For investors largely restricted to investing in ADI issued debt securities, but wishing to make a positive (or not negative) environmental impact with their investment dollars, there are generally few opportunities available without compromising risk or return. Many investors choose a mixture of the two strategies outlined below, but there is a strong argument the combination of the two approaches is far less effective than pursuing either approach in isolation, particularly on an aggregate basis.
The first strategy is to exclude all ADI’s that fund carbon pollution producing enterprises from the investment universe. In practice, this generally means not investing in the four Australian major banks as these are the only domestic entities large enough to fund many of the multinational enterprises in the fossil fuel burning industries. The theory of not supporting the major banks is that if sufficient pressure is brought to bear on them they will either cut ties with the carbon polluters or bring such financial pressure upon them that they are forced to accelerate the reduction in their carbon polluting activities. In practice, many of Australia’s largest carbon polluters such as AGL are also at the forefront of leading the transition to renewable energy so seeking to deny them bank funding may be counter-productive to the goal of hastening the transition to renewables.
A second strategy is to buy “Green Bonds” where the proceeds go solely to fund renewable energy sources such as wind, solar and energy efficient buildings. Within the ADI sector by far the largest issuers of “Green Bonds” are the major banks because, as above, they are generally the only ADI’s with balance sheets large enough to lend to sufficient green entities to provide backing for a “Green Bond”. The economic logic is if there is greater demand for Green rather than standard bonds, then funding for Green assets will become cheaper and this will help drive more Green projects. However in actuality, there is currently little, if any, pricing differential between Green and standard bonds as the credit risk in both cases is tied to the issuing bank, not the projects financed and so the default risk is identical.
The irony of combining the two strategies is they effectively negate each other in practice. In the first strategy, funding is denied to major banks to drive lending behaviour change, but simply by bifurcating their borrowing books into Green and standard programs these banks recapture all the funding (and more) lost from environmentally conscious investors under the second strategy. From the investor perspective having a portfolio of debt where they can say none of the proceeds are going to fund the burning of fossil fuels certainly shows an admirable intent, however following the logic above, it has little practical effect in pressuring the major banks to change their behaviour apart from signalling the concerns of the investor.
It is also probably no better to exclusively pursue one of the two strategies as if a similarly concerned investor solely purses the other one, then it is largely the same result as both investors pursuing both strategies. It is only collectively if all investors decide to either stop funding major banks entirely or all investors decide to purchase exclusively Green bonds from major banks that there is any practical pressure applied to the major banks to show any preference for lending to Green projects over carbon polluters. Pursuance of a single strategy by all investors seems unlikely given the wide range of investors in the market and the fact that most investors are unwilling to give up economic performance for environmental considerations anyway.