Climate Bonds: Coming Soon to A Broker Near You 0

Over the past two years, The Climate Bonds Initiative has been creating a new class of bonds that can finance a rapid transition globally to a low-carbon economy.

“Bonds have allowed us to finance the building of Europe’s sewer systems, the growth of America’s highway system, and the financing of two World Wars. We can now use Climate Bonds to finance the quick, global transition required to head off runaway climate change,” explains James Cameron, Vice Chair of Climate Change Capital.

“Putting the emphasis on private financing allows a different perspective. In place of always talking about the ‘costs’ of climate change, we can talk instead about investment opportunities,” notes Nick Robins, HSBC Climate Change Centre of Excellence. “The transition to a low-carbon economy presents capital with what is likely to become the largest commercial opportunity of our time: investing in clean energy and low carbon infrastructure,” he adds.

Most of the bonds will be bought by institutional investors, but there are plans to make them available to retail investors too.

The Climate Bonds Initiative, which was initiated by the International Network for Sustainable Financial Markets, an international think tank, now operates as part of the investor-led Carbon Disclosure Project.

According to the International Energy Agency, about a trillion dollars a year through 2050 must be pumped into low-carbon industries to avert catastrophic climate change and to fund adaptation. A large portion of that money will have to come from bond markets.

That may sound like a lot of money, but the mainstream bond market is quite large: more than $6 trillion in new bonds were issued in 2010 alone and funds under management reached $105 trillion.

Just 1% of those assets need to be redirected toward building a low carbon economy. In the past two years, the nascent green/climate bond market grew from $1 billion to $5 billion outstanding, with about $12 billion issued.

Growing this “green debt” market will provide institutional investors with opportunities to switch from carbon intensive to low-carbon investments both to mitigate climate change (renewable energy installations, new technologies that reduce greenhouse gas emissions, reforestation) and adapt to its consequences (watershed management, flood protection, disaster risk reduction).

New Carbon Bond Standard Released

How can investors and governments judge which bonds will help the most to mitigate climate change or help people adapt? Which ones should they prioritize?

It’s important to guide investors to the most vital investments – those bonds that make the most difference – and that’s what the prototype Climate Bond Standard does.

Released in late November, the Standard certifies Climate Bonds using strict criteria, starting with bonds that are currently on the market. It begins with eligible wind projects, and will expand to solar and other renewable energy projects over the coming months.

The Standard assures that funds raised using a Climate Bond are used in ways consistent with delivering a low-carbon economy, and can include projects or assets that directly contribute to:

  • developing low-carbon industries, technologies and practices that achieve the level of resource efficiency necessary to avoid global temperature rise over 2 degrees Centigrade
  • essential adaptation to the consequences of climate change.

For the next six months, certification will proceed using a prototype Standard, while changes are incorporated based on feedback. After that, the Standard will be final. To apply for certification, bond issuers will pay one-tenth of a basis point of the bond’s value, and will also pay a licensed third party to verify the bond complies with the Standard.

“The transition to a low-carbon economy requires a wide range of energy and infrastructure investments,” says Jack Ehnes, CalSTRS CEO. “We are concerned that the investments being made are the right ones. Climate Bonds Standards will provide a simple tool for investors to screen the opportunities that come before them.”

“We are looking for investment grade returns that also address climate change,” says Michelle Cunningham, CalSTRS director of fixed income. “We challenge industry and government to provide the investment opportunities we need to both deliver secure pensions for our members and address the long-term systemic threat of climate change to investment values.”

The Standard was developed by the Climate Bond Board, which consists of large pension funds such as the California State Teachers’ Retirement System, (CalSTRS), investor groups such as the Ceres Investor Network on Climate Risk, governments like the California State Treasurers’ Office, and nonprofits such as the Natural Resources Defense Council.

The Climate Bonds Initiative is also developing government policies which support rapid scaling of green investments, such as regulatory mechanisms, tax policies and green banks. And it’s developing models to make projects and assets attractive for bond financing, such as renewable energy, energy efficiency and forestry.

State Street’s Green Bond  

In October, State Street Global Advisors, one of the world’s largest fixed income managers, began offering its High Quality Green Bond strategy, which allows institutional investors to hold separate accounts that invest in fixed income green bonds.

The move followed that of Nikko Asset Management of Japan, which raised $640 million for its Nikko AM World Bank Green Fund, the first fund dedicated to investing in green bonds issued by the World Bank.

In the last three years, the green bond market has begun to open, led by multinational development banks and other supranational organizations, like the World Bank and the European Investment Bank. They now issue low-risk triple A-rated bonds, yielding double the rates of U.S. Treasury bonds.

So far, the largest issuers of green bonds are the World Bank at $3.3 billion, the European Investment Bank at $1.8 billion, and the Asian Development Bank with $897 million. About $12 billion has been issued to date.

The US issued its first green bond in 2007, but most of the funds in the The Qualified Energy Conservation Bond program remain unspent. Of the $3.2 billion available, only $550 million has been spent, leaving $2.7 billion for efficiency, green building and clean energy projects. A move is underway to make these funds available.

Given the volatility of financial markets, bonds are a lower-risk option, but until now there have been few investment-grade green bond choices, and most of those were small and lacked liquidity, keeping institutional investors away.

State Street’s strategy offers investors a way to scale green fixed income investing, which will likely drive better pricing and facilitate greater liquidity due to aggregate buying power.

The company hopes to create a fund that can accommodate smaller investors or those investors that prefer a commingled structure.


Climate Bonds Initiative

Green Bond Bankers in Japan, Sweden Beat U.S. to $7 Billion

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