The Syndicate podcast, episode five: World Bank and the first green bond

4 min read
Gareth Gore

The sleepy financial centre of Stockholm seems like an unlikely place for one of the biggest – if not the biggest – market innovations of the 21st Century. But in 2008, a confluence of factors came together that saw the Swedish capital give birth to the first-ever green bond. After a slow start, that one deal would eventually grow into an asset class that today generates US$1trn of issuance a year, raising vital funds to tackle climate change and create a more sustainable future.

It was born into an almost feverish world of financial innovation. This was just before the global financial crisis, the era of the quant, those mathematical prodigies lured into banking by the fat salaries on offer, who were becoming increasingly confident in their ability to structure ever-more complicated products. Banks were cooking up new varieties of alphabet soup on a regular basis – this was the era of the CDO, the CDO-squared and CPDOs.

It was also a time of growing public awareness around the issue of climate change. The IPCC had just put out a report stating for the first time there was indisputable evidence that human action was causing global warming. Al Gore had just won an Oscar for his film An Inconvenient Truth. Both the report and the film were credited with galvanising the public and policymakers in a fight to save the planet, culminating in the two being awarded the Nobel Peace Prize.

The frenzy of financial innovation and the growing awareness around climate change gave one banker at SEB in Stockholm an idea. Unable to keep up with the big US and European banks on the complicated products that promised risk-free returns being pushed to clients, Christopher Flensborg decided that one way to compete was by doing something completely left-field. Why not offer clients something that promised to directly tackle climate change?

Flensborg knew he had a captive audience for such a product right there in Stockholm. He knew that the big Swedish pension funds by law had to invest their money responsibly. While many of them had divested from unsavoury investments such as arms manufacturing, in truth they were struggling to show their boards just how they were investing the public’s money responsibly. Flensborg and his team at SEB thought they had a structure that would solve that problem.

This episode of the podcast tells the story of how Flensborg and his team made that first deal happen. It’s the story of how they fought to convince a handful of pension funds in Stockholm and Norway to back their new idea and how, after finding potential buyers, he then had to find someone to actually issue a bond in this new format. It’s the story of how he convinced the World Bank to be the first issuer and of the months of back-and-forth to make it happen.

But it’s also the story of how the deal came very close to falling through, of how the collapse of Lehman Brothers and ensuing blow-out in spreads led to some buyers dropping out. In a race against time, SEB and the World Bank rushed to get the deal over the line before all the potential investors dropped out. Just seven weeks after Lehman collapsed, the World Bank priced the first green bond deal, a Swedish kroner five-year issue, raising SKr2.325bn – about US$300m at the time.

To hear this episode – and more like it – for free and in full, click one of the links below or search your podcast provider of choice for "IFR the Syndicate".