Investors Can’t Diversify Away from Climate Risk

With the U.S. role in the Paris Climate Agreement hanging in the balance, over 280 investors managing a collective $17 trillion in assets spoke up in support of the agreement:

As long-term institutional investors, we believe that the mitigation of climate change is essential for the safeguarding of our investments. . . . . We urge all nations to stand by their commitments to the agreement.

Why do investors care?  As pointed out in a blog earlier this year, for investors, it all comes down to risk and return. And, where climate change is concerned, this is a risk that is omnipresent.

Simply put, investors cannot diversify away from the risks of climate change. Unlike other risks such as currency fluctuations or new regulations, the disruptive impacts of climate change on the global economic system are so pervasive they cannot be offset by simply shifting stock portfolios from one industry to another.

A study from Cambridge University found equity portfolios face losses of up to 45% from climate shocks, with only half of these losses being “hedgeable.” Likewise, The Economist Intelligence Unit estimates that investors are at risk of losing $4.2 trillion by 2100, with losses accruing across sectors from real estate to telecom and manufacturing.

Because investors recognize that climate risk is unavoidable, they support a coordinated global effort as envisioned in the Paris Agreement. It is also why investors have already expressed such strong support for regulatory limits on carbon and methane emissions.  Governments globally will need to take further proactive action to limit greenhouse gases, and incentivize technology shifts towards lower-carbon energy.

Seizing opportunities in a low-carbon economy

Technology changes will require significant adjustments in how global capital is allocated, which is an opportunity investors are eager to seize because of the promise of risk-adjusted returns in the space.

It is estimated that a shift to a clean-energy economy will require $93 trillion in new investments between 2015 and 2030 and the rise of impact investing shows markets are starting to respond to opportunities in renewable energy, grid modernization, and energy efficiency among others.

For example, the green bond market has grown from $11 billion to $81 billion between 2011 and 2016 with projections for 2017 as high as $150 billion. On top of this, leading global investment banks have already pledged billions towards sustainable investing.

And where capital flows, so do jobs.

As we’re seeing in the US, renewable energy jobs grew at a compound annual growth rate of nearly 6% between 2012 and 2015 and the solar industry is creating jobs 12 times faster than the rest of the economy.  Similarly, the methane mitigation industry is putting Americans and Canadians to work limiting highly potent emissions from oil and gas development.

Technology and capital changes are already happening, but are unlikely to happen quickly enough on their own.  Government policies and frameworks that speed this transition, like a price on carbon, will be critical.

Which brings us back to the importance of the Paris Agreement…

The Paris Agreement is crucial to addressing climate change

Investors vote with their dollars, and are strongly backing U.S. participation in the Paris Agreement. Global investors understand the risk of climate change and see the Paris Agreement as a good return on investment, with an optimistic $17 trillion nod to the power of capital markets to provide the innovation and jobs we need if the right policies are in place. The U.S. administration should ensure it is considering the voice of investors and the capital they stand ready to put to use as it makes its decision.

Spurring investment in environmental solutions starts here

As the Stanford Social Innovation Review (SSIR) blog series “Mission Possible: How Foundations Are Shaping the Future of Impact Investing” rightly states, there are increasingly innovative ways for philanthropic money to play a more strategic role in capital markets to advance social and environmental progress.

Like the thoughtful foundation leaders contributing their perspectives to this series, we at Environmental Defense Fund (EDF) continue to evaluate, evolve and articulate our own sustainable finance strategies. And, over the past several years, we have become ever more convinced that leveraging the power of financial markets is core to delivering on the ambitious goals we laid out in our Blueprint 2020 strategic plan. This is because we know that the amount of philanthropic and public sector resources deployed to addressing our key issues is a small fraction of the total capital needed. We, therefore, must tap into the influence, expertise and capital of the private sector and the financial markets that direct those capital flows to be successful in our efforts.

EDF is a proven leader within the environmental community in working with the financial sector to drive progress on key issues. Over the past several years, EDF initiatives have raised the bar for environmental management across the private equity (PE) industry through pioneering partnerships with KKR, Carlyle, and Oak Hill Capital, delivered healthier air to millions of New York City residents by empowering building owners and operators to invest in nearly 6,000 heating oil conversions through NYC Clean Heat, and accelerated the transition to sustainable fisheries management by providing loans totaling over $4.2 million to support California Fisheries Fund borrowers.

Building on this successful track record, we are now introducing a robust three-part sustainable finance strategy that complements the amazing work of foundations profiled in the series:

EDF’s Sustainable Finance Strategy:

  1. Getting the rules right We are working to advance policies and practices that improve transparency, reduce risks, and create clear incentives and price signals in order to design more efficient and effective markets for environmental investment opportunities.
  2. Making engagement and investment easier To spur new investment in environmental solutions, we must lower barriers and transaction costs. We are creating and promoting tools and resources that improve information flows, standardize complex projects, and build capacity in the marketplace.
  3. Demonstrating returns Environmental investments remain below the radar for many investors. We aim to connect private capital with priority environmental opportunities by working with partners on “lighthouse” or pilot transactions that demonstrate a strong investment case, mitigate risks, and deliver returns. In the process, we are creating new investment models for others to follow and take to scale.

Keep an eye out for subsequent blogs from a range of EDF experts that will profile a few specific examples to showcase how this strategy is being put into action across EDF’s programmatic work. We look forward to collaborating with those who are working in this growing space!

With Green Bonds, Legitimacy Comes to Those Who Verify

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


Namrita KapurGreen bonds have been hailed as a key vehicle for driving clean energy investments both before and after the signing of the Paris climate agreement. And the range of organizations utilizing them continues to diversify – Apple issued its own $1.5 billion bond last month to finance energy efficiency and renewable energy projects for its operations. But as the pool of bonds issued each year grows, investors are increasingly concerned that clear standards are needed.

Through 2013, the World Bank was the primary issuer of green bonds. The simplicity of the market made it easier to verify the environmental benefits. As the market has grown, so has the need for institutionalizing transparency to validate the promised benefits.

While roughly two-thirds of global green bonds issued in 2015 received either third-party verification or second-party opinion, only two U.S. municipal offerings received any external review, casting doubts on the U.S. market’s credibility. Investors like insurance firm Allianz are concerned that many of the funds earmarked for sustainable development projects are not achieving the desired impact, and are calling for strong standards to help provide the market with increased certainty.

Bankers and investors are driving progress on transparency Read more

Green Bonds: A Year in Review

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


Green bonds were a glimmer in the eye for investors when we first reported on them two years ago, but since then these sustainability-oriented debt financing instruments have exploded onto the investment scene. In fact green bonds were held up as a key instrument to keeping warming below the global high-end target of 2°C at COP21.

career-544952_640-300x211In the past year, the market to buy these bonds — which, by design, are linked to an environmental benefit — has significantly grown and matured. Over the course of 2015, the green bond market expanded from $37 billion to $42.4 billion, with much of this growth due to diversification — both in who is issuing them and for what wider types of projects.

While expansion of this market is encouraging, its growth is much slower than most experts had originally anticipated. Early predictions for 2015 had the green bond market booming to $80 billion, or even $100 billion. Instead, numbers seem to have stagnated. What does the future hold for this market, especially in the wake of COP21? Read more

KKR Expands Its Green Portfolio by Shepherding Green Solutions

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


We’re proud to see the Green Portfolio Program, an initiative we helped kickstart in 2008 with private equity firm Kravis Kohlberg & Roberts (KKR), evolve to identify and implement more efficient practices in its portfolio companies that drive business value and reduce environmental impacts. Last week, KKR relaunched this initiative as the Green Solutions Platform (GSP), expanding its mission to include companies outside of its private equity portfolio, as well as a wider range of business and environmental benefits.

kkr_logo_13932KKR announced a shift in its investment strategy in its latest ESG report, and the relaunch of the GSP gives us a first glimpse into what that means in practice. The GSP’s scope has expanded beyond finding energy, water and waste reductions – what KKR refers to as “eco-efficiency projects” – to include portfolio company projects that can drive both top-line and environmental gains (“eco-innovation”) and companies whose core business drives a positive environmental impact (“eco-solutions”).

Much like GE with its Ecomagination product line or social enterprises focused on delivering renewable energy or clean water, the GSP’s new direction has the potential to support business activity that, by its nature, curbs climate impacts and creates value for communities and companies alike.

In just eight short years, 27 KKR portfolio companies reported that they achieved nearly $1.2 billion in avoided costs and added revenue, and avoided more than 2.3 million metric tons of greenhouse gas emissions, 27 million cubic meters of water use, and 6.3 million tons of waste through eco-efficiency efforts. We’re heartened to see an already-forward looking firm push its boundaries further in the pursuit of greater environmental gains, and look forward to seeing what innovations emerge from the Green Solutions Platform.

Inside the Climate Bonds Initiative with Sean Kidney

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

2014 has seen exciting growth in the maturing green bonds market, with clear investor demand and issuance tripling compared to 2013. However, for the market to grow to scale, this sector needs the kinds of systems and accepted standards in place that sustain the $80 trillion global debt capital markets.

Climate Bonds InitiativeI recently caught up with a key figure in the green bond movement – Sean Kidney, chief executive and co-founder of the Climate Bonds Initiative (CBI) – to discuss the current state of green debt and what it will take to scale up investments. Kidney launched CBI as a project of the Network for Sustainable Financial Markets, after a career in social marketing and strategy consulting, including working at some of the largest Australian pension funds. Here are some highlights from our conversation:

I understand that policy will play a key role in scaling the green bond marketplace. What role is CBI playing in the policy arena?

A price on carbon is critical to creating a scale, but that has proved challenging to secure in the near-term. Instead, we are largely focusing on what we call financial system policy.

First and foremost, we are advancing international standards, working to establish clear, green and robust definitions. We have a huge number of organizations involved in this, representing $34 trillion of investors, and sizeable grants from Bloomberg and the Swiss government. The type of certification system we are working to establish is critical to building and maintaining reasonable confidence in green bond “credentials”.

Our second focus is what we call policy formulation, helping governments see that ‘There’s a pot of gold over there,’ and showing them how to harvest it. Examples of this effort include a couple of papers we published in the spring. One is about what China can do to grow its green bond market and the macroeconomic reasons to do it. We also published a report for the European Commission on Financing the Future, where we articulated the role of green bonds in designing stable financial markets.

Our third effort is what we call market education; here our focus is to increase issuance. We’ve established there is investor demand, and now we need to feed it with bonds, so we travel the world working with the issuer community. We brief banks and cities on this new market, hoping to motivate them to enter it and thereby build supply.

There’s a lot of issuance coming through the system. I think we’ll see double the market this year than we saw last year without too much difficulty, but I want it to triple again because triple gets us to a magical $100 billion issuance, which has political resonance. Read more

In Its 5th Citizenship Report, KKR Reaches Beyond ESG

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

Sustainability pioneer and inspiration to many of us at EDF, Ray Anderson frequently talked about his company’s efforts to scale the seven faces of Mount Sustainability and develop a more responsible company along the way. Summiting a mountain is a good analogy for a company’s journey to improve its environmental performance. To succeed you need a plan, commitment, resources, and the ability to change direction if there are obstacles in your path.

In the case of a private equity firm like KKR & Co. L.P. – with over 56 portfolio companies participating in value creation programs linked to its environment, social and governance (ESG) strategy since 2009– the journey is more akin to traversing an entire mountain range, whose contours keep evolving as companies enter and exit their portfolio.

That changing landscape is what’s driven KKR to continue to adapt how it manages ESG challenges and opportunities. KKR’s recently-released 5th annual ESG & Citizenship Report details how these programs have continued to evolve since our initial partnership in 2008.

Our work together helped drive KKR’s Green Portfolio Program which, six years later, has added a cumulative $1.2 billion to its portfolio companies’ bottom lines while avoiding more than 2.3 million metric tons of greenhouse gases and reducing waste by 6.3 million metric tons and water use by 27 million cubic meters, according to results announced last fall.

kkr_logo_13932KKR’s latest report documents the firm’s progress in advancing ongoing efforts, including measuring and improving ESG performance at key portfolio companies, rolling out a publicly available ESG policy across its global private equity staff, contributing its expertise to the Sustainable Accounting Standards Boards’ development of ESG disclosure guidelines, bringing together sustainability professionals and other experts at its first Sustainability Summit last year, and hiring a full-time energy expert and two EDF Climate Corps fellows to help its portfolio companies more systematically adopt solutions for better energy management.

In addition, something new caught our eye. KKR plans to refocus its investment efforts through one of three lenses – responsible investing, solutions investing and impact investing.

  • Responsible investing incorporates ESG metrics and analysis into investment decisions.
  • Solutions investing refers to investments made in companies that have an intentional focus on solving a societal challenge and deliver traditional returns to investors, such as providers of reusable bulk shipping containers, developers of environmentally-responsible office buildings in Korea and microfinance groups increasing access to capital for business owners in rural and semirural India.
  • Impact investing goes beyond the other two, focusing on investments in companies that put environmental and social impacts on par or even ahead of financial impacts. KKR began advising two impact businesses in 2013 by providing technical assistance, helping the companies scale their businesses and secure additional funding. Moving forward, KKR will consider investing in such businesses.

At EDF, we believe that private capital can and must be part of the solution to our biggest environmental challenges. We’re encouraged to see major investors like KKR expand their investment strategy as the next step in this journey and eager to see the environmental and financial results it delivers.

Carlyle Sheds Light on How Sustainability Creates Value in 2015

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


On the eve of The Carlyle Group releasing its 2015 Corporate Citizenship Report, I had the chance to catch up with Jackie Roberts, Chief Sustainability Officer at Carlyle and former EDF colleague who was one of the founders of EDF’s Corporate Partnership Program. Here are highlights from our conversation:

Jackie RobertsWhat attracted you to your current role at Carlyle?

Rather than being in an arm’s-length advisory role, I now get into more of the details of implementation. I work directly to support sustainability leads in a broad range of companies, helping them prioritize among business goals, crystallize sustainability strategies and, most importantly, execute on a lot of different ideas. Also, as Carlyle is an owner of companies in many countries and industries, I have the opportunity to understand how aspects of sustainability play out differently across the globe. In short, it is a tremendous platform for influencing corporate sustainability.

What are you and Carlyle particularly proud of in this year’s report?

This is the first year that we have designed the report to align with the types of value creation we typically see, such as customer satisfaction, brand equity, operational efficiency and workplace strength. This year’s report moves beyond operational efficiencies into these other key drivers for companies.

What does Carlyle see as the value of ESG management for its business? How do you quantify that value? What form is that taking, both for Carlyle and its portfolio companies?

We have examples across these four ways that ESG management connects to value creation (customer satisfaction, brand equity, operational efficiency and workplace strength). A great example related to both customer satisfaction and brand equity comes from a portfolio company that quantified its sales increase for greener products. Their primary customers, mainly hotels, were requesting green products, so the company invested in this area, which paid off in increased sales – a clear win-win. Read more

Impact Investing: What is the Path to Scale?

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


An issue many nonprofit and for-profit groups face is how to get beyond the pilot stage and scale up efforts. This is the crux of the issue in impact investing and was the focus of the “Bringing in Big Money” panel at this year’s Skoll World Forum.

Skoll World ForumIn many areas of EDF’s work, we’ve found that the capital needed for the issues we care about – turning the corner on climate emissions, bringing fisheries under sustainable management practices, and protecting natural resources – outstrips the availability of philanthropic and public sector budgets.

On the panel, Elizabeth Littlefield, president and CEO of the Overseas Private Investment Corporation (OPIC), commented about how amused she is by how widely quotes from academia range on the amount of capital that can be accessed – from the relatively small numbers of the “derisive minimizers” to the large estimates of the “breathless maximizers.”

Rather than focusing on the absolute amounts, she looks at the leverage entities like OPIC can create through guarantees, insurance and, in some cases, direct financing itself. These efforts by OPIC and multilateral institutions have led to a dramatic shift in the ratio of public sector to private sector finance. In contrast with 20 years ago when public sector grants exceeded the amount of private investment capital, today, it is the reverse $7 of direct private investment for every $1 from the public sector.

What, then, are the keys to amplifying this trend and repeating it in other sectors? Read more

Demand Soars for Green Bonds

As noted in my last post on green bonds, there has been a recent dramatic growth in green bond issuance. Supply is responding to a burgeoning demand. Quite simply, investors are snapping up these debt instruments that are linked to an environmental benefit. Three recent transactions highlight this seemingly insatiable appetite:

blogphoto-environment-street-sign2

(Source: eProGuide)

  • Massachusetts’ sale of $350 million in green bonds in September attracted more than $1 billion in demand from retail investors and institutions. This — the state’s second green bond issuance — will fund clean water, energy efficiency, open space protection and river preservation projects.
  • The order book for the Nordic Investment Bank’s $500 million green bond issue quickly climbed to $800 million, with more than a third of investors being new to NIB. This bond will funnel proceeds to climate-friendly projects in Nordic countries, such as renewables, energy efficiency, green transportation and wastewater treatment.
  • In September, the World Bank tripled the size of its planned structured green bond to $30 million in response to investor demand, raising more than expected for climate projects, such as energy and forestry initiatives. Since its first green issuance in 2008, the World Bank reports raising more than $7 billion from 77 bonds in 17 currencies.

These data points back up the buzz I’ve heard among market players. At the recent Associated Grant Makers fossil fuel divestment panel, Sonia Kowal of Zevin Asset Management talked about the tremendous interest Zevin has seen from clients for buying green bonds. Read more