This is innovative financing and could transform the pension market

Posted on

The World Bank has announced:

12 November 2008 - The World Bank has issued its first bond where the proceeds will be directly invested in climate change-related projects. The bond is the first product of a wider Bank effort, in collaboration with large institutional investors, to direct large-scale institutional money to tackling climate change.

The Bank has raised around $300 million in Swedish krona-denominated six-year bonds, sold by Swedish bank SEB to Scandinavian institutional investors. The money raised will be invested exclusively in technologies that reduce greenhouse gases, energy efficiency projects, reforestation or avoided deforestation projects, or to help developing countries adapt to the effects of climate change.

"This was very much based on demand from key investors," Heike Reichelt, head of investor relations at the World Bank, told Environmental Finance . "SEB has had very positive feedback - we think there will be interest in other markets in Europe and maybe in the US."

The Green New Deal group, of which I am a member, has been arguing for the issue of Green Bonds in the UK by local or regional authorities to finance local economic regeneration to counter the recession.

I think the logic of such bonds, and the need for pension funds to invest in them is so glaringly obvious that I cannot understand why the development has not occurred. The fundamental pension equation is incredibly simple to understand, despite all the myths that are built around it. One generation has to create sufficient capital which the next generation will need to ensure that their offspring will wish to pay their parents sufficient for use of that capital to provide the older generation with an income in their old age. There is nothing more, or less, to it than that unless one relies upon the goodwill or philanthropy of succeeding generations (as we have always done, at least in part).

There is absolutely no way on earth that we can pretend that the capital that must be created to fuel this process can be generated by investing in the shares of stock exchange companies. There have been almost no net share issues other than to refinance losses or to pay for takeovers by the stock exchange companies for many years. Indeed, in the USA there has been a declining supply of shares in stock exchange companies available for sale: a deliberate process that ensures the continuing wall of money thrown at the markets by pension funds, month in and and month out, must result in an increasing share price because the shortage of supply guarantees that is the case until the resulting excess price is appreciated to be exuberant and a massive restatement takes place (as we have just seen). That is inevitable when the stock exchange is merely a mechanism for trading in second-hand shares and creates very little liquidity and almost no net investment in productive capacity in the economy.

Investment through bonds specifically issued for the creation of public infrastructure for green investment on the other hand does result in direct investment in the economy and as a consequence produces both an immediate economic boost and a long-term capital resource which produces savings in energy costs, a store of value, preserves the value of our currency, provides a net contribution to the local economy in which the person paying for it might well live, and pays a return over the period during which the person who has made investment might require that return to provide them with an income in their old age. Accordingly there is a complete economic match between the investment process and the required payback to ensure that the pension obligation is met.

Colin Hines, Alan Simpson MP and I first argued for this in a New Economics Foundation publication called "People's Pensions" back in 2003. The argument was pretty much dismissed at the time, but I remain sure that the essence of our case was absolutely sound, and its time has come. Pension reform is part of any Green New Deal: indeed any New Deal whether Green or not. And I think that the way I suggest is the way to go. Never again should we allow people to so recklessly invest the savings of our potential pensioners in hopeless speculation in the meaningless shares issued by major corporations whose life expectancy is, we all know, more limited in most cases than the people on whose behalf the funds are invested.