Zurich Insurance Group recently joined a roster of
increasingly big-name institutions investing in green bonds.
The Swiss insurance giant, which invested in the high-grade,
fixed-income securities through an external manager (though it
did not tell Institutional Investor the size of the
investment), follows asset manager BlackRock; California State
Teachers Retirement System; St. Paul,
Minnesotabased 3M Co.; and New Yorkbased financial
services firm TIAA-CREF, all of which invested in a February
green bond offering by International Finance Corp., the
Washington-based World Bank Groups private sector
The first green bonds were launched by the World Bank in
late 2008. Since then, a number of other issuers have joined
the fray, including the European Investment Bank, the African
Development Bank, the Nordic Investment Bank and the
Export-Import Bank of Korea. The past 18 months have seen the
markets fastest growth yet. In that period the market has
nearly doubled, from $5 billion to about $9.5 billion.
As one of the original architects of the green bond,
Christopher Flensborg, head of sustainable products and product
development at Swedens Skandinaviska Enskilda Banken
(SEB), says he believes he is helping to oversee what he calls
the birth of a new market. In a recent conversation
with II, Flensborg explains why he believes the impact
of green bonds means much more than facilitating funding for
Are you noticing any changes in the tone of your
recent conversations with investors about green
When you come up with a new product, theres always
some concern, and theres due diligence that needs to be
done. But what were seeing now is a bigger priority
placed on how to integrate green bonds. People are realizing
that its not so difficult to integrate them into their
portfolios, and consequently theyre much more open to
including them. This is due to the growth of the market, and
the diversity of the issuers now appearing, and the broader
contribution among asset managers and banks.
What do you think the impact of the green bond is on
the larger investment market?
One of the things that I think is interesting is the
transparency you get with a green bond with the issuers
coming out and explaining what theyre doing with the
money. This also becomes an educational process about what is
happening with respect to climate-related stress. People are
talking about floods in New York or droughts or fires, and what
can be done about those.
The reason thats interesting from a financial
perspective is because were all exposed to
climate-related risks in various parts of society and regions
[in our portfolios], though we might not be aware of it. Take
the example of flooding in New York. In the lower-lying regions
that flooded [during Hurricane Sandy], you will probably see
house prices be slightly more sensitive and insurance premiums
reflecting slightly more caution because the risks suddenly
seem different than they did a year ago. Thats just one
example you had the same in Copenhagen, you had the same
in Seoul, you had the same in Bangkok in the last couple of
years. Thats just one climate event, and it indicates
that we need to be more alert to what can actually happen, and
how it can impact financial valuations.
Discussions around green bonds are helping many investors
get educated about this.
So in terms of accounting for climate-related risks
within a portfolio, you present green bonds as a first
Its not the end solution, but its a good way to
dip a toe in and get an idea about what is needed to raise
awareness and thereby reduce risks and optimize the potential
of a portfolio thats the way I see it.
Do you believe that green bonds are less risky than
other similarly rated infrastructure bonds that dont
explicitly take climate into account?
The way we do them today, theres no difference in the
risk of green bonds versus nongreen bonds. We build them on the
same framework as other bonds, and that means the risk is
However, I would claim that an issuer who has awareness
about his exposure and about strategies to [mitigate these
climate events] is less risky than one that does not. In other
words, I do think you could say that in the case of two
different issuers of bonds with the same rating, where one has
an awareness about these climate areas and the other does not,
the one with awareness potentially has a lower risk but
that is for the rating agencies to say, not me.
What is the role that other banks need to play in
developing the green bonds market?
That is slightly more complicated. Im glad youre
raising that because attention toward this might enable banks
to change their attitudes. Basically, banks are built in silos.
Individual silos are responsible for various things. I think
some of these silos might be interested in green [products],
but they dont really know how to go about it. One of the
advantages weve had as a smaller bank is that we can
bridge the silos quite easily. Im basically able to have
meetings very high within my organization and across the
organization, which has enabled us to create what weve
created; and I think the silos in big banks are preventing
that. One of my big challenges when I have to approach the big
banks is who to approach and how to approach them and
how to get consolidated feedback from that institution.
However, the big banks do have an interest, and I think the
individual silos do have an interest in joining us. So my
approach is that I try to find the right entrance and then I
try to find out how, together, we can continue to develop this
Were aware that we cant create this market by
ourselves. We cant bring this to the large scale
were aiming for by ourselves. We know that we need the
But some of the major banks, like those that
underwrote the recent IFC green bond issuance, have gotten on
Yes, theyre beginning to get active, and we welcome
that warmly. We see that as a strength of the market, and we
also see it as a slight danger. We see it as a strength because
its necessary to get more and more investors on board and
to raise awareness to the point that its a mainstream
product. But we also would see it as a danger in the event that
some banks could start trying to create their own versions of
the green bond. That would start to dilute the perception of
the bond, and it would confuse investors.
So one of the other reasons were going after the big
banks is because we need to make sure we consolidate the
development of this market to make sure it doesnt become
confusing. There needs to be a common understanding of what a
green bond is.
Where is the green bond development now in terms of
the path to the final market you envision for it?
In the late stages of the early phase. We have asset
managers entering the green bond market on a bigger scale for
the first time.
I think from here, the next big thing well see will be
different kinds of asset managers introducing strategies on how
to offer their clients green bonds. And then slowly you will
see this work down to the retail level. And that will drive the
banking industry to come up with more issuance.
The ideal situation and where were moving
is that we look more like the regular bond market. That
means we still need to create a proper yield curve and we still
need to create a proper credit curve. And in order to do that,
we need different sorts of issuers. Were very dedicated
to bringing new issuers in from along the curve. Were
working with a number of corporates; were working with
other banks. We see this happening; my own ambition is that
itll happen fast.
The other thing is we need to see the structure of the
creation of green bonds getting more standardized so that
theres a smooth process for getting new issuers through
Are there any other green financial
products that might spin out from all the work SEB has done on
Thanks to the green bonds, were in a privileged
situation because weve managed to get a lot of
information, and weve used that to develop new solutions.
My mandate at the moment is fixed income, but we are working on
other things as well, which well be able to offer in the
next couple of years.
SEB is also in active dialog with several governments to see
how the green bond concept can be used, or fine-tuned and used,
to source money towards sustainable energy, infrastructure and
development aid. We expect the results of this work to be seen
in the market over the next two to five years.