Highlights of Climate Bonds Initiative Advisor Panel April meeting

1. IFC on their US$200 mil of Green Bonds2. Climate bond tipping points and issue volumes3. Climate Bonds Standards4. Transition to a low carbon economy: what is missing?5. Green investment banks6. New Climate Bonds Initiative Advisory Panel members

1. IFC issues US$200 mil of Green Bonds

Our guest for the evening, Shilpa Patel, Climate Change Chief at the International Finance Corporation (IFC), told us that the IFC had just issued a $200 million Green Bond; it's a regular IFC bond but proceeds are ring-fenced and only applied to climate-friendly investments. The bond is a test; if the market is receptive, as it looks like it will be, expect a lot more Green Bonds.

Shilpa’s view is that these bonds are a great investment for mission investors and others looking for something to say about their commitment to sustainability in their annual reports.

Issues Shilpa underscored:- Asset backing will be important in the future.- Issues that have arisen with the bonds are (a) additional operational costs associated with ring-fencing without the ability to charge a premium and (b) how do you define climate friendly investment? How far upstream and downstream to include in the analysis of “climate friendly?” Which GHG accounting methods should be used?

Shilpa believes that if there are industry standards developed for Climate Bonds, that would be extremely useful to protect the integrity of the process and to drive scrutiny.

2. Climate bond tipping points: the importance of issue volumes

It was noted that one key to investors increasing their interest in climate bonds will be getting some into the benchmark indeces. That will require issues of between US$500 million and US$1 billion, depending on the index. Getting into an index would mean all fixed term investors would have to look at why not to invest in them. Watch this space.

3. Climate Bonds Standards

Work is underway, led by Prof. Cynthia Williams and Sean Kidney, developing a project to set standards for the labeling of climate bonds. This work has looked at existing models where public private partnerships have created standards – e.g. the privately-developed International Financial Reporting Standards (IFRS) which have become global financial standards in use in 120 countries. The team is currently engaging some cornerstone stakeholders that need to be involved in standards development to give them legitimacy.

There was some discussion about whether to include ratings agencies and project developers in the initial coalition behind the standards.

Arguments to exclude rating agencies were centred around the fact that their current role is to evaluate financial strength whereas the standards we are referring to are an environmental rating. Arguments for their inclusion included the potential for payback coming directly from the project thereby creating a different process for them to rate, the potential to use their experience in developing the rating process and the relationship between climate resilience and financial strength. For project developers it may be more appropriate to involve them at a later stage in order not to have the standards compromised by developers’ financial interests, which may lead to weaker standards.

Experience from developing forest bonds identified the need to reflect what the underlying bond is doing and to allow for regional diversity and not be too prescriptive. Country examples instead of set global standards were suggested, working together to develop an operational response rather than a standard.

The issue of whether the bond should be binary (climate-change-mitigating/not) or graded was raised. CBI expects it to be necessary to have both – with some standards (e.g. for certain renewable energy assets) being able to have a binary standard and more complicated areas requiring a gradation.

4. Transition to a low carbon economy: what is missing?

Is it projects or finance? There was an initial suggestion that a lack of projects was an issue and that the projects that are there are difficult to get at scale.

A strong case was made that the projects are there but the finance is not and there is a need to package for institutional investors. Difficulties in obtaining finance for early stages of projects was also identified as was the problem of obtaining finance for small projects —needed is a policy incentive to encourage aggregation.

5. Green investment banks: extending overseas

All three main political parties in the UK election have backed a Green Investment Bank of some sort, so the country is likely to see one in the near future. This is something we have been pushing for over the past year, working closely with groups such as the TransformUK coalition, Climate Change Capital, Green Alliance, the Aldersgate Group and E3G. Key players on our side have been James Cameron, Sean Kidney, Sean Hanafin and Nick Silver. The debate now will be about how to structure the UK bank and what size it needs to be.

Focus now will be on promoting the model in countries outside the EU. A lack of reliable specialist banks in various countries, in particular to aggregate projects, is seen as a potential barrier to expansion of this market.

In the case of climate bonds, one model being explored is where banks would provide initial project finance, with the green investment institution concentrating on buying the debt from the originating banks to securitise them and sell as bonds. The original bank then has available capital to invest in more projects. The green investment institution would be able to test the investment to confirm that it is green and safe.

Lessons can also be learnt from microfinance. Here getting the intermediaries has been difficult. The role of government was debated, with some seeing the potential for greater certainty in maintaining feed-in tariff policies if they were part of the scheme. Others saw advantages in keeping the government out of the process. It was agreed that green bank structure would need to be tailored to individual countries.

6. New Climate Bonds Initiative Advisory Panel members- Bryn Jones, investment manager, Rathbones- Christoph Harwood, Marksman Consulting- Paul Dickinson, Carbon Disclosure Project- Vicki Bakhshi, F&C Investments