{"id":7101,"date":"2020-12-03T17:56:26","date_gmt":"2020-12-03T16:56:26","guid":{"rendered":"https:\/\/reclaimfinance.org\/site\/?p=7101"},"modified":"2023-03-03T14:40:04","modified_gmt":"2023-03-03T13:40:04","slug":"will-investors-use-their-bond-power","status":"publish","type":"post","link":"https:\/\/reclaimfinance.org\/site\/en\/2020\/12\/03\/will-investors-use-their-bond-power\/","title":{"rendered":"Will investors use their bond market power to drive climate action?"},"content":{"rendered":"

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Investors are responding to the climate emergency with one hand tied behind their backs. However, it finally looks like investors are preparing to use their full power in the bond markets as well as their power as shareholders. It is high time that climate-conscious investors stop buying bonds from companies that are not aligned with the objectives of the Paris Agreement, starting with those developing new fossil fuel projects. <\/b><\/p>\n

The Principles for Responsible Investment (PRI) have recently put a spotlight on bond investors to broaden the initiative’s influence on the largest carbon emitters. Reclaim Finance supports the PRI\u2019s call to bondholders considering the growing importance of bonds issuance as a source of financing for fossil fuel companies, including for those that are state-owned. <\/b><\/p>\n

A bondholder responsibility coming soon?<\/b><\/span><\/p>\n

Current initiatives and discussions about investors\u2019 responsibility in response to the climate crisis often focus on their role as shareholders<\/b>. As holders of assets in a company, they use the tools that are generally associated with engagement, such as filing resolutions and voting at shareholders’ meetings. However, this approach is not only very time-consuming, but up to now has resulted in insubstantial and very slow progress.<\/p>\n

To focus exclusively on shares means ignoring the much bigger leverage tool at their disposal: bonds, and in particular bond issues, which represent a critical moment for investors to influence a company’s transition process<\/b>. As Xavier Baraton, global fixed income CIO at HSBC GAM, writes<\/u><\/a>: \u201cDuring capital rounds companies and their advisers literally beg for cash. They listen to feedback, adapt strategies and make promises\u201d. This is why, he says, \u201cbonds are preferable to equities for impact investing: the primary market is easier to access.\u201d<\/p>\n

The current focus on shareholders also ignores the growing importance of corporate bond issuance in fund-raising strategies and the already significant weight of this type of asset in investors’ portfolios<\/b>. These corporate bonds currently represent approximately 41 trillion dollars (USD)<\/u><\/a>.<\/p>\n

But change is underway. The Principles for Responsible Investment (PRI) have recently called on their signatories<\/u><\/a> to mobilize their bonds<\/b> to put them at the service of the Climate Action 100+ initiative and its efforts towards influencing the largest corporate greenhouse gas emitters. The PRI intends to define more clearly the means to be used by bond investors to influence such companies.<\/p>\n

A strategic lever for climate<\/b><\/p>\n

Mobilizing bondholders could prove to be more strategic than activating traditional shareholder engagement to influence corporate behavior. Indeed, share issues are rare, whereas companies regularly issue bonds to finance their operations and develop them. More than $5 trillion<\/u> is estimated to have been granted to oil and gas companies between 2010 and 2018. As banks try to control their exposure to climate risks, bonds could represent a growing source of new money to finance fossil fuel projects at risk of becoming stranded assets.<\/b><\/p>\n

This leverage will be all the more crucial as some of the world’s largest greenhouse gas emitters have governments as their majority shareholder, making private sector shareholder engagement impossible. This is, for example, the case with Gazprom and Abu Dhabi National Oil Co, or PEMEX and Saudi Aramco, which have both recently joined the CA100+ target list.<\/p>\n

No more financing for companies that are not aligned with the Paris Agreement<\/b><\/p>\n

Banks refusing to issue bonds and investors refusing to buy bonds related to the construction of fossil fuel projects is a first step<\/b> that must be taken by any financial institution willing to contribute to the realisation of the Paris Agreement\u2019s climate objectives. But investors must also refuse to buy any bonds issued by companies that continue to develop new fossil fuel projects. Finally, we can expect investors who are members of the CA100+<\/u><\/a> or have committed to aligning their activities with a carbon neutrality objective of 2050 to go further. <\/b>In particular, they could commit to no longer buy bonds from companies that do not provide legally-binding covenants setting out independently verifiable \u00ab\u00a0net-zero\u00a0\u00bb action plans consistent with the lifetime of the bond.<\/p>\n

No bonds for a controversial coal plant in South Korea<\/b><\/p>\n

Many coal plants in operation have benefited from refinancing via the bond market in recent years.<\/b> Examples include bond issues for the power plants of an AES Chilean subsidiary (Angamos) in 2014, a PLN subsidiary (Indonesia Power) and YTL Power International in 2017, and LLPL Capital and AES Gener <\/u><\/a>in 2019.<\/p>\n

And a controversial coal plant in South Korea is shaping up to be a clear test of whether investors have a coherent climate approach in the bond market.<\/p>\n

The Samcheok project is a 2,100 megawatt (MW) coal plant planned by Pospower in Samcheok, South Korea.<\/b> Currently about 25% built, the plant is expected to be operational in 2024. As well as being incompatible with the remaining carbon budget to contain warming to 1.5\u00b0C, the project is also inconsistent with the Korean government’s new goal of achieving carbon neutrality by 2050. This project is already having trouble and can be stopped: Pospower failed to raise all the project finance before construction started and is issuing new bonds every six months to raise the remaining US$800 million it needs<\/b>. The next issuance is due in March 2021.<\/p>\n

Because of the risks<\/u><\/a> associated with the project, both for the local population and the environment and climate, we call on potential investors to state publicly that they will refrain from purchasing bonds from the Samcheok project and commit to aligning their bond purchases with their climate commitments. Our partner Korea Beyond Coal has reached out to the 30 largest asset managers in the corporate bond market and is keeping track of commitments<\/u><\/a> to not invest in the project.<\/b><\/p>\n<\/div>

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Further reading<\/span><\/b><\/p>\n