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California - from electric cars to green bonds

California has fostered the breakthrough of electric cars. Now the sunny state focuses on green bonds.

Back in 2008, I participated in the launch of the first roadster from Tesla Motors, in a garage in Silicon Valley. It was a small event, but I felt this could have a huge impact. I got goosebumps of excitement when I could try-sit the car. The same car that Elon Musk now sent up in space.

Ten years later, Californians buy almost half of the electric cars sold in the US. The state aims to have 1.5 million zero-emissions vehicles on the roads by 2025. Admittedly, with 300-400.000 EVs sold today, California is still far from meeting this target.

We’ve got the scientists, we’ve got the lawyers, and we’re ready to fight.

Governor Jerry Brown at the American Geophysical Union in San Francisco, December 2017

Governor Jerry Brown is championing the ambitious EV target, thereby challenging President Trump on climate change. The Trump administration wants to weaken environmental standards for cars. According to Brown, this will wreck the American car industry.

Instead, California continues applying high environmental standards for cars. And, since 40 percent of all cars in the US are sold in California or in states that have adopted the same standards as California, most American car manufactures will continue to comply with the Golden State Standard. 

Californian investors go green

California has also high ambitions on green finance, in particular on green bonds. Recently, I was invited to a green bond symposium at the Milkin Institute in Santa Monica, hosted by the Treasurer of California, to share CICERO’s view on how California could scale up green bonds issuance and investments. Beingthe world’s sixth largest economy, California has a potential to shape the global market.

The key question for Californian investors is what can qualify as green. Is it green to invest in energy efficiency improvements of a refinery? Could it be green to invest in energy-efficient buildings in an airport? Is it green to invest in renewable energy if the grid is already 100 percent renewable?

There is currently no single authority, which defines what is green. The green bond market is a voluntary market, guided by principles agreed by the main participants in the market – the Green Bond Principles.

Creating a common language on green bonds for investors, scientist and companies is key.

Harald Lund

Authorities in various parts of the world are currently considering how to regulate the green bond market, through taxonomies (i.e. lists of green investments) and green bond standards. At the conference in California, I shared some important lessons that CICERO learned through a decade of experience of independent reviews of the environmental quality of green bonds.

Capacity building 

Green bonds are a communication tool between investors and issuers. They connect investors with organisations that provide solutions to reduce greenhouse gas emissions and increase resiliency to climate change. Green bonds also contribute to raising investors’ awareness of climate risk.

Taxonomies and green bond standards should facilitate rather than replace this fruitful dialogue. In our view creating a common language for investors, scientist and companies is key.

All investors should consider and understand climate risk when they make investment decisions. The Respol bond last year allocating proceeds to energy efficiency in a refinery, was a controversial issuance but caused a healthy lively discussion in the market on whether these investments would actually reduce emissions in the long run or just prolong the life of the refineries. This dialogue happens without interference from heavy political and bureaucratic processes. What is key is to have enough transparency to allow for these discussions.

Creative solutions and new technologies

The long-term goal of low carbon societies will eventually require a near phase out of fossil fuels, and marginal climate improvements today should not come in the way of more future oriented solutions that eventually require a near phase out fossil fuels. One should avoid investments in projects that lead down ‘blind alleys’. Taxonomies if not continuously updated runs the risks of misleading the market. In Oslo, diesel ferries were replaced with ferries that run on natural gas some years ago. They could soon be transformed into battery-driven ferries.

Encouraging positive competition between issuers

We have experienced how important competition has been for green bond issuance, e.g. municipalities in Sweden want to show their investors that they are better than their neighbour. With a standardized green or not green approach, you risk reducing the level of ambition.

This argument resonated well at the conference in California where participants believe competition is key in every well-functioning market. It was a different story when I visited Beijing earlier this year. Many we met said that the local level, need to be told what is green.

An approach with clear definitions could be efficient in China, but could demotivate engagement in other parts of the world. The beauty of the green bond market is that it allows for different approaches depending on different regulatory traditions.

Expressing climate risk

Climate risk is a financial risk. I told the treasurer that CICERO thinks that providing transparency on shades of climate risk is a better approach than a minimum standard that defines what is green.

Our methodology has been inspired by how credit rating agencies approach financial risks. When we do second opinions in the green bond market we allocate a shade to the bond: dark, medium or light green. The shading depends on how well the investments stand out in a 2050 perspective, how exposed the investment is to climate risk. We want to facilitate a longer term thinking by investors guided by climate science.

Back to California

After the conference in Santa Monica, I stayed on for a few days to visit a friend from law school that lives in Santa Barbra. While driving along the highway (in a Toyota Corolla; the rental company did not offer Tesla roadsters), I heard reports on the radio about the evacuation of Montecito, a town close-by Santa Barbra and home to Oprah Winfrey and other celebrities.

At the beginning of the year, twenty people in Montecito died in a mudslide after heavy rainfall. The mudslide again was a consequence of the forest fires last year. Until vegetation will cover the hillside again, which could take several years, Montecito risks new mudslides with every heavy rainfall. Therefore, the local authorities evacuated inhabitants precautionary.

California showed what to expect with climate change.

Harald Lund

While hearing those reports, on my left side, out in the ocean, I counted as many as nine oil platforms: the silhouettes causing the problem. On the right side, I saw the impact of climate change: burnt trees and hills. 

California had once again made a big impression on me. It showed what to expect with climate change. I hope indeed that Governor Brown will succeed in his efforts to gather the green states in the US, despite Trump’s efforts of stopping progress on climate issues. Including scaling up the green bond market. If they succeed, we will allocate a dark green shading.

Miriam Dahl