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Father of green bond: “It all started in hospital”

Christopher Flensborg’s official job title is ‘Head of Climate and Sustainable Finance Business Development’ at SEB, a leading Nordic financial services group. For many people, though, he is better known as the ‘father of the green bond’. He himself is uncomfortable with this accolade, regarding himself simply as ‘one of many pioneers’.

For those not entirely familiar with the term, a ‘green bond’ is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. They’re hugely popular today, but how did they come into being?

Three months in hospital

“It all started back in 1996, when I spent three months in hospital,” Christopher Flensborg says. “While I was in hospital, I promised myself that, if I could ever do anything for the climate, inside of what I believe in, then I would do it. And I do believe in capitalism. I do believe that the human drive comes from performance: for some people that’s dollars, for others, it’s running a hundred metres, and for other people, it’s beauty. But somehow we all like to compete. We don’t always win, but we want to give it a shot. And that’s what the capitalist system works on. It thrives on this kind of motivation. And I believe in that. I also believe that you should try to do good at the same time.”

“The opportunity came in 2006-2007, a time of massive wealth creation due to low interest rates. High incomes meant high tax revenues, so there was no government demand for finance. In that type of situation, pension funds and insurance companies have a problem: the government bond market dries up. So the management of SEB asked me to try and find something to replace government bonds. The obvious alternative were SSA (sovereigns, supranationals and agencies) bonds.”

A second problem

“But there was a second problem, which was that all kinds of other instruments were yielding higher than SSA bonds – they were yielding 20, 30, 40 basis points more than traditional SSA bonds. The prime buyers of SSA instruments – central banks and pension funds – were looking at these alternatives for picking up a bit of yield. That meant that it was not as easy as it should have been to find an alternative for zero-risk instruments.”

“I went back to the promise I had made in hospital and said, ‘Okay, so pension funds are talking a lot at the moment about climate and global warming. Maybe we can use this to find a replacement for government bonds. And I came up with a rough idea, which I showed to a number of Nordic pension funds. And they said, ‘We like this. This is something we would like to do.’”

“So suddenly there was an opening for making up for the lack of government bonds, picking up 30, 40, 50 basis points and contributing to the climate change movement. With the blessing of four local pension funds, I went to two large issuers. One of them, the World Bank, said ‘We like this idea.’ At that stage, most of the World Bank’s funding came from central banks, so it formed an opportunity to re-engage with an investor class – pension funds – who had been absent for a while. A month later, the World Bank came back and said, ‘Yes, let’s do this.’

Climate language, not financial language

“But when they sent me a draft of what the bond would look like, I suddenly realised that they didn’t understand what they were talking about. They were talking in climate language, not in financial language. They were talking about mitigation, adaptation, lock-in effects, life cycles and all these kinds of things. We all know them about now, but nobody had ever heard of them in finance before.”

‘Okay, so pension funds are talking a lot at the moment about climate and global warming. Maybe we can use this to find a replacement for government bonds.


“So I got back to my team at SEB and asked them: ‘How can we demonstrate to our pension fund clients that we’re doing the right thing?’ We needed to find an expert, someone who knew something about climate issues and who could tell us what we needed to do. So I did some Googling, and I ended up with an internationally recognized climate research institution in Norway called Cicero. I called Knut Alfsen, the Head of Research and said, ‘I have this great idea, but I don’t know how to proceed. We need to verify whether this is the right way to go ahead, so that we can go to the pension funds and say that the scheme is backed not just by the World Bank, but also by a recognized verifier. Can you help me?’ And Knut said ‘Yes.’”

“So we got ourselves a second opinion. This was the outcome of a debate between Cicero and the World Bank about short-term and long-term impacts, lock-in, recycle and rebound effects, and life cycles. Cicero examined all these factors, which today are all part of the climate market. And in doing so, they set the standard for the future.”

Half the order book lost in three days

Once this had been done, everything was in place for execution. The plan was to raise one billion dollars. There were already Swedish and Norwegian investors on board, together accounting for around 800 million dollars, so the target was pretty close to being met.

“But then Lehman Brothers went bust and I lost half the order book within three days. We waited for another week and then we said “Okay, we still have the other half of the order book. We’ll execute.”

“This was the very first transaction. And it wasn’t long before a call came in from the UN Joint Staff Pension Fund saying, ‘We saw this transaction and we want to buy another 500 million.’ A couple of months later, the State of California called me: their treasurer liked the idea and they wanted to invest 400 million dollars.”

Exciting times

“I went back and forth to the US a number of times to speak to US investors. The Mennonite Medical Association wanted to invest. A number of highly regarded ethical investors came in, as did the New York Commons. So there was a lot of activity in the US. These were exciting times, especially because SEB is itself a very European institution. We are not a traditional US house and suddenly, we had US investors and were doing US dollar transactions. That meant that I needed a lot of support from my back office and my mid-office. These guys realised not just that it was something new, but also that it was in aid of a good cause. They were amazingly helpful: they worked all hours and stood on their heads to make it happen.”

But then Lehman Brothers went bust and I lost half the order book within three days. We waited for another week and then we said “Okay, we still have the other half of the order book. We’ll execute.”

More issuers

The next step was to attract more issuers. So Flensborg went to the IFC, the World Bank’s neighbour. The IFC issued a green bond in 2010, taking things to the next level. “State Street joined up and devised a strategy. On the back of the World Bank, IFC and State Street, Zurich Insurance also started doing green bonds. We had Bank of America, and we worked together with the Export-Import Bank of Korea. And then nine banks sat down to draft the ‘Green Bond Principles’. And people started saying, ‘Wow, there something’s going on here. We need to get into this.’ And so a market gradually came into being.”

An inclusive transition

Which is how things snowballed into today’s green bond market, representing some
EUR 700 billion in assets. One of today’s buzz words is ‘additionality’. “Protocols and disclosure are both tremendously important in the green bond market.” Another is ‘transition’: “We need the old energy to transform into carbon-free in one way or another; we need the old transport system to transition to carbon-free. And we need the old housing system to transition to carbon-free, basically reducing the imbalances of carbon in the atmosphere. If we don’t invite the old players to take part, we’re going to create segregation. Segregation is going to create instability, not solutions. The only way we can have impact in the year aheed, is by having an inclusive transition.”

Flensborg believes that it will be investors who set the agenda in the future. “That’s how the green bond market has evolved, and that’s how the transition bond market is going to evolve, too.” In other words, the onus lies on the pension funds as investors.

Asked what he would recommend to others also wanting to make a difference, Flensborg says he believes that the current coronavirus crisis may also be an epiphany. “We all want to contribute to society in one way or another. But we have our limitations in terms of our mandates and the need to pay our bills. Covid-19 might well be a trigger: lockdowns have given people time to think what they can do to create a more robust society. The questions they ask will lead to more awareness in decision-making.”