Germany, known for its fiscal probity, is considering loosening the purse strings to help finance a climate protection program, according to a report from Reuters. The speculation attracted most attention in the bond markets, briefly lifting the yield on the 10-year Bund. With the European Central Bank considering further monetary easing to support economic growth, any signs of fiscal flexibility from Europe's largest economy would be welcomed by many economists.
The Germany Finance Ministry subsequently said there had been no decision to abandon its balanced budget policy. But the reports highlight the growing opportunity for investors provided by the trend toward governments considering bolder measures to help the environment. For example, there is an ongoing debate in Germany over whether to eliminate preferential VAT tax rates for meat, in part because of the significant contribution the livestock sector makes to the production of greenhouse gases globally.
We believe that a combination of government action and a shift in consumer behavior will boost returns for various investments:
- Mounting financial headwinds for firms with high carbon emissions increase the financial opportunity for renewable energy producers. The price of European Union carbon permits recently hit a record high of EUR 29.76, 260% higher than at the start of 2018. Meanwhile, between 2009 and 2017, prices of solar panels and wind turbines fell 76% and 34% respectively, making them competitive with, or cheaper than, fossil fuels in most major markets.
- The range of options for environmentally conscious investors has been increasing. Reports this week suggest that Germany's Ministry of Finance is considering funding its upcoming climate drive with green bonds, fixed-income instruments that devote their proceeds to environmental projects. Issuance of bonds used to finance clean energy projects has already reached a record USD 85bn so far this year. Green bonds as an asset class have grown from nonexistent to a USD 600bn market in just over a decade, and the issuance of higher yielding green bonds from emerging markets has also been rising. Liquidity has been improving as well. Over half of the emerging markets' green bond issuance last year was benchmark-sized, at USD 500m or more.
- Disruptive tech and new ideas are shaking up the global food and agricultural sector, presenting investors with an opportunity to reshape the farming, shipping, and consumption of food. We expect food innovation to become a USD 700bn market by 2030—a fivefold jump from today. Read more in the CIO report "The food revolution: The future of food and the challenges we face."
So we believe clean energy offers potential for long-term investors. For more details, see our long-term themes on renewable energy and energy efficiency. Green bonds, meanwhile, are becoming an established asset class and have so far been offering comparable returns to conventional bonds, while allowing investors to align their portfolios with their ethical values.
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