Last week, Clarmondial became a partner to the Climate Bonds Initiative (CBI). With issuances up by ca. 25% from 2012 to 2013, and high rates of over-subscriptions, ‘green bonds’ and ‘climate bonds’ are taking off. This year has also seen the official launch of the voluntary Green Bond Principles (GBP) by a group of major financial institutions. While this is really exciting, without integrity labels can quickly become meaningless. The CBI has played an important role in promoting the climate and green bonds concept, as well as transparency and accountability in its application. We therefore see great potential for working together with CBI, for example, by collaborating on standard and taxonomy development, and on demonstration projects.
Bonds are a way for organisations to raise debt, where the bond buyer is paid back the principal plus interest (unless something goes very wrong, of course). Bonds, in particular the very secure ones issued by governments and leading corporates, form an important part of a typical investment portfolio. There are obviously a multitude of issues that should be considered prior to issuing and purchasing bonds, which depend on the issuing organisation and market.
Specific bond issuances can be made attractive to investors through de-risking, e.g. by Governments, or multilateral agencies providing credit enhancements or ‘risk wrappers’, providing guarantees or backstopping bond issuances through purchasing. Organizations such as the World Bank and the Multilateral Investment Guarantee Agency (MIGA) have important roles to play in this context. Governments can also introduce tax incentives: for example, the US Clean Renewable Energy Bonds (CREB) and Qualified Energy Conservation Bonds (QECBs) both have tax benefits for US investors.
Why choose ‘green’ or ‘climate’ bonds?
An issuer might choose to label its bond issuance as a ‘green bond’ or a ‘climate bond’ to show its commitment to Environmental and Social Governance (ESG) issues, attract more buyers or secure government support, for example. As a result, it is likely to benefit from a discount on the interest rate (i.e. lower borrowing cost than on a regular bond).
Similarly, a buyer might choose to purchase labeled bonds because of a corporate sustainability commitment, government / multinational incentives, or simply the perception that the issuer has a more sophisticated understanding of risk. For example, the United Nations Principles for Responsible Investment (UN PRI) issued an interesting paper on sovereign bonds and ESG Risks in 2013 , which indicated that Environmental and Social Governance (ESG) factors have had a neutral to positive impact on performance.
Green bonds vs. climate bonds
Although both initiatives aim to promote the use of bonds for environmental good, the GBP and the CBI differ in their rigorousness and scope.
The GBP could be applied to all sorts of environmental initiatives, from biodiversity to drinking water to renewable energy. The GBP identifies four general types of green bonds:
- Green use of proceeds bonds,
- Green use of proceeds revenue bonds,
- Green project bonds, and
- Green securitized bonds.
The GBP has four components:
- Use of proceeds,
- Process for evaluation and selection,
- Management of proceeds, and
The GBP encourages issuers to provide assurance to purchasers, however there is actually no requirement for independent third party verification / certification.
The CBI Climate Bond Standards and associated certification scheme complements the GBP. The focus of this standard is on initiatives that promote climate change mitigation and adaptation. So far, specific guidelines have only been developed for wind and solar energy-related bonds. The ‘Climate Bond Certified’ mark is applicable to:
- Corporate bonds,
- Portfolio bonds issued by securitization vehicles compromised of individual loans to finance physical assets or equity investments in physical assets, and
- Project development bonds.
The standards have several general requirements, including that an approved auditor independently verifies the nominated activities that comprise the bond portfolio. Additionally, there is a requirement for non-contamination by activities inconsistent with a low-carbon economy, and that ESG standards and best practices are followed.
The outlook for certified bonds
Here at Clarmondial, we are excited with the increasing trend for corporates to issue bonds linked to improved agriculture and forestry practices, water management and renewable energy. For example, Unilever’s popular issuance of a GBP 250m 2% fixed rate note last week aims to significantly reduce the company’s Greenhouse Gas emissions, water footprint and waste generation. We are, however, very concerned that much of this might be taking place without adequate transparency or independent verification of claims. Without care, interest in green and climate bonds might easily be undermined by claims of green washing.
We also see great potential for Governments and municipalities, particularly in more mature emerging markets, to issue such bonds. For example, municipal, national, or even regional bonds could be issued to promote climate smart agriculture. This could include rehabilitation of water management infrastructure and agricultural infrastructure to increase land management efficiency, which could contribute to improved rural livelihoods, resilience, GHG mitigation and adaptation. Clarmondial is exploring specific opportunities in this area with Governments and donors.
We would encourage anyone wishing to read more about the subject to visit the Climate Bonds Initiative website and to subscribe to their blog.