Green Bonds: Devin Stewart Interviews Christopher Flensborg

Jun 10, 2010

Banker Chris Flensborg is one of the pioneers who developed green bonds. Issued by the World Bank, these bonds give institutional investors the opportunity to earmark their investments into climate-friendly projects.

DEVIN STEWART: Hi. I'm Devin Stewart, here at the Carnegie Council, and I'm sitting here with Chris Flensborg. He's with SEB, which is a Swedish bank, and he's also pioneering the green bond, which was recently featured in the Financial Times.

Chris, great to have you here at Carnegie Council.

Thank you for taking the time.

DEVIN STEWART: Tell me, what is a green bond?

CHRISTOPHER FLENSBORG: The green bond is a concept that we have developed in cooperation with the World Bank. It's a way for institutional investors—even private, but primarily institutional investors—to earmark their investments into climate-friendly projects.

DEVIN STEWART: Climate-friendly projects?

CHRISTOPHER FLENSBORG: Yes. I understand why you would ask that question. For us as a financial intermediary, it's very difficult to judge what is climate-friendly and what is not climate-friendly.

We have been making a lot of different alliances to secure the greenness, or the climate-friendliness of the bonds. It's not the Treasury Department [of the World Bank] that is selecting the projects that are financed from the green bonds. It is the Environmental Department which is giving the stamp of approval.

The Environmental Department of?

CHRISTOPHER FLENSBORG: Of the World Bank, which is giving the stamp for the greenness of the project.

DEVIN STEWART: So the World Bank is certifying that these projects are green.

CHRISTOPHER FLENSBORG: Yes. At the same time on behalf of our investors, we ask for a second opinion from an environmental specialist called CICERO, which is based in Oslo and is part of the Oslo University Science Park. They are internationally recognized environmental specialists. We did this for two reasons:

  • First, we wanted to be sure that the right questions were asked. As a financial specialist, I wouldn't know what questions to ask. They knew.
  • As a second issue, we also wanted to make sure that the independence of the group that was raising the questions was secure—meaning that it was a third party and not one of the participants who was involved in the transaction.

DEVIN STEWART: Give me an example of some of these green projects.

CHRISTOPHER FLENSBORG: The projects are selected by the World Bank's Environmental Department. They range from all kinds of regions and areas. It could be reforestation or windmills. It could also be to set up a unit to secure the environmental policies in a specific region, or to secure that there are people to actually see what is going on and to show directions for the country involved.

DEVIN STEWART: And they occur around the world, these projects? They are in many different regions?

CHRISTOPHER FLENSBORG: They are in many different regions, though since the World Bank—it's called the World Bank green bond, and now also the IFC green bond, because the IFC [International Finance Corporation] has been issuing green bonds as well. It's called the World Bank green bond.

We also launched the IFC green bonds. Both institutions are part of the World Bank Group and are operating in developing regions in the world, meaning that the regions where the projects will be done will be in the member countries or in the areas where the World Bank Group is active, at this stage.

DEVIN STEWART: I see. Now, take me through the process.

First, you work with the World Bank to issue these green bonds, and they go to fund these various projects. Then who buys these bonds? Who are the investors?

CHRISTOPHER FLENSBORG: The investors so far have been a lot of institutional investors, like California State Teacher Retirement System [CalSTRS], State of California Treasurer, New York Common Retirement Fund, the UN Joint Staff Pension Fund, the AP funds in Sweden, the national pension funds, Skandia Life and Trygg-Hansa, which are life pension funds. We have some asset managers like MMA [Marketing Management Analytics] and some churches in there. We even have NGOs, like WWF [World Wildlife Foundation], which has been investing in the bonds. So a lot of very different investors have been joining in for a common purpose.

DEVIN STEWART: A place like WWF, would they be investing funds from their endowment? Where are they getting the capital?

I don't know. I know that they sometimes have cash reserves and they will invest. I don't know where the money is coming from.

DEVIN STEWART: How much money has been raised so far?

CHRISTOPHER FLENSBORG: In total, we have around $1.65 billion. The first issue was launched in November 2008. In November 2009, we were at $600 million. In February 2010, we broke $1 billion, and today we are at $1.65 billion. So we are seeing a massive acceleration of investments.

Do you have any projections?

CHRISTOPHER FLENSBORG: That is so difficult, though I do expect that the acceleration is continuing. I expect that on the back of the pipeline we have and on the interest we see in the meetings. I've had more than 350 meetings with clients. So I'm very confident.

DEVIN STEWART: These are clients around the world, all countries?

CHRISTOPHER FLENSBORG: It's all over the world. I am quite busy. Unfortunately, I'm quite busy traveling.

DEVIN STEWART: But you are based now in New York, for the time being.

CHRISTOPHER FLENSBORG: Yes. I decided instead of traveling back and forth between Europe and New York, to actually station myself for four months in New York.

DEVIN STEWART: To meet with New York clients?

CHRISTOPHER FLENSBORG: To meet with a lot of U.S. clients, but, absolutely, also New York clients.

DEVIN STEWART: What is the energy in SEB? Do you have companywide support for this initiative?

I certainly see a lot of support. I'm sure there is not 100 percent, but I'm finding a very broad support.

What has been extremely fun is that on the back of the positive experience with the green bond, we are seeing a lot of "green shoots" which everybody is talking about. People are seeing this as an example and we are seeing ideas popping up here and there, which is a great pleasure.

DEVIN STEWART: The estimates that you hear among the UN crowd or NGOs—they say that the amount of funding that needs to be raised to deal with climate change needs to be in the billions. Some people even say up to $100 billion a year.

How do you see this acceleration going ahead into the future? Do you see that this type of movement could actually fulfill that need?

CHRISTOPHER FLENSBORG: I think it's very easy. Whenever you go into the bank and put money into the account, make sure it has a purpose.

Whenever you're sitting on a board and you have to make a decision, raise the question: What are we doing? Are we doing the right thing? Then the money will be raised.

We have instruments. The World Bank green bond is an example of that. The IFC green bond is an example of that. The instruments are there. It's just to raise the questions: Are we doing anything? Can we look at resources this way?

DEVIN STEWART: How does this green bond, as it currently stands, make money?

The return is fixed. Our clients, which all have a financial mandate, have been replacing primarily government bonds to invest in this bond. They are all satisfied with the financial return.

And does it make SEB money as well?

Of course. We have been pretty strict in that matter.

Normally you see that you have benchmark issues, which are the cleanest or the straight issues, two, five, seven, ten years, issues which are launched by the big governments and by the big supranationals. Our fee structure is comparable to those.

Of course, it would not be sustainable if we were charging extra for doing a green bond, and it would not be sustainable if we were charging less, because I wouldn't get the internal commitment to actually continue this process. So we are very strict on staying at the same kinds of principles.

DEVIN STEWART: What do you see as some of the challenges going forward with making sure that there is demand for this kind of thing?

CHRISTOPHER FLENSBORG: One of the purposes of the World Bank green bond, and now the IFC green bond as well, is to show leadership—that is, to have an example which others can follow and put up some frames under which climate capital can be raised.

One of the big challenges is to avoid dilution of this concept. Another big challenge is to secure standardization or to secure the way to classify the different kinds of asset classes, to secure that they are really green, so it's easy for investors to actually know how it proceeds.

One thing which might also be a danger is, if too many instruments, too many solutions are coming too soon—meaning that people will be uncertain about where to allocate the capital—if there are ten choices instead of one, they might be confused and wait with their allocations due to that. It's much easier if we are getting some kind of uniform market, which we are trying to advocate between banks and NGOs.

Is a green bond the kind of product where there was no demand until you created it?

There is this idea that there are some markets out there where an entrepreneur comes along and creates demand out of the blue. Or is the green bond manifesting because of demand for such a product? If so, where is that demand coming from?

CHRISTOPHER FLENSBORG: I wouldn't have a chance without demand, though, saying that, there was no green bond, and therefore there was no demand for it, when I started. So it's both. There was the need to have a product like this, and there still is the need. There is a rising need for having products like this among investors.

As an entrepreneur, I saw the possibility. I didn't see it alone. I saw it together with the World Bank. We developed this product which fulfilled those needs of the investors. But it's a combination. We have been spending a lot of time and are still spending a lot of time to explain to people how it fits into this new demand which is in the market. Otherwise, you would say that if the demand was there, it would probably be $100 billion already today.

Why it is a solution needs to be explained. It is not the solution, but one of the solutions that is needed for the future.

DEVIN STEWART: Where did you get the idea?


DEVIN STEWART: Was it from a memo? Where on your desk?

No, I created the idea.

DEVIN STEWART: Take me through that process. Were you just walking around the street one day or riding your bike? How did that come about?

CHRISTOPHER FLENSBORG: I reckoned that all entrepreneurship which is successful takes a lot of personal commitment, meaning that if you don't have your heart where you are putting in your efforts, you might not be able to run the whole way. I certainly have a strong personal ambition for doing things like this, if they are within my mandate. That was the way I developed this.

DEVIN STEWART: So you believe in it.

I certainly do.

DEVIN STEWART: Do you believe that it can change the mentality of the human civilization, generally speaking?

No, I don't think you can change human personalities, but I think you can highlight things and stress different factors. By showing that this is possible and by investors going out and showing that they can do things like this—highlighting the investors which I mentioned before, like the AP funds and CalSTRS and New York Common Retirement Fund and so on, which have taken this initiative—I think you can motivate other people to highlight similar characteristics. It can be a very good showcase and a very good motivator.

I don't think you can change anything with it, but I think you can change attention.

DEVIN STEWART: You have told me in the past that there are some transformational aspects of this concept, as you put it—for example, green deposits at your local bank.

What does a more green financial system look like? Tell me about the green deposits.

CHRISTOPHER FLENSBORG: The natural step when you are developing a product inside a new area is to look at what else is possible within your industry. We are obviously looking at all kinds of different instruments and are quite far in that development.

I believe it's quite simple. If you go into a property developer and say you want good insulation to save energy, you have a possibility to do it. If you go into a car salesman and say you want a greener car, you have a choice. If you go into a bank, it's very often that you actually have a choice to say, "I want a green solution," or, "I want a different solution than the common one." You basically just put your money into the bank and they will select where your money will be reinvested or what they will be financing.

The green bond is a good example of how you can earmark proceeds. I think that is very likely to be white-labeled and it's very likely to be copied in other financial products, like deposits.

Green banking sounds great. I think I would choose to have a green deposit if I had the choice. Do you see signs that that's taking off?

CHRISTOPHER FLENSBORG: You see a lot of political talk and you see a lot of ideas floating around, but that is very much on a philosophical plane and it's very much on a political plane. On the straight product side, on the techniques, we are one of the pioneers. I reckon that—we know it's running—it will be running faster, and I think that other banks will follow up.

As you mentioned, if there was a green deposit, you would choose it. If I could offer that tomorrow and my neighbor couldn't, I would have a competitive edge. That will change the landscape.

DEVIN STEWART: What's stopping banks from offering it tomorrow?

CHRISTOPHER FLENSBORG: It's a transition, as you mentioned yourself. It's not a one-off. It's not a turn from one side to the other. Banks are very big organizations, and you can't change from one day to the other.

I believe that the discussion right now in a lot of banks—and a lot of different companies is, "How do we actually implement this? How do we secure a smooth and non-painful transition into delivering new products?"

As an entrepreneur who has come up with something fairly revolutionary, fairly new, paint a picture for me. Where do you see green finance going in the future? What do you hope to see one day that people aren't talking about today? What happens after green bonds?

CHRISTOPHER FLENSBORG: Sincerely, I hope that you will have a choice, when you have savings, on what those savings will be able to do. Then it's up to you as a consumer, investor, or saver to actually direct the institution you use in that direction. If you have that choice, it's up to the consumer himself.

DEVIN STEWART: In terms of the global financial system, though, do you see this completely changing the landscape of project financing and the types of projects that you see going up around the world?

I believe with the headlines that we are seeing all the time—people talk about global warming, climate change, human-created and non-human-created. There are a lot of headlines. For sure, there is something happening. Those headlines are stressing and they are creating a new demand for awareness. Due to that demand, I believe that you are going to see a change of the supply, because they will be requested.

So I do see a change, a massive change, of the landscape. And I hope it's going to go fast. Personally, I would like to have those options out there.

DEVIN STEWART: Sometimes people talk about the change in behavior about climate change to be either top-down or bottom-up. Do you make that distinction? How do you see things changing?

CHRISTOPHER FLENSBORG: I don't make any distinctions. You have different approaches. You have political ones, which are top-down, and you have entrepreneurial, which is bottom-up. Without commitment from both sides, you won't get anything done.

I think it's extremely important in this context to respect the need for different groups and the need for different areas to get a solution. That has also been used by both the World Bank and us, where we have included talks with all kinds of different stakeholders, to secure the prudence and the structure of the green bonds.

DEVIN STEWART: You have been going around the world talking to people in finance, nonprofits, and other communities about the green bonds, as well as climate change generally.

What are some of the scenarios that you have heard out there? Which sectors are the most worried? What is the scope of the possibility for climate change that you're hearing? Do you have a kind of spectrum of the possibilities?

CHRISTOPHER FLENSBORG: The most worrisome thought for everyone is the water supply. If there isn't enough water for everyone, that will be something that will be highlighted very heavily. That is just one effect of climate change.

The reason why we have approached the climate within the green bonds is because that's the only market where we actually find a market size or critical mass to create a market. We do expect that down the road we will have efforts to actually address needs like water, perhaps even watersheds, all those kinds of things—adaptation projects in general—if the estimations from scientists are going to hold.

Talking about the commitment and talking about the attention which climate change gets in general, I think that you get a lot of attention in many layers of the society. Though, when you're talking about business, which I'm representing, we have some strict mandates and we need to operate inside those mandates. Otherwise, we wouldn't be doing the job which our owners have been asking us to do. Therefore, we need to develop solutions inside the mandates that might get a different framework. At the moment, the frameworks are very strict. That is our limitation.

If water is indeed the most pressing issue in climate change, do you make the distinction, like some governments and some companies do, between green products and blue products? Is there a blue bond coming up in the future?

That might actually be likely, but I don't think it's going to be in the near future. As I said earlier, I hope that we are going to have a uniform market, because if you want to attract the large capital, you need a very uniform market and you need support for it. After you have created that, we hope and we believe that we will see a lot of subclasses—for example, as you expressed it, blue bonds to support specific areas.

When you're talking about large money managers or mandates from pension funds, you talk about a financial mandate. They wouldn't have a specific interest in going in and saying, "Okay, we want to support the water situation," as it is today. But the climate is something that is on the agenda.

Environmental and social governance is a mandate by the pensions. They need to incorporate it one way or the other within their financial mandates, and the green bond is an example of how you can do that.

DEVIN STEWART: Going back to the Financial Times article, the reporter suggests that there has been some challenge in selling this product to the Norwegian Government Pension Fund-Global.

How do you explain some of the challenges that you have already come across?

CHRISTOPHER FLENSBORG: We are not making comments on specific clients. I can tell you that there has been some white papers out in Norway, and I can recommend people to look at that.

In general, we have very broad support, and we also have very broad support inside Scandinavia.

DEVIN STEWART: How have you been received in New York so far?

CHRISTOPHER FLENSBORG: Very well, though saying,"very well" in terms normally within the financial world or investment banking is that you have a deal within a week or two, or perhaps even a day—maximum, a month.

The runway for this is much longer, and that means that it's normal that I spend several months, if not even more—up to a half a year—on a specific client to actually discuss the back and forth on this. I think that might be one of the reasons why we so far are fairly alone in this field.

How do you explain the time difference there?

CHRISTOPHER FLENSBORG: Normally when you operate within a mandate, it's pretty strict: What is my return? You buy it or you don't. But here you are actually saying a statement. You go in and you invest in something which also makes a commitment or a statement that this is actually important, at least if you agree to be mentioned as an investor.

That is not a decision that is taken by the portfolio managers. That is a comment that is made by the chief investment officers or perhaps even the chief executive officers. That is a very high-level decision. Therefore, they need to understand the concept. They need to agree to the concept before they actually agree to be mentioned as an investor.

Are you talking to the whole span of financial institutions? Are they mostly banks? What type of client are we talking about in New York?


DEVIN STEWART: You can't comment.

I can't comment. We have very few clients which have agreed to be mentioned. But we have been speaking to many clients.

DEVIN STEWART: But you have had a lot of success already in California.

CHRISTOPHER FLENSBORG: We had some very good stories in California. We have a strong commitment from the state treasury and from CalSTRS, which have both invested. They totally support the concept, at the same time as they are very strict with the financial return. There is a combination of financial return and commitment to this area.

DEVIN STEWART: Chris, tell us how our listeners can get involved. How about people from civil society or academics, scholars? How can they help you with your project?

I would, of course, love them to help me with my project. I think it's a very important project.

The most important part is to raise the question whenever having the chance: What are we doing?

For example, if you are sitting on a supervisory board, and you have a chance to supervise the whole investment company or corporation you are in, simply ask, what are we doing? Can we do anything? Are we investing in green bonds or other products which are actually addressing this need?

Doing that, you are starting a process which will support a transition.

DEVIN STEWART: You're calling on academics and civil society to sort of open up the door of options, and get the conversation going.

CHRISTOPHER FLENSBORG: Basically, that's all you need to do. I think whenever it's started, it's self-running.

DEVIN STEWART: Chris, SEB is a Swedish bank. Why would a Swedish bank be helping to pioneer this idea?

CHRISTOPHER FLENSBORG: In general, as a Scandinavian, I think that all human beings like nature, but we have a lot of nature and we don't have that many people. So we are very close to nature and very keen to promote nature, which can be seen in a lot of the corporations we have in Scandinavia.

So it's quite natural that we, as a part of this society, actually take the step to promote products which are supporting an area like the environment.

You grew up in Denmark. Did growing up in Denmark have any impact on your thinking and coming up with this idea?

CHRISTOPHER FLENSBORG: I'm sure it did, though I have not lived in Denmark for the last 20 years. I have been traveling around.

I had a period in the mid-1990s when I spent three months in a hospital, and I think that had more of an impact, saying, what are you spending your life doing? What can you do to make a change inside your frames, inside your life? Can you actually address some needs?

I think that certainly pushed my way of promoting the green bonds and gave me the energy to continue working with it for so long.

DEVIN STEWART: Going back to your thinking about Scandinavian societies and their relationship to nature, do you feel that Scandinavian societies have a more salient or a more visceral relationship, a more direct relationship with nature?

We are forced to have a very close relationship. Whether it's more or less I wouldn't know, but we have a very close one.

DEVIN STEWART: In terms of market demand around the world, do you find that Europeans are more excited or more enthusiastic about this product than others?

CHRISTOPHER FLENSBORG: No, I don't think so. I think that the commitment is very strong on a global scale.

Looking at the distribution we have so far, we have roughly 30 percent distributed in the U.S. American investors have been very thoughtful and very engaged in the process as well. The reason why I'm spending four months here is because we are seeing a lot of interest in the U.S.

There's a lot of talk on this side of the ocean that Europeans are more proactive and more committed. I think that's wrong.

DEVIN STEWART: In terms of distribution, which country represents the greatest amount?

CHRISTOPHER FLENSBORG: Sweden. But there's a reason for that.

We developed the green bond in 2007-2008 and it took roughly 14 months. We didn't want to go out to non-house clients, so we went out to our closest clients and said, "This is what we are looking to do. Is this something you will invest in? Is this something where you can give us some input so we are secure that the feature of the bond is actually fulfilling the needs of an investor?"

Give me a timeframe here, as well, a time span. What are we talking about for this product to be fully mature, where it's in the common conversation on Wall Street; ten years, 50 years?

CHRISTOPHER FLENSBORG: The world is about refining. I think that is a process that will be going on forever. I hope that's the case for this one as well.

DEVIN STEWART: How long until "green bond" is a household name?

CHRISTOPHER FLENSBORG: I think we are moving fast in that direction. I couldn't tell you. I hope it will be tomorrow.

DEVIN STEWART: Great. Chris, before you go today, what's next for your agenda in New York and your global agenda?

I'm going to Hong Kong, Shanghai, and Beijing at the end of the month and the beginning of next month. I'm going to spend another three weeks here and then I go to Asia. Hopefully, I will be in Sweden over the summer. Then I might be back here in the autumn, because we have quite a few very interesting discussions going on in the U.S.

And all that travel in Asia is to talk to potential clients as well?

CHRISTOPHER FLENSBORG: That is to talk to potential clients, yes.

Chris, good luck for your travels and for your endeavor.

Thank you very much.

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