Economy

If Finance Rules The World, Green Bonds May Be Planet's Only Hope

The finance mechanism for sustainable infrastructure, energy and industry may be the ultimate key to curbing, and partly reversing, the harms of climate change.

Walking by Santiago's Stock Exchange district
Gema Sacristán*

-Analysis-

SANTIAGO — Is there a plausible way to reverse global warming? We must do things very differently, sure. We must devote a wholly different level of investment in time, money and effort. But how exactly? Invest to reverse — that is really the only way. We must create investment mechanisms to change production processes and models that have accompanied us for centuries, and replace them with less energy-intensive and resilient alternatives.

As the United Nations recalled recently, time is running out in the fight against climate change. Countries must multiply by five their efforts to reverse the current trend, which would raise the planet's temperatures 3.2 points above pre-industrial levels and not below the 2 °C set in the Paris Climate Pact. In recent years, so-called "Green bonds" have emerged to reverse this trend, as an investment formula to finance environmental projects. Today they have become the star asset of sustainable financing. The total outstanding balance is $520 billion according to figures from the Climate Bonds Initiative (CBI). And while emissions faltered in the last part of 2018, this year they have resumed briskly. CBI expects record emissions of green bonds this year, perhaps worth up to $250 billion, and total emissions of up to $400 billion in 2020. Green bonds have seen quantitative and qualitative growth, with a constant arrival of new emitters and sectors beside a high degree of innovation.

Last year was a highly positive one for green bonds in the region.

Last June, Chile dived into the market with the first emission in Latin America of sovereign green bonds, which additionally found considerable takers — with demand exceeding offer by 12.8 times. The emission occurred in two stages, first in U.S. dollars, then in euros, for a total $2.4 billion. The bonds have helped improve energy efficiency, helped create cleaner public transportation and more sustainable public buildings, generated renewables and financed more efficient management of natural resources.

The Chilean emission is helping expand the green bonds market in Latin America and the Caribbean, dominated thus far by Brazil and Mexico. Last year was a highly positive one for green bonds in the region, with $4.6 billion's worth of emissions from January to September, or three times the figures for 2018. Their accumulated value was $13.6 billion from eight countries: Mexico, Costa Rica, Colombia, Brazil, Peru, Argentina, Chile and Uruguay. Colombia and Peru hope to emit bonds in 2020. Most bonds have so far been for the energy sector, particularly renewables like solar and wind. The infrastructures sector is expected to take the lead in the future.

UN Climate Change Conference in Madrid, Spain on Dec. 15 — Photo: Lu Yang/Xinhua/ZUMA

Returning to the global market, we may consider certain innovations and discernible trends. One novelty is variable returns for investors or lenders dependent on attaining set sustainable objectives. This was the formula adopted by the Italian energy firm Enel in its emission last September, worth $1.5 billion. The firm is to pay bondholders a higher rate unless it attains its goal of renewables constituting more than 55% of its generation capacities in 2021. We can expect more such clauses in the future.

There is no lacking innovation here.

Another interesting trend is of so-called transition bonds, which seek to finance transition toward decarbonized firms and economies. There is increasing specialization in niche products, like the blue bonds issued by the Seychelles to protect and safeguard the surrounding seas, or forest bonds issued by Mexico City. We also have innovative financial structures and products, like Freddie Mac mortgage titles financing energy and water-efficient construction, or bonds to finance solar projects like El Naranjal and Del Literal in Uruguay, structured by the Inter-American Development Bank (BID Invest). There is also innovation in placements, as in emissions by the Austrian firm Verdund and more recently by BBVA for insurers Mapfre, executed entirely with blockchain technology.

There is no lacking innovation here, as fighting climate change does not just concern polluting industries. One way or another, we are all involved. From the demand perspective, we need only observe the growing appetite of investors for assets that are proving both profitable and helping build a more sustainable planet. These are all the ingredients we need so that, together, we may all reverse what is still reversible.


*Gema Sacristán is the Director-General for Business at BID Invest.

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Society

Why Chinese Cities Waste Millions On Vanity Building Projects

The so-called "White Elephants," or massive building projects that go unused, keep going up across China as local officials mix vanity and a misdirected attempt to attract business and tourists. A perfect example the 58-meter, $230 million statue of Guan Yu, a beloved military figure from the Third Century, that nobody seems interested in visiting.

Statue of Guan Yu in Jingzhou Park, China

Chen Zhe


BEIJING — The Chinese Ministry of Housing and Urban-Rural Development recently ordered the relocation of a giant statue in Jingzhou, in the central province of Hubei. The 58-meter, 1,200-ton statue depicts Guan Yu, a widely worshipped military figure from the Eastern Han Dynasty in the Third century A.D.

The government said it ordered the removal because the towering presence "ruins the character and culture of Jingzhou as a historic city," and is "vain and wasteful." The relocation project wound up costing the taxpayers approximately ¥300 million ($46 million).

Huge monuments as "intellectual property" for a city

In recent years local authorities in China have often raced to create what is euphemistically dubbed IP (intellectual property), in the form of a signature building in their city. But by now, we have often seen negative consequences of such projects, which evolved from luxurious government offices to skyscrapers for businesses and residences. And now, it is the construction of cultural landmarks. Some of these "white elephant" projects, even if they reach the scale of the Guan Yu statue, or do not necessarily violate any regulations, are a real problem for society.

It doesn't take much to be able to differentiate between a project constructed to score political points and a project destined for the people's benefit. You can see right away when construction projects neglect the physical conditions of their location. The over the top government buildings, which for numerous years mushroomed in many corners of China, even in the poorest regional cities, are the most obvious examples.

Homebuyers looking at models of apartment buildings in Shanghai, China — Photo: Imaginechina/ZUMA

Guan Yu transformed into White Elephant

A project truly catering to people's benefit would address their most urgent needs and would be systematically conceived of and designed to play a practical role. Unfortunately, due to a dearth of true creativity, too many cities' expression of their rich cultural heritage is reduced to just building peculiar cultural landmarks. The statue of Guan Yu in Jingzhou is a perfect example.

Long ago Jinzhou was a strategic hub linking the North and the South of China. But its development has lagged behind coastal cities since the launch of economic reform a generation ago.

This is why the city's policymakers came up with the idea of using the place's most popular and glorified personality, Guan Yu (who some refer to as Guan Gong). He is portrayed in the 14th-century Chinese classic "The Romance of the Three Kingdoms" as a righteous and loyal warrior. With the aim of luring tourists, the city leaders decided to use him to create the city's core attraction, their own IP.

Opened in June 2016, the park hosting the statue comprises a surface of 228 acres. In total it cost ¥1.5 billion ($232 million) to build; the statue alone was ¥173 million ($27 million). Alas, since the park opened its doors more than four years ago, the revenue to date is a mere ¥13 million ($2 million). This was definitely not a cost-effective investment and obviously functions neither as a city icon nor a cultural tourism brand as the city authorities had hoped.

China's blind pursuit of skyscrapers

Some may point out the many landmarks hyped on social media precisely because they are peculiar, big or even ugly. However, this kind of attention will not last and is definitely not a responsible or sustainable concept. There is surely no lack of local politicians who will contend for attention by coming up with huge, strange constructions. For those who can't find a representative figure, why not build a 40-meter tall potato in Dingxi, Gansu Province, a 50-meter peony in Luoyang, Shanxi Province, and maybe a 60-meter green onion in Zhangqiu, Shandong Province?

It is to stop this blind pursuit of skyscrapers and useless buildings that, early this month, the Ministry of Housing and Urban-Rural Development issued a new regulation to avoid local authorities' deviation from people's real necessities, ridiculous wasted costs and over-consumption of energy.

I hope those responsible for the creation of a city's attractiveness will not simply go for visual impact, but instead create something that inspires people's intelligence, sustains admiration and keeps them coming back for more.

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