Why green isn't always the new black

Wed Feb 27, 2013 12:48am EST

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(This article is an opinion piece published in IFR Asia, on February 23.)

* Kexim saves on green bond

* Asians eye growing SRI pool

* Results of carbon market not encouraging

By Jonathan Rogers

Feb 27 (IFR) - In the knowledge that green is apparently the new black, it was highly appropriate that South Korea's Kexim last week tapped hungry SRI funds with its first "green bond". The acronym stands for Socially Responsible Investment, and Kexim will be investing the proceeds from the US$500m foray in the eco-friendly projects it sponsors around the world. In the process the canny Korean policy bank managed to shave five basis points off its implied funding cost in conventional format at five years, which isn't too shabby a result on a benchmark-sized trade.

The deal also featured as bookrunner Sweden's SEB Enskilda Bank, an institution I can't recall having featured on any public offshore bond offering from Asia in the near decade I've been covering the region's debt markets. SEB's presence on the deal, unlikely though it may appear, is a reflection of Scandinavia's love of all things green and eco-friendly.

A large chunk of Scandinavia's pension fund and insurance cash sits in SRI funds, and its banks are expert at structuring products that comply with the rag-bag of global eco-friendly edicts. And if Asia - which has, to put it mildly, a patchy record on environmental awareness - gets hip to the green issue, we might well see more Scandinavian banks leading public issuance out of the region.

In fact, while Asia is home to many notoriously eco-unfriendly projects, there are growing pockets of social investments in the region. One is the joint project between Singapore and China to develop the Tianjin Eco-city in China, which will recycle its water and draw energy from the sun and the ground. In South Korea, a "green action plan" has been put in place and US$85bn of state funds is being devoted to a range of eco-friendly initiatives, with the aim of transforming the country into a "green nation" by 2020.

There's no doubt that green funds are growing into a significant pool of global capital too, with around US$3trn invested in SRIs as of 2010, according to researchers at the Forum for Sustainable and Responsible Investment.

But there's one aspect of the green wave that has failed entirely to live up to the breathless hype assigned to it in the middle of the last decade: carbon trading. You will remember that hype. Carbon trading was the means by which countries could meet the requirements stipulated in the 1997 Kyoto Protocol to reduce carbon dioxide emissions. Companies that produce less carbon dioxide can sell a valuable carbon credit to others that produce too much CO2, who will need to buy the credit.

I recall interviewing the softly spoken Haruhiko Kuroda, chairman of the Asian Development Bank - and, incidentally, a possible candidate to replace Masaaki Shirakawa as governor of the Bank of Japan - back in 2007 when he enthused about the potential for the growth of the carbon trading market.

That enthusiasm wasn't in the least surprising coming as it did from the head of a multilateral development bank with a core mission to reduce pollution in the countries under its purview. But flash forward six years and despite all its initial promise the global carbon trading system, the clean development mechanism, is in a state of disarray.

This is partly the result of reduced economic activity in Europe which has meant most companies have no need to purchase carbon credits. The price of carbon credits in the clean development mechanism has collapsed from around US$20 per credit at the time I met Kuroda to around US$3 today. This means the value of the credit companies could have earned from setting up clean-energy projects - when they were assessing them at that US$20 per credit - is so low that projects are being abandoned in droves.

Meanwhile, investors who poured into the carbon credit market have also left in droves after losing their shirts in what was meant to be a sure-fire money spinner. No green was earned from the black, so to speak.

It all seems rather paradoxical, with the blame perhaps best laid at the feet of the world's governments and the setting of quotas that were too high, given that the US refused to ratify Kyoto and that China is under no obligation to reduce emissions under the terms of the protocol.

But if government is to blame for the collapse of the carbon trading market, it is also at the heart of the SRI boom, and some are getting the joke faster than others - South Korea among them. With a ready pool of dedicated green capital coming out in force to support Kexim's debut SRI trade and the bank saving on its funding costs into the bargain, I would bet that others are going to start getting the joke as well. (Reporting By Jonathan Rogers; editing by Steve Garton)

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