Climate bonds are fixed-income financial instruments (bonds) linked in some way to climate change solutions.
Climate Bonds are issued in order to raise finance for climate change solutions - climate change mitigation or adaptation related projects or programs. These might be greenhouse gas emission reduction projects ranging from clean energy to energy efficiency, or climate change adaptation projects ranging from building Nile delta flood defences or helping the Great Barrier Reef adapt to warming waters.
Like normal bonds, Climate Bonds can be issued by governments, multi-national banks or corporations. The issuing entity guarantees to repay the bond over a certain period of time, plus either a fixed or variable rate of return[1].
Most Climate Bonds are asset-backed, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs[2].
In their UNEP paper on investors and climate change, Mackenzie and Ascui[3] differentiate a climate bond from a green bond: “(A climate bond is) an extension of the green bond concept. Green bonds are issued … in order to raise the finance for an environmental project. Climate bonds (are) issued … to raise finance for investments in emission reduction or climate change adaptation.”
The Climate Bond Standards Board provides a certification program for Climate Bonds.
Climate Bonds are theme bonds[4], similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s. Theme bonds are designed to:
- Allow institutional capital – pension, government, insurance and sovereign wealth funds – to invest in areas seen as politically important to their stakeholders that have the same credit risk and returns profile as standards bonds.
- Provide a means for governments to direct funding to climate change mitigation. For example, this might be done by choosing to privilege qualifying bonds with preferential tax treatments.
- Send a political signal to other stakeholders.
Otherwise, for operational purposes, theme bonds largely function as conventional debt instruments. They are risk-weighted and credit rated in the usual way based on the creditworthiness of the issuer, and tradable, market conditions permitting, in international secondary bond markets. These instruments can theoretically be issued at all levels of the fixed income market, from sovereigns to corporate.
References
- ^ Environmental Theme Bonds: a major new Asset Class brewing, excerpt from Sustainable Banking – Risk and Opportunity in Financing the Future, edited by Joti Mangat, published by Thomson Reuters 2010
- ^ Mathews, Kidney, Mallon, Hughes. Mobilizing private finance to drive an energy industrial revolution. Energy Policy 38 (2010)
- ^ Mackenzie, C and Ascui. F. Investor leadership on climate change: an analysis of the investment community’s role on climate change, and snapshot of recent investor activity. Published by the UNEP Finance Initiative and UNPRI, 2009.
- ^ Iggo, C. Climate Bonds: a major new asset class brewing. Published by AXA Investment Managers
I am looking for funding for marine conservation projects in Greece. I’m curious as to how the investor is paid back? Thanks.
A thematic bond is simply a loan where the borrower promises to use the money for a specific purpose.
In the case of climate bonds or green bonds it means the loan is used to do something “green”. We’re setting up the Climate Bonds Standards Scheme specifically to help investors differentiate what is really and no “green”.
But as far as the underlying asset, you still need to find a revenue stream to pay back the loan, usually one generated as a result of the capital investments (e.g. setting up a wind farm part-funded by project development bonds gives you the wind farms revenues to pay back the bond; or a forest retention project under REDD+ might give you carbon credits).
The key is structuring a credible business plan, and then, with unusual projects like a marine park, mitigating risks down the line, including bringing in supportive governments or multi-national development banks (or even corporations) to provide some guarantees for investors so the interest rate is to high.
With a Marine Park it may be hard – I guess your options to pay back the bond are:
- taxes – some government body pays it back. That means you get a big lump sum up front to do something important (buy fishing rights?) and it gets paid back slowly over time. Basically the same as government borrowing to build hospitals, but they could “hypothecate” the bond (so that everyone can see exactly what they are doing – generally for political reasons).
- tourism revenue – a park management authority raises the bond against projected tourism “gate” revenue of some sort (needs a solid business plan). This assumes you can somehow charge a fee for using the Marine Park (boat fees for snorkelling trips?)
- local levies, This is a model being tried out by the Australian Great Barrier Reef Marine Park. Effectively government brings in a tax on businesses that thrive on the Marine Park (tourism, diving), with or without the consent of those businesses; in turn the Marine Park does stuff with the money to help increase revenue for those businesses or, in the case of the Great Barrier Reef, undertake adaptation work to try and keep the reef alive as climate change threatens it.
You can’t get away from having to design some sort of business case. The advantage of climate or green bonds is that many investors are actively looking for such bonds, so will notice and buy them whereas they might otherwise not see them.