Standard & Poor’s have issued a report (available to Ratings Direct subscribers here) which discusses the role that the bond markets and capital markets in general have to play in financing countries response to and mitigation efforts for climate change. The report identifies that there are issues to overcome before institutional investors will allow their capital to be used in low-carbon and climate change adaptation projects in developing countries.
The report (which details the findings of a roundtable event held by S&P earlier this year) identifies around 30 risks which are hindering the involvements of the capital markets and institutional investors. The risks highlighted fit into the following categories; policy risks, capacity risks, transaction risks, and project risks.
“There is an urgent need for large-scale financing to enable developing countries to mitigate and adapt to climate change. However, there is a yawning gap between the level of finance currently available and even the most conservative estimates for the amount required,” said Michael Wilkins, Managing Director and Global Head of Carbon Markets at Standard & Poor’s. “As the developed world emerges from recession with severely depleted public finances, capital markets have a big role to play in climate change finance and investors have signaled they are committed to taking action–providing policymakers put in place a long-term framework of climate and energy policy and regulation that reduces risk, minimizes uncertainty, and allows an appropriate risk and reward balance to be struck.”
There is an important role to be played not just by the bond, capital markets and institutional investors here but also by the insurance and reinsurance industries. There is a particularly important role to be played by those providing alternative risk transfer and financing and also those providing microinsurance. Many of the risks covered in this report can be hedged via insurance or the capital markets but until the institutional investors are aware of that they are hesitant to get too involved. The re/insurance industry needs to make the range of risk transfer and financing options available more widely known and work alongside investors and policymakers to put the risk management structure in place that will allow money to begin to flow into projects that will really help.
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