investment viewpoints

Making investment work for a cleaner planet

Making investment work for a cleaner planet

Climate change represents an unparalleled challenge and it demands a global response. Impact bonds can help meet this challenge by generating important positive environmental and social externalities as part of a liquid portfolio.    

LO Funds Global Climate Bond was launched in March 2017, as a result of a strategic partnership between Lombard Odier Investment Managers (LOIM) and Affirmative Investment Management (AIM). The primary purpose of the fund is to match investor capital with projects that combat climate change, generally either through adaptation or mitigation.

The latest LO Funds Global Climate Bond Impact Report details how investors have supported efforts to mitigate climate change and promote resilience to its effects. In 2018, the fund supported more than 900 projects and initiatives that helped avoid 70,085 tonnes of greenhouse gases (annualized).

The potential investment universe has continued to grow, offering us a greater array of projects and initiatives to support worldwide. There were 204 new issuers, bringing the total to 625, from 44 countries. New sovereign issuers appeared on the scene, including Indonesia, Belgium and Lithuania.

Assessing potential investments involves verifying whether they are aligned with our purpose to support the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement. The fund now supports all 17 of the SDGs, which aim to eradicate poverty, fight inequality, and tackle climate change. The UN estimates that achieving the goals could create up to $12 trillion in market opportunities in sectors such as food and agriculture, transportation, energy, natural resource management, and health.

In order to reach the broader goals of the Paris Agreement, countries would need to dramatically accelerate the transition toward clean energy. Clean energy could achieve 90% of the energy-related CO emission reductions required under the agreement. Energy remains the most significant sector supported by the fund and accounts for around 33% of investment. The fund predominantly supported energy generation projects in 2018, but also facilitated crucial infrastructure projects such as upgrades to transmission networks.

Responses to climate change broadly fall into two areas – mitigation and adaptation.  For example, investment in renewable energy generation would typically fall into the former category. However, one of the key highlights of 2018 was the increased weighting towards climate adaptation projects in the portfolio. Whereas mitigation efforts are concentrated on reducing greenhouse gases (GHGs), adaptation efforts are a direct response to the effects of climate change. In 2018, 14% of the portfolio was given over to adaptation-focussed activities, up from 8% in 2017.

One of the adaptation projects the portfolio supported in 2018 reflects the risk climate change presents to food security. According to the World Bank, agriculture and food is especially vulnerable to the kind of extreme weather patterns associated with climate change, and the sector accounts for 65% of the world’s poorest workers. This vulnerability means that building in resilience to climate risks and environmental hazards is imperative.

The project in question was based in Fujian, which is close to the source of typhoons that frequent the south-eastern coast of China. Through an International Bank of Reconstruction and Development Green Bond, the fund backed a series of adaptation projects, including an upgrade of emergency response systems. Around 11,000 fishers and their families –approximately 64,000 people – benefit from increased warning and protection against extreme weather events.

Other projects and initiatives supported by the portfolio include a metro project in the Indian state of Jaipur, a green new building in Norway’s Halden municipality, and a green office complex in the densely-populated Parisian outskirts. A water management project in Bahrain helped address the kingdom’s pressing issues with groundwater scarcity and irregular rainfall. 

Investors are increasingly interested in the opportunity to both make a material difference to the environment and grow their investments in a sustainable fashion. In response to this growing demand, we have established a diversified bond portfolio that seeks to create a positive impact, while aiming to provide both a higher yield and lower turnover than a typical investment grade portfolio.

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