investment viewpoints

in conversation: Carolina Minio-Paluello on climate change

in conversation: Carolina Minio-Paluello on climate change
Carolina Minio-Paluello, PhD - Global Head of Solutions, Limited Partner, LOIM

Carolina Minio-Paluello, PhD

Global Head of Solutions, Limited Partner, LOIM

Which countries are leading the way in combating climate change?


The defining feature of climate change is the effects will not be limited to any one specific area on Earth. It manifests in a variety of different ways, whether through rising temperatures, reduced freshwater, or greater levels of pollution. Consequently, we are seeing a real coordinated effort by countries globally to mitigate the damage caused by greenhouse gas (GHG) emissions. 

Climate change represents an unprecedented threat to our world and it is frankly beyond the means of any one country to fight it. There is also a divergence in term of priorities, which inevitably differ on a case-by-case basis. The Netherlands, for example, is highly vulnerable to rising sea levels since 26% of the country is below sea level while 59% is at risk of flooding. This has inspired world-leading flood management interventions from the Dutch Water Authorities.    

Impact investment is not a static phenomenon and for this reason, no one country is assured of remaining at the forefront of efforts. While Europe has championed efforts to develop renewable technology, China has emerged as a key driver of growth in wind energy over the past decade. It has installed more than twice that of any other market in terms of wind power capacity in 2017, according to the Global Wind Energy Council

Progress has been gradual, but it is happening. Wind supplied a relatively small proportion of the EU’s power in 2017 - 11.6% - but new annual market records for production were set in Germany, the UK, France, Belgium, Ireland and Croatia, according to the Global Wind Energy Council

Climate change is a multi-faceted event and we are increasingly seeing countries ramp up their efforts to invest in initiatives based on their individual needs and resources. Ultimately, we are clearer on what measures will help address the threat of climate change and this has facilitated the development and availability of solutions. 


Which sectors are most affected, and is that likely to change?


We anticipate that energy will continue to be a major focus. Energy production and use is a leading cause of GHG emissions and, by our estimate, accounts for some 67% of global emissions.  Recent estimates would suggest moving to clean energy solutions could achieve 90% of the energy-related CO emission reductions required to meet the central goals of the Paris Climate Change Agreement – limiting global warming to 2 degrees Centigrade above pre-industrial levels. 

The move to cleaner energy is supported by a decline in the associated costs as efficiency improves dramatically and the technology continues to develop apace. The International Renewable Energy Agency (IRENA) expects all types of clean energy to fall within the cost range of fossil fuels by 2020 . That will continue to drive rapid uptake of cleaner solutions. In the space of nine years, for example, the total amount of clean energy produced globally has more than doubled as it is increasingly seen as a cost-effective investment choice.

However, it is vital this does not translate into complacency. Renewable energy needs to be scaled up at least six times faster than current levels for the world to meet the decarbonisation and climate mitigation goals set out in the Paris Agreement, according to the International Renewable Energy Agency (IREA). If we are to meet our international targets, energy will have to remain a key areas of focus. 


What are impact bonds and why are they gaining popularity?


Broadly speaking, impact bonds refer to those where the proceeds from the sale are used to fund specific thematic objectives. Affirmative Investment Management (AIM) specially considers impact bonds to be those with positive social and/or environmental externalities.

The first impact bond was launched in 2007 and since then we have seen this market grow by 173%, on an annualized basis.1  To us, this underscores the real demand for these products. This is important because in our view they enable an investor’s capital to work in a way that promotes a sustainable future without compromising the potential to generate returns.

There are three main types of impact bonds. Green bonds permit investment in environmental sectors and raise funds that are earmarked to projects with a positive environmental impact. Social bonds do the same for social sectors, while Sustainability bonds cover both. 

This range can be applied to a broad spectrum of initiatives that deliver a positive change. We have supported efforts to improve water efficiency in the Qinghai province through a green bond from the Asian Development Bank, just as we have supported efforts to finance microcredit through a green & sustainability bond issued by Île-de-France. 

There is a strict screening process for these bonds and we analyse all for their adherence to Environmental, Social, and Governance (ESG) principles. Issuers and issuances must meet a specific set of criteria to be eligible for the investment universe. This process considers the positive impact associated with the bond, as well as other considerations such as the credit-worthiness of the issuer and whether we can determine the proceeds are applied as expected. It is also aligned with international agreements such as the 17 UN Sustainable Development Goals, which aim to eradicate poverty, fight inequality and tackle climate change. 


How is climate change going to change the world? 


Global warming is having a profound impact on our world, which is s set to increase the frequency and ferocity of tropical storms, cause sea levels to rise, crop yields to deteriorate, and is expected to drive the migration of millions of people. The focus is often on mitigation efforts, but we also need to support adaptation initiatives. 

This represents an often-overlooked element of the debate. We believe that mitigation is a priority, but it is important to remember that climate change is no longer a possible outcome – it is already here. This means we also need to turn our attention to projects that have been designed to help us adapt to the consequences. According to the United Nations Environment Programme (UNEP), the projected costs of adaptation will be $300bn a year in 2030, compared with the $22.5bn spent by developing countries in 2014. There is a funding gap and it needs to be addressed.

More than 4000 forest communities are believed to have benefitted, annually, as a consequence, according to the 2017 Impact report.

Climate change is changing the world as we speak. Investments in both mitigation and adaptation are both necessary if we are going to mount an effective defence against climate change. 


What is the sustainability revolution and how will it affect investors? 


We believe we are already on the cusp of the next economic revolution and it centres around this idea of sustainability. It is our view that the sustainability revolution will drive risk-adjusted returns in the next five years2 and beyond and it is already causing us to rethink how we approach every sector and every region.

This is a not a new concept but it is one which is gaining serious momentum and proving to be a significant driver of growth, at a pace which is rendering many existing economic, social and governance models obsolete. The need to adapt is more urgent than ever before, given the sheer scale of the challenges we face.

Sustainability is no longer simply a question of choice. We believe companies which cannot or will not make the transition are going to find themselves at a significant disadvantage to those who do.

We believe companies which commit to the transition and manoeuver themselves to be at the forefront of this revolution, stand to be the best performers of tomorrow. In our view, the positive economic impact they may generate will can be reflected in their long-term results.2

Lombard Odier has partnered with Affirmative Investment Management (AIM) in order to develop a stronger investment process which prioritises ESG criteria. AIM specialises in identifying investments which support positive climate-related outcomes. AIM has developed a rigorous analytical framework that is applied to select impact bond issuers involved in the battle against climate change. 

More information on this topic and the work being supported by Lombard Odier Investment Managers and Affirmative Investment Management is available in the LO Funds – Global Climate Bond 2017 Impact report.


1 Source: Bloomberg, AIM research

2 Forecasts are not a reliable indicator of future results. There is no guarantee that these results will be achieved or that there will be a return on capital.


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