Sean Kidney – The $100 trillion bond market everyone in regen ag should know about

Koen van Seijen: Today I’m interviewing Sean Kidney co-founder of the Climate Bonds Initiative, an international investor focused non for profit. They’re the only organization working solely on mobilizing the 100 trillion bond market for the climate for climate change solutions. Welcome Sean.

LISTEN TO THE FULL INTERVIEW HERE.

Sean Kidney: It’s a U-turn. It is no longer a right hand turn because of the extent to which emissions have gone up in the last 30 years. We are putting more CO2 in the atmosphere the last 30 years than in the previous 50 years while we’ve been talking about it of course. So that’s what we’re faced with.

Sean Kidney: Now if you need to make this kind of change in the economy and in the planet and society there are large capital needs, it is a very high cap ex part. Take solar, low opex high capex, that means a lot of capital upfront, that means interest rates are critical for these investments.

Sean Kidney: So bond markets are about 100 trillion dollars outstanding globally. Equity markets are 60 trillion. This gives you a flavor of the difference. Bond markets are pension funds, insurance companies, government bodies, banks. These are different types of investors compared to equity investors, a lot of the time they tend not to be watching the stock market, the S&P 500 every day, especially amongst the institutional investors who have a long term appetite. Among pension funds and insurance companies there are a lot of buy and hold investors. Now if you’re trying to do a capex investment with a lot of long return on investment profile, this is the perfect investor class for you. We need to get these investors into the game. At the moment they are only marginally exposed to what I call solution sectors. And in the sectors that need to become solution sectors we need to change practices. They’re not largely aware of what’s involved. In other words they can’t differentiate between a water utility that is doing a capital investment which is climate ready versus a capital investment which is not climate ready. And frankly might fail anyway as it becomes a credit risk because of the weather volatility and the rainfall volatility.

Sean Kidney: We can’t afford a niche market here. We have to be able to engage the mainstream portfolio managers around the world. So these bonds walk and talk like an ordinary bond, similar yields, similar coupon, ect. The distinguishing feature is a promise by the issuer governed by a national framework to allocate the proceeds to qualifying (sustainable, editor’s note) investments. And now we’ve got about 600 billion dollars outstanding of these globally and rapidly growing markets.

Koen van Seijen: Can you give a short overview of where we are in terms of climate bonds and land use in agriculture?

Sean Kidney: Well, clearly from a climate perspective the agricultural sector is so important. In Europe agriculture is the largest source of greenhouse gas emissions, for example working with the agricultural sector is a vital thing now. There are many things to be done.

Sean Kidney: Not necessarily going to do these with direct investments. We’re not going to stop deforestation by investing in a forest. There are many attempts to do REDD++, tree bonds and so on. But the cash flows aren’t there. There we have to look at the Economic Development of the society around the natural capital assets and how do we make those richer and have a different economic path than destruction of capital assets. That’s the challenge.

Sean Kidney:  I’m separating out the bond issuance from the environmental challenge first. The first thing to do is to identify activities that achieve our outcome. Once you’ve done that, then you look at the potential for bond issuance in an area agricultural sector that will always be relatively small in bond issuance. The big sectors will be infrastructure and buildings and energy. But it’s critically important from an emissions perspective. So, what I’m trying to say, is that preservation of national capital is one. The increase in sequestration of soils and the regrowth of forests is another; as you would know, the potential for soil sequestration is huge. The changing of practices to reduce emissions at our farm level is also important.

Sean Kidney: In the bond space, you need to be a reasonably large institution that means a government, a bank or a corporation to be able to do this. And then the money trickles down through their processes, to smallest landholders or whatever. You’re not going to be a coffee farmer in Ghana and be able to show a bond realistically, but you might get a green loan from a microfinance company who is able to issue a bond to refinance its portfolio of loans.

Sean Kidney: One first thing is carbon measuring and improving carbon stocks. If people can show evidence that they’re doing that, that’s going to be part of the solution. However that’s very difficult and not happening very often. So what we’ve ended up doing is having a basket of practices, which are relatively short term in nature, but are seen to be consistent with improving carbon stocks, you know, zero tilling agriculture for example, assessing from open plows in Europe. If people can show that they are using that basket of practices which are effectively proxies for activities that are all descriptions of activities that will improve carbon stocks, then that will count for the taxonomy. In other words they’ll get access to green loans if there are large agricultural organization they can do green bonds. That’s how we’re tackling it. It’s very early days.

Sean Kidney: Well, my point was that we need to look at resilience. Resilience is actually more than just resilience against weather. It’s about our ecosystem resilience. You know. Complex systems if they hollowed out collapse quickly and dead recover. We have hollowed out our global ecosystems. We need to work to make them more resilient by improving their biodiversity by improving their ability to be able to respond to extreme climatic shocks or weather shocks. Going to have. That’s essentially it. One of those issues is the use of artificial substances. We know that when you release a lot of antibiotics into the ecosystem all sorts of changes happen.

Koen van Seijen: And I think it comes back nicely to the point of the need of transition finance because these farmers, these land users can get off these substances for the most part and in some cases even completely. But they need through that face off and some people say five, some people say 10 years, some people say three years, it depends on the land of course where it’s been used before, but they need to be helped. And actually climate bonds are the large scale of transition finance. On the more local scale is needed for many to go through the path of a number of years of getting off the drugs and basically revitalizing the land or actually making it adaptive again or making it actually alive again.

Sean Kidney: What we’re working around globally is to make those loans cheaper with development banks providing credit support with governments, providing regulatory support. The lending to the green sector will be materially cheaper than lending to non green sectors. So having a direct financial incentive now, you might be a farmer in somewhere like Italy and you’re concerned about these issues, but you’re trapped because you try to raise money and run something in a marginal way, you’ll be able to get cheaper capital from UniCredit because it’s great. That’s where we’re going on this and you’ll see that unfolding.

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Thank you so much and see you at the next podcast!

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