Stockholm (NordSIP) – As the world wrestles with the details of the energy transition, fixed income has become one of the main battlegrounds of the green revolution. With the bond market fast approaching the US$1 trillion mark, sovereigns joining the fray and regulation mapping the charge, consistency and commitment to quality within the green bond market is more important than ever.
In that spirit, the Anthropocene Fixed Income Institute (AFII) was officially launched on Monday, September 21st, “to monitor, advocate for and influence the impact of fixed income markets in the age of human-induced climate change.” The AFII is a non-profit organisation founded by Swedish fixed income and sustainability specialist Ulf Erlandsson and funded by the Growald Family Fund (GFF), a New York-based high-impact venture philanthropy fund investing in the rapid transition to a clean energy future.
Catching Up to Climate Change
“At over USD100 trillion in market capitalization, fixed income markets dwarf the size of public equity markets and play a crucial role for providing finance to corporations, sovereigns and the myriad of economic entities in between,” Erlandsson says. “But fixed income markets are severely lagging in climate change mitigation. Although the green bond market is growing rapidly, it still only accounts for 1% of total market size.”
“At the same time, 2020 is already the biggest year ever in terms of bond market lending to oil majors, supplying almost unlimited capital to keep up fossil capital expenditure and protect dividend payments. In 2019, Saudi Aramco’s inaugural bond saw the biggest ever order book in corporate bond history,” he says.
To tackle the contradiction inherent to a world where the record-breaking IPO and bond launch is in direct opposition to the predominant global investment trend, “the AFII conducts research across the green versus fossil divide,” Erlandsson explains. The organisation also “executes advocacy against bond market climate transgressions and works with education and outreach to broaden understanding of the importance of fixed income in the energy transition.”
The Anthropocene Fixed Income Institute
The creation of the AFII, was the result of a meeting of kindred minds. “Over the past two years, I have been doing a number of presentations under the banner ‘Fixed income in the Anthropocene’ in parallel to my travels raising capital for a hedge-fund strategy on the climate theme,” Erlandsson tells NordSIP. “Earlier this year, I met the Growald Family Fund which turned out to not be a natural hedge-fund investor, but have a history of early philanthropic support to some of the blockbuster institutions in climate finance such as CarbonTracker and IEEFA.”
“They encouraged me to submit a proposal for a parallel non-profit outfit, and there rest is history so to speak. GFF has been quite supportive and have an extremely strong network in the climate impact space enabling a lot of interesting conversations now when AFII is up and running.”
Using Research to Create a Strong Positive Narrative
The research published by the AFII is to be “a hybrid between the industry’s practical but sometimes overly simplistic approaches, and academia’s intellectually stringent but often market distant approach,” Erlandsson explains. “The industry understands the data but lack quantitative tools, and academia knows the tools but does not understand the data. Blending the two can get you very interesting conclusions”
Based on the research, the AFII can then approach the problems more strategically. “We will offer critique of other companies, dealers and investors over time. But you cannot go out all guns blazing from the beginning, rather we believe in weeding out the really weak targets out there. There is not a lot of support for the Swedish Riksbank lending tens of billions of SEK to Scott Morrison’s Australian fossil ventures, for example.”
“But it is also a question of creating a stronger positive narrative: we see a lot of mainstream market participants – bond traders and portfolio managers – with a genuine concern about climate issues,” he adds. “However, professionally they are wary of anything that looks like glossy marketing, and to be frank, there’s a fair amount of that going around in ESG space. If we can make a strong argument with them how they can make returns and generate impact without getting pigeon-holed into ESG, there’s a tremendous potential force. So when the AFII writes about ‘ESG in CDS indices’, it’s a way to actually compel traditional players into action.”
Discussing how the AFII’s actual approach to advocacy works, Erlandsson cites a recent case study. “The ‘Global investors and the Carmichael mega-mine’ investigates the fixed income funding flow for a massive coal project, down to individual bond ISIN codes and global investor holdings of those bonds. That article was a good testing ground.
“We seek a compelling argument for divestment on technical rather than ideological grounds, and then engage with asset owners and managers to shift their portfolios away from ‘transgressions’ when such happen. We might not always do the engagement ourselves, there are often actors in the eco-system better suited to that part. The great thing with climate commitments from investors is that they create a leverage point for you to engage,” Erlandsson concludes.
Image courtesy of Ulf Erlandsson