.
  4. Green monoline: Credit ratings can be enhanced by government guarantee, making clean energy infrastructure or asset backed securities allowable under Tier 1 capital. A green monoline would be a government (or multi-government) supported enterprise that insured green securities.
  5. Tax benefits: Investment into clean technologies would benefit from favourable tax treatment, which is economically justifiable due to the positive externalities generated. Favourable tax treatment could be introduced for R&D, green pension investments, VC funds, green real estate investment trusts and green muni-bonds.
  6. Basel III: currently Basel III introduces adverse incentives for long-term investment. This should be removed for clean energy investment, and all proposed regulations should be assessed for their potential impact on the rapid transition to a low carbon – and thus more sustainable –economy .
  7. Government guarantees: Credit ratings can be enhanced by government guarantee, making green corporate or municipal securities allowable under Tier 1 capital.
  8. Green development banks: existing development banks need to become green banks that deliver government policy towards a low carbon economy. At a minimum they should not be investing in coal of any sort. That’s beginning to happen with recent moves by the EIB and the World Bank.
  9. Introduce a policy risk insurance facility for clean energy: some clean energy requires policy support, which in itself introduces risk that this will be removed. Regional or national facilities can be set up to insure this risk and hence de-risk these investments.
  10. Quantitative easing: direct quantitative easing into green infrastructure bonds would support urgently needed investment.

All of the instruments need to be supported by green standards so that investment is targeted at solutions that governments and investors can be confident will address climate change.


[1] An easier tweak would be to widely publicise this evidence.