In December 2010, the Climate Bonds Initiative launched the Climate Bond Standard and Certification Scheme to help both the investment community and governments preference fixed-income investments for climate change solutions.
The Climate Bond Standard will grow green debt capital markets by:
- Providing assurance for investors about the environmental integrity of climate bonds
- Providing governments with an easy-to-use tool to preference investments
- Fostering growth for investor demand in climate-related investment opportunities.
Climate Bonds are themed asset-backed or ring-fenced bonds issued to raise finance for climate change mitigation or adaptation related projects or programs.
Themed bonds are a means of making a claim about policy or values benefits of the underlying assets. They don’t necessarily infer differences in risks or rewards — ratings agencies still look at the credit worthiness of the issuer and/or the underlying assets.
Thematic labeling provides a means for investors interested in the theme area to focus investing on that area. More importantly, it provides a tool for governments to preference debt in a specific policy area, for example through innovative regulatory mechanisms, tax policies and risk-sharing.
Since the launch of the World Bank Green Bonds programme in 2007 and the Climate Awareness Bonds by the European Investment Bank (EIB) in 2008, investors have snapped up Triple A-rated paper whose proceeds are ring-fenced for investments that help combat climate change. The fact that the bonds are plain vanilla issuances, no different in structure or risk reward to standard multilateral debt, means that fund managers can cater to investor demand for environmental impact without compromising their investment strategy.
It is important to remember that much of global wealth under management is derived from pension funds and insurance companies who often have an acute awareness of the macro risks of climate change. But while they recognise that fiduciary duty – the need to protect the best interests of benefactors – compels them to consider the impacts of climate change to their portfolio, they are often uncomfortable with the risk profiles of mitigation investments such as clean energy, energy efficiency or forestry.
The World Bank and EIB bond programmes fulfil this investor appetite for low risk, low-carbon debt, and provide assurances about how their climate bonds’ proceeds are used to satisfy investors.
The Climate Bonds Standard sets out to achieve a similar assurance within the wider bond market. What is innovative about the standard is that it allows not only obvious project bonds for renewable energy generation or green portfolio bonds to be labelled as ‘climate bonds’, but it also allows corporate bonds to be linked with low-carbon activities, without compromising on the normal credit ratings of the issuer.