In October 2018, the Climate Bonds Initiative convened the Adaptation and Resilience Expert Group (AREG) to design a set of principles that would guide the integration of criteria for climate adaptation and resilience into the Climate Bonds Standard. The Climate Bonds Standard & Certification Scheme for green bonds was established in 2015 to provide guidance to issuers and provide assurance to investors on green bond credentials in a voluntary market.
Questions on Adaptation and Resilience?
The Climate Resilience Principles (CRP) document is therefore intended for a wide audience, including but not limited to bond issuers, investors and other stakeholders seeking guidance on:
The potential range and type of climate resilience investments
How to define and assess physical climate risks
How to credibly demonstrate climate resilience outcomes
The Principles provide a framework for Climate Resilience Criteria requiring Certified Climate Bond issuers to go beyond just assessing climate risks. Specifically, issuers must demonstrate that for the assets and activities (re)financed via the bond they:
- Understand the climate risks faced by the asset, activity or system in question;
- Have addressed those risks by undertaking risk-reduction measures and adopting flexible management plans that take account of inherent uncertainties around climate change, ensuring that the asset, activity or system is robust, flexible and fit-for-purpose in the face of that uncertainty;
- Can deliver resilience benefits over and above addressing identified risks (for system-focused investments); and
- Are undertaking regular (re)evaluation of the asset and/or system’s climate resilience performance, adjusting to risk reduction measures over time as needed.
See the AREG members here.
Figure.1. Overview of the Climate Resilience Principles
In terms of the range of climate resilience investments, two types are identified, both of which are encouraged for inclusion in green bonds:
- Asset-focused: Where the intention is to maintain or enhance the resilience of an asset or activity to climate change, specifically to ensure that the asset or activity’s performance is fit-for-purpose over its design lifespan. In many cases, this will also contribute climate resilience benefits to the system in which the asset or activity is a part, depending on the type of product or service the asset or activity provides.
Examples of asset-focused investments include upgrading, replacing, or relocating infrastructure to reduce vulnerability to floods etc, use of drought resistant crops or training on and implementation of sustainable farming practices at individual farm level to maintain and enhance productive capability and incomes.
- System-focused: Where the intention is to deliver climate resilience benefits to the broader system (i.e. going beyond merely ensuring an asset’s or activity’s performance over its design lifespan). To be effective, such an asset or activity will also need to have a sufficient degree of resilience to climate change.
Examples of system-focused investments include the construction and operation of desalination plants, research into drought resistant crops, wild-brush clearing at landscape level, climate monitoring and data management technologies and services, and provision of healthcare services for the treatment of diseases that might increase due to climate change.
The Climate Resilience Principles:
1. Boundaries and interdependencies for assessing climate risks and resilience impacts are clearly defined
Issuers must define the boundaries of the climate resilient investment and associated assets and activities, as well as the internal and external interdependencies between the broader system affected by those assets and activities.
These boundaries and interdependencies are important for scoping risk and benefits assessments, and ensuring the asset or activity being invested in is fit-for-purpose and does no harm to the system of which it is part, per the further principles defined below.
2. Physical climate risk assessment undertaken
Issuers must perform an assessment of the physical climate hazards to which the subject asset or activity will be exposed and vulnerable over its operating life.
Issuers should use both top down risk assessment methods using a broad range of climate models and observed data. RCP 4.5 and 8.5 emissions scenarios should guide these top down assessments. Bottom up risk assessment methods that look at inherent system vulnerabilities in local context should also be used.
3. Risk reduction measures undertaken
Issuers must demonstrate that the risks identified have been mitigated to a level such that the subject asset or activity is ‘fit for purpose’ in the face of coming climate change over its operational life, and does no significant harm to the resilience of the system of which it is a part.
It is recognised that that there will be uncertainty about future climate change impacts, which influences on what it means to be ‘fit for purpose’. Therefore, flexible solutions that are robust in a variety of scenarios are encouraged.
4. Climate resilience benefit assessment undertaken
Issuers are to assess the climate resilience benefits of system-focussed assets and activities and demonstrate that they are ‘fit for purpose’ in the sense that they significantly contribute to enhancing climate resilience at a systemic level, again with flexibility to take into account the inherent uncertainty around future climate change impacts.
5. Mitigation trade-offs
Climate mitigation requirements may be lowered for climate resilience focused assets or activities whose resilience benefits considerably outweigh associated emissions or serve to avoid GHG emissions in the event of a disaster. In these instances, a trade-off analysis is required. Discussion is ongoing as to a rule set to determine under what circumstances such a trade-off might be permitted and the nature of the trade-off analysis in the circumstance.
In every case, the asset or activity must not lock in fossil fuels or undermine any international or national commitments.
6. Ongoing monitoring and evaluation
Issuers are required to undertake ongoing monitoring of climate risks and benefits to determine whether the subject assets and activities continue to be fit for purpose and maintain any climate resilience benefits as climate risks evolve.
In its reporting to the Climate Bonds Initiative, the issuer must annually verify this ongoing monitoring and evaluation of the climate resilience performance.