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Amundi, AIIB create framework to unlock climate bond market

Green bond issues are not the complete answer to making companies greener, and firms need to look at adapting their overall businesses to potential climate risks, according to an executive from the Asian Infrastructure Investment Bank, which has developed a framework with asset manager Amundi SA to address the issue.

Green bond issues help companies be more transparent about climate-friendly projects, but do not address how an issuer will reduce carbon emissions, resilience to physical risks such as rising sea levels or the financial cost of the transition to a more green economy, Stefen Shin, senior financial institutions relationship officer at the AIIB, told S&P Global Market Intelligence in an interview.

A green bond does not necessary transform a company into a "green" one, and some institutions that issue traditional bonds are more environmentally friendly than those who issue green bonds, he said.

"From a transparency point of view it's a win," Shin said. "However, what is lacking, and what hasn't been addressed, is how does that one company or issuer look and talk about their resilience and the transition to green."

The framework with Amundi aims to address what Shin called "an orange solution to an apple problem" by looking at climate mitigation, resilience and transition.

Data gathering

Under the framework, the two financial institutions aim to gather data on how companies are implementing the 2015 Paris Agreement on climate change by rating them on their climate mitigation, resilience and transition. The Paris accord aims to limit global warming ideally to 1.5 degrees Celsius above pre-industrial levels, and to 2 degrees Celsius at the most.

To determine how a company is faring on the transition to a green economy, the framework will measure the percentage of the company's green activities as a percentage of total revenue, Shin said.

"If it's greater than 70% or 80% then yes, they have transitioned to a green economy," he said.

Shin said Amundi and the AIIB looked at the Paris Agreement to develop ways of integrating it into an investment portfolio and how to mobilize capital from institutional investors. The framework is designed to act as a "catalyst," Shin said, adding that the AIIB is talking to organizations such as the Climate Bonds Initiative, which promotes green bond issues and the United Nations investor network Principles for Responsible Investing, to advocate the idea.

To launch the framework, Amundi will manage a $500 million Asian climate bond portfolio, and the asset manager and the AIIB hope to mobilize a further $500 million from green fund managers. The fund will aim to look at "impact" rather than return, and public pensions and sovereign wealth funds are a "natural fit" because while they also have to provide returns to their investors, they also tend to work for social good, Shin said.

"If we can get several billion invested under this framework, then the asset manager will have a really good story to tell," he said.

'A-list'

The scoring system is going to differentiate "A-list and B-list climate champions." The A-list will be those companies that rate highly on mitigation, resilience and transition, while the B-list might score well on just one of those three factors.

Amundi would then work with companies on the B-list to identify how they could improve their ratings and encourage them to raise their ratings to attract investors, Shin said.

"That incentivizes the CFO and the treasurer of that company to start having a corporate strategy on mitigation, resilience and percentage of green," he said.

A transparent benchmark of how to get there will help them because some companies do not know how to transition to a green economy, Shin said. The seven-year investment period will show how companies have improved their scores, he added.

Certain sectors will have more difficulty moving to a carbon-free economy, he said, adding that energy companies can invest in more renewables, but retailers do not have obvious ways of reducing their carbon intake.

The framework's strategy is more to promote companies that are transitioning to a carbon-neutral economy rather than punishing those that are not taking action, Shin said.

"We’re giving proper recognition to companies who are doing really well in the green economy. It is the reward methodology rather than the punishment methodology."