A fixed-income solution to global warming


FT.com, 22 January 2007

By Kenny Tang and Ruth Yeoh, Financial Times

The threat of dangerous disruption to our global climate is a real one. According to the UK government's Stern review, climate change will have a potentially devastating effect on the economies of developing countries, and the issue needs to be tackled now.

Given its wide impact, it is also clear that climate change has gone beyond an economic issue or a purely environmental issue: for developing countries especially, it is a security issue as it threatens the basic elements of life such as use of land for food production, access to water, energy and health.

What can the developed countries do to help developing countries and the poor people likely to be hit earliest and hardest by climate change? Stern recommends that strong early action on climate change outweighs the costs. Developed countries are committed to help developing countries - but how can early and effective action be crystallised and the whole climate change agenda and action plan brought forward while we have a small window of opportunity over the next 10-15 years?

We propose the issuance of triple-rated Oxbridge Climate Bonds in the international market place to raise up to ?5bn ($9.8bn, 7.6bn) a year for the next 10-15 years as part of the United Nations' Millennium Development Goals.

Investors that would be keen to invest in these climate bonds include central banks, religious groups, pension funds, charities and corporate social responsibility funds.

How would the climate bond be collateralised? This is where the financial innovation comes in - sovereign governments from the developed world would need to make legally binding irrecoverable grants for the next 10-15 years. Through pledging these grant commitments to the new entity that would launch the bond issue, these governments of the developed world would re-engineer three critical dimensions in the funding of climate change programmes.

First it would front-load the annual grant payments over the next 10-15 years forward to today. Annual grant payments are very useful but, in the context of climate change, what developing countries need is money now. Front-loading is precisely what Stern recommends on strong early action to tackle climate change, especially for developing countries that will be hit earliest and hardest.

Second, it would crystallise a bigger pot of funds from a group of developed countries for longer-term projects rather than small annual sums by individual countries that might be frittered away on sub-optimal projects, often with little long-term impact. Through this bigger "capital" pot, significant long-term projects could be addressed immediately and in a co-ordinated manner.

Third, it would bring stability, predictability and certainty to the grant process for developing countries by locking in future grant commitments compared with the annual approval process that is subject to the prevailing economic and political situation.

In effect, climate bonds would allow vital climate change adaptation and mitigation projects in fresh water, food production and other areas for developing countries to go ahead immediately with investors' money, which would be repaid by legally binding sovereign governments' grant payments.

There is already a precedent. Just last month, an innovative bond based on the same principles raised $1bn aimed at financing child immunisation in the world's poorest countries. The bond, issued by the International Finance Facility for Immunisation and supported by the UK Treasury's International Finance Facility, enabled vaccination schemes to proceed immediately with investors' money, which will be repaid by future aid payments. This and the climate bond could pave the way for significant activity in the innovative financings of good causes in developing countries via the capital markets.

Kenny Tang is founder and chief executive of Oxbridge Climate Capital. Ruth Yeoh is finance director of YTL Group. Their book, 'Cut Carbon, Grow Profits - Business Strategies for Managing Climate Change and Sustainability', will be published in February.

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