Climate Bonds

Bonds key to protecting forests

Posted on 22. Sep, 2011 by Sean Kidney in blog

The Climate Bonds Initiative, with WWF and the Global Canopy Programme, today published the “Unlocking Forest Bonds” report of a high-level workshop on tropical forest finance. The report argues for regional development bonds as an instrument to save forests.

> “Read the PDF report – “Unlocking Forest Bonds”

> Read the press release below — and join the WEBINAR on 29 Sept.

London, UK, 19 Sept 2011 – Forest bonds could be key to scaling up finance to conserve the world’s tropical forests, according to WWF, the Global Canopy Programme (GCP) and the Climate Bonds Initiative (CBI). The organizations are calling on governments to take action to close the gap between current financial commitments and the resources needed to protect the world‟s forests.

Upcoming United Nations climate change talks, set to get underway in Panama in early October and South Africa in December, provide an opportunity to focus on innovative options for financing forest conservation. To end forest loss, forest countries need support from industrialized countries. While public financing is essential, other sources of innovative financing, such as credit support for forest bonds, could be a way to leverage private-sector finance so that the public sector is not alone in efforts to scale up forest finance, according to the groups.

“The alarming rate of forest loss around the globe is releasing billions of tonnes of CO2 and destroying irreplaceable biodiversity. The world needs to increase forest finance by tens of billions of dollars in the current decade just to halve this forest loss,” said Don Kanak, Advisor to WWF‟s Forest and Climate Initiative, who is also Chairman of Prudential Corporation Asia.

Kanak added “We can’t wait until the last tree has fallen to find this large-scale of finance. Forest bonds may be a promising way to close that short-term gap in financing so our forests don‟t slip away while we sort out how we’re going to fund their long-term conservation.”

“Tropical forests are critical natural capital that provide ecosystem goods and services that underpin the world’s wealth and human wellbeing, supporting climate, water, energy, food, health and livelihood securities at local to global scales,” said Andrew Mitchell, Executive Director of Global Canopy Programme. “The responsibility to end forest loss and protect these services has to be shared among governments and private sector from industrialized and forested countries. With carbon market negotiations proceeding slowly, forest bonds offer a way to compliment the public funds available by leveraging large-scale private-sector finance to help safeguard vital ecological infrastructure.”

Bonds are a familiar financing mechanism in sectors such as health and energy, and are receiving increased interest as a mechanism to finance mitigation of and adaptation to climate change, including for reducing emissions from deforestation and forest degradation, and conserving, sustainably managing and enhancing forest carbon stocks (collectively referred to as REDD+).

“Forest bonds are a tool for countries, multi-lateral development banks, and private financial institutions to tap into the international bond market that is worth nearly 100 trillion USD,” said Sean Kidney, Chair of the Climate Bonds Initiative, an investor-focused NGO.

Kidney added “Time is short. While REDD+ is an opportunity, investor demand is weak. We think the most fertile ground is to use regional forest retention programs that rely on diversified income streams to support a ‘forest’ bond. We can use such programs to create jobs and give people better opportunities than felling trees.”

Borrowing allows significant up-front investment to be made in developing the financially viable projects that will enable forest retention. According to WWF, GCP and CBI, under the right conditions, forest bonds could become a useful large-scale financing mechanism in the effort to reduce global forest loss.

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Summary of report

Based on the outcomes of a workshop that brought together experts on tropical forest policy and finance, Unlocking Forest Bonds reports on how to overcome challenges associated with using bonds for the conservation and sustainable use of forests. The workshop was co-hosted by WWF, GCP and CBI, and supported by Goldman Sachs and Fondation 1796 (Lombard Odier).

Key findings include:

REDD+ and More — To make forest bonds feasible on a large-scale, a range of revenue streams should be used to pay the bonds back. Along with REDD+, payments for watershed services, environmental taxes, sustainable timber revenues and many other revenue generating mechanisms should be explored as collateral against a forest bond.

Making Forest Bonds Legitimate —To succeed, forest bonds must work for all stakeholders, including private sector investors, international policy-makers, and governments and citizens of forested countries. This means that the risks and rewards must be appropriately balanced between these groups. It also means that there must be real environmental and social benefits associated with making such an investment.

Role of the Public Sector — Forest country governments can themselves issue bonds, and this may be a good option in some cases. For example, Brazil has a strong economy and an international mandate to reduce forest loss in the Amazon. Donor countries can support forest country governments, and other institutions wanting to issue a forest bond, by using their available public funds strategically, to reduce the risk associated with its payback.

> Download the report: www.climatebonds.net/resources/unlocking-forest-bonds-5-messages/

Our partners

About WWF. WWF is one of the world’s largest and most experienced independent conservation organizations, with over 5 million supporters and a global network active in more than 100 countries. WWF’s mission is to stop the degradation of the planet‟s natural environment and to build a future in which humans live in harmony with nature, by conserving the world’s biological diversity, ensuring that the use of renewable natural resources is sustainable, and promoting the reduction of pollution and wasteful consumption.  www.panda.org/forestclimate

Adaptation bonds to help save Australia’s Great Barrier Reef – seminar 27 Sept in London

Posted on 21. Sep, 2011 by Sean Kidney in blog

> You’re invited to hear Judith Stewart, CEO of the Great Barrier Reef Foundation, speak about Reef Bonds on Tues 27 Sept, 4pm London time. Location: central London; dial-in available.

Climate Change investment usually means ‘mitigation’ – clean energy to reduce power sector emissions, transport to shift away from oil, etc.

But global GHG levels are already so high so that we’re no longer in a race to avert climate change – we’re too late for that – but rather to avoid the catastrophic climate change that would come from 6-7C temperature increases at the higher projections made by the IPCC. That’s where we’re currently headed.

Wherever we end up, we will require huge adaptation effort to deal with the changes already in the planet’s climate system, which will see, among other things, warmer ocean temperatures and increased ocean acidification. Say hello to a lot more acid-loving jellyfish.

Over the last two years Australia’s Great Barrier Reef Foundation (GBRF) has been developing a new program of research into how the Great Barrier Reef (the Reef) might adapt to these changes. 10 months ago it launched a new portfolio of projects called Resilient Coral Reefs Successfully Adapting to Climate Change.

Yes, you read right, concrete proposals to help reefs adapt in the face of climate change.

However, time is pressing. GBRF’s Board of Directors and International Scientific Advisory Committee are now convinced that forecast changes in critical conditions leave as few as ten years in which to assist the Reef’s adaptation to climate change. Already, the Reef is experiencing the damaging first wave of climate impacts, yet there is almost nothing practical to hand with which to combat their effects.

GBRF needs funding as quickly as possible to fund its R&D program, to roll out pilots and to then scale up successful trials. It needs $AUD100m with 60% of that required upfront.

For the past 18 months the GBRF, working with pro-bono partners Goldman Sachs and KPMG, has been exploring the idea of raising that money from the domestic and international capital markets with a five-year “Great Barrier Reef Bond”.

The bond would be serviced with a revenue stream assembled from those who use the Reef and others who benefit most directly from having a healthy Reef (i.e. those who have the most to lose from a catastrophic climate-induced event on the Reef ). KPMG has looked at a revenue stream based on collecting very small increases in existing levies and charges relating to Reef use or benefit (effectively hypothecated tax revenue), and to see if it could be brought to scale. The political palatability of any such charge or levy is the main issue; it will rely on support from Reef-dependent business.

The user-pays revenue stream is central to the model’s success in the longer term; it will provide long-term, sustainable funding for climate adaptation research over the years to come and it is absolutely key to its replicability to a host of other valuable public and private applications.

GBRF will allocate the funds so raised by the Bond, in priority order, to its Portfolio of Reef adaptation research projects, a process directly overseen by GBRF’s own governance and compliance processes.

The Climate Bonds Initiative sees this asset-backed or asset-linked approach as essential to assure investors, governments and other stakeholders that funds intended for climate change solutions are going to the right places.

Judith Stewart, CEO of the GBRF, says that “Preservation of the Reef is fundamentally important to Australia’s economy, its reputation and its international brand. We are very confident that if we can do make this bond work for the Great Barrier Reef, many other high public good activities, both philanthropic and otherwise, can be financed using this model.”

Join the talk and find out just how far this proposal has gone.

“Financing for a zero-carbon power sector in Europe”: new report from ECF, Climate Bonds & Co.

Posted on 16. Sep, 2011 by Sean Kidney in blog

We’ve been working – with a bunch of others – on a project for the European Climate Foundation around finance for a transition to a low-carbon Europe. The report of that project has just been released. http://goo.gl/0PPYV

If you want a short-cut summary go straight to the European Energy Review article about the report that came out yesterday. http://goo.gl/clBuL

Some of the findings:

• European energy companies will not be able to finance the transition to a decarbonised power system on their own. They will need the help of institutional investors. But there has been too much emphasis on pushing risk on to investors. Governments have to lower policy risk associated with low-carbon energy sources.
• An “investment-grade policy framework” has to look beyond energy and climate policy.
• Better dialogue is needed between policy makers and the financial community.
• Investment-grade climate-related bonds should be explored.

The report follows on from the earlier, highly-regarded, “Roadmap 2050: A practical guide to a prosperous, low-carbon Europe“.

The report was funded by the European Climate Foundation (ECF), who were also a participant in research. The project team also included the Climate Bonds Initiative, the Institutional Investor Group on Climate Change, Mark Woodall (ex-CEO Climate Change Capital), Kirsty Hamilton (Chatham House), E3G, the Carbon Disclosure Project, Climate Strategy & Partners and the Ecofin Research Foundation.

Eversheds to provide legal advice for our eco-refurbishment finance project

Posted on 16. Sep, 2011 by Sean Kidney in blog

Earlier this week I sent you a note about our “LEEP” project to develop capital markets financing solutions for residential eco-refurbishment (energy efficiency + micro-renewables). It’s a UK project at the moment, with plans to extend our work to other countries. Key features of the model are:

- Local Authorities facilitating and supervising local loan funds and service delivery for households.

- A mix of policy and service delivery solutions that will address barriers to eco-refurbishment being taken up by householders.

- Re-financing loan funds by issuing climate bonds designed to meet the needs of institutional investors.

We’ve had some good news today for Phase 2 of that project: Eversheds, one of the UK’s largest law firms, has agreed to provide pro-bono legal advice to the project. That will be invaluable when it comes to exploring contractual options for Local Authorities managing schemes and regulatory changes that might be required.

Eversheds partner Michelle Davies said:

“The UK’s Climate Change Committee has told us all how vital it is in addressing climate change that we improve energy efficiency across the whole country; that simply can’t be done unless we can engineer finance from capital markets. We’re delighted to have the opportunity to support the Climate Bonds Initiative and the LEEP project in their efforts to design policy and schemes that address this issue.”

Good news for the LEEP consortium (Climate Bonds Initiative, UK Energy Saving Trust, Ecofin Research Foundation and Marksman Consulting) and, hopefully, good news for emissions reduction in the future.

Climate Bonds to release residential eco-refurb financing rpt – sneak preview

Posted on 15. Sep, 2011 by Sean Kidney in blog

The Climate Bonds Initiative has been working all year on developing a sustainable and replicable residential eco-refurbishment solution that attracts commercial capital at a national scale.

> Download advance copy of Phase One Report – click here

Called LEEP (Local Energy Efficiency Project), it’s a joint effort between the Climate Bonds Initiative and the (UK) Energy Saving Trust, the Ecofin Research Foundation and Marksman Consulting. In parallel, project partners Energy Saving Trust and Marksman Consulting have been working with Birmingham City Council on a new £100 million residential eco-refurbishment fund that allows us to implement some of the LEEP proposals.

The Phase 1 report of the project will be released at a project seminar at HSBC in London, on 21 September 2011. (Let me know if you want to join; there are still places available.)

The research aims to address three issues:

1. How to design programmes that will attract substantial capital markets financing.

2. How to dramatically increase household uptake, to both meet emission goals and to improve commercial viability of efforts?

3. How to ensure sustained emission reductions and energy savings?

There’s been a lot of work on promoting energy efficiency measures for householders, but both investment levels and householder take-up rates have remained low. As an authoritative report from the US Regulatory Assistance Project said recently:

“No large jurisdiction can claim to have developed and demonstrated an approach to residential retrofits that is capable of averaging a market penetration of 5% per year. Indeed, no country or jurisdiction of any size is currently reaching even 2% of the housing stock annually through whole-house approaches.”

This is troubling because at 2% p.a., let alone 5%, the UK will take too long to meet national household energy efficiency improvements needed to meet emission reduction targets. And that’s an issue in all countries trying to tackle the issue.

The LEEP project uses Local Authorities as facilitators of comprehensive programmes designed to attract private sector commercial finance.

Work on Phase 2 of the project will begin next month, subject to securing funding. If your organisation works in the area and you’d like to get involved in developing solutions, let me know.

PS. If you haven’t checked out the OECD report in yesterday’s email, have another look. This is going to be a very influential report.

New OECD paper on ‘Role of PFs in Funding Green Growth’ recommends standards for green/climate bonds

Posted on 14. Sep, 2011 by Sean Kidney in blog

The Organisation for Economic Co-operation and Development (OECD) will next week publish a Working Paper on the ”Role of Pension Funds in Financing Green Growth Initiatives”.

> Download a sneak preview here.

The paper is part of their major Green Growth initiative and their Institutional Investors and Long-term Investment work.

The paper provides a thorough and easy-to-read overview of initiatives aimed at connecting pension funds with green growth projects. Different financing mechanisms are outlined — including climate bonds — and suggestions made as to what role governments, especially pension fund regulatory and supervisory authorities, can do to support pension fund investment in this sector.

The paper notes that pension funds’ asset allocation to green investments remains low, partly because of a lack of environmental policy support, but also because of a lack of appropriate investment vehicles and market liquidity, scale issues, regulatory disincentives and lack of knowledge, track record and expertise. It argues that, to tap into this source of capital, governments have to ensure that attractive and liquid opportunities and instruments are available to pension funds and institutional investors – such as green bonds and green funds.

They make a distinct recommendation in support of Climate Bonds Standards.

“Governments should also support the setting up of a “rating agency” or standard setter to “approve” green projects (such as green bonds or green funds).

A simple step would be for the OECD member countries to participate in and support investor-driven ratings initiatives such as the Climate Bonds Standards Scheme.

Governments could also use the eligibility criteria of such schemes as a base reference for preferencing policies around fixed income investments. This would ensure consistency of labelling with international debt issuance: for smaller countries in particular this will support access to internationally focused institutional investors.”

This recommendation ties in with the OECD’s current work in relation to defining and measuring green FDI flows and on monitoring and tracking long-term finance to support climate action.

The report also had this interesting comment on pension funds:

“The incentives along (their) investment chain have become short-term and misaligned with the ultimate, long-term goals of the pension fund. Hence as institutional ownership has grown, the holding period of stocks has declined.

Before pension funds can be expected to invest in green projects or financial instruments, they must be encouraged to once again act as providers of long-term capital.”

Sounds like something sensible from a Network for Sustainable Markets report. But is that really true? Can we afford to wait?

Clmt Bnds Adv Panel recruits: Morgan Stanley’s Ahmad + muni bond leader Bianco + IETA’s Derwent + climate lawyer Hobley join (London, Houston, Geneva, Sydney)

Posted on 02. Sep, 2011 by Sean Kidney in blog

We welcome four new members of Climate Bonds Advisory Panel, working to develop green debt capital markets:

Imtiaz Ahmad , Executive Director, Morgan Stanley Bank. Imtiaz was responsible for establishing the Morgan Stanley’s carbon trading and projects business; he is currently working on climate finance initiatives. He Imtiaz is a director of the International Emission Trading Association and a member of the UK Government’s Capital Markets for Climate Initiative.

Jonathan C. Bianco, Managing Director, Catalyst Capital Investors. Jon is a Houston-based investment banker specializing in alternative energy and environmental services. He is a former MD of Coastal Securities and President of Aurora Financial Services. He has 17 years experience in the US bond and equity markets, in particular with municipal bonds.

Henry Derwent, CEO of the International Emissions Trading Association (IETA). Henry was previously the international climate change Director for the UK Government, overseeing the UK’s role in the international negotiations, in the G8 (especially as Prime Minister’s special representative during the UK G8 Presidency in 2005) and in other forums. He previously had responsibilities for all aspects of climate change and sustainable energy in the UK as well as air quality and industrial pollution control. In an earlier life he was a corporate finance executive at a major investment bank.

Anthony Hobley, Norton Rose global head of climate change and carbon finance. Based in Sydney, Anthony specializes in climate change and clean energy law as well as UK, EU and international environmental law. He is a frequently published author on climate change and carbon trading and speaks on those topics at conferences around the world. He was previously legal counsel at Climate Change Capital.

Check out the Bloomberg wire story on this in the San Francisco Chronicle.